Quantitative Trading Strategies for High Probability Trades and Managing Trading Risk
“The only thing more expensive than education is ignorance.” – Benjamin Franklin
Retail traders share many common experiences as they navigate the perilous waters when trading financial instruments. Whether it’s stocks, bonds, options, futures or currencies, we have all experienced the seemingly endless contradictions and reversals of pundits, the strategy failures of “Trading Gurus” and the breakdowns of the chart indicators we rely upon most.
As a result, we shift back and forth between strategies. We find things that work and let go of things that don’t work, only to find that those strategies that worked need to be changed again. At times we don’t know who to rely upon because they are either wrong half the time or they have learned to not take a clear position one way or the other. You might have heard about the studies that flipping a coin can yield better results than listening to a professional stock picker.
Since James Carville, Bill Clinton’s campaign strategist for his Presidential candidacy in 1992, when reminding his campaign staffers about what voters cared about the most, made the famous statement, to refocus on the obvious: “It’s the economy stupid”!
Sometimes simple truths get lost in the noise. When it comes to trading it can also be said: “It’s the direction stupid”! Still, as I entered the world of trading I was quickly struck by the vast amount of and variety of tools, tricks, guides, gurus, and educational resources available that did little more than to “help” the trader get lost in the weeds. Once we’re ‘lost’ we can be easily manipulated to buy or to sell.
The sad truth is that Traders are vulnerable to these things because the vast and complicated marketplace without deep analysis can only appear mysterious. Yet through all this mystery we must struggle to make some sense so we can control our risk. Sometimes we think we see light in truths uttered by those who are more experienced, and we hope more knowledgeable than us.
Sometimes there seems to be truth in the price charts adorned by lots of indicators. These “spaghetti charts” have many points of intersection where inferences are made. When price lands on a few of these indicator levels it can be inferred that price is “bouncing off resistance” and set to reverse, except, oh yeah, that was on a 2-minute chart, and it doesn’t indicate the same on a 5- minute or a 10-minute chart. Seemingly the truth is only the truth when we look at it in the timeframe, we want to see it in.
And then there are the ‘Trading Gurus’. They tell us how to trade using trading strategies that if they really worked why would these so-called Trading Gurus be teaching and not just trading their way to riches? Some will give you strategies that really don’t work and then change those strategies after everyone catches on to this, while others will just make you afraid to trade without subscribing to their advice.
And then let’s not forget the influencers. These are market experts we see every day on CNBC, FOX Business, CNN, Bloomberg and countless other financial media. They are storytellers who appeal to those looking for explanations on why the market moves in a certain way. While their appeal is obvious – we all feel better when we can make sense of our world- they are mainly peddling irrelevance for those eager to assign causation.
On any given day we can see headlines like “Futures flat while Investor’s weigh inflation data”. But then 2 hours later when the market rallies the headline changes to justify the rally. Did the weighing inflation data stop? These influencers expect us to believe that the market is just one large committee that makes investment decisions on a basic criterion.
The truth is that the market is very diverse.
Thousands of factors impact the buying and selling decisions of investors every day. The aggregate impact of all these factors is practically impossible to forecast by any theory alone. To do so might seem like untangling a large constantly changing ball of rubber bands. So perhaps, this may be a big reason why traders’ find that the market is so perilous. Navigating without a map or navigating with an incorrect or confusing map will invariably get you lost. And this is the cycle for most retail traders – hope & frustration.
A Simple Truth
Knowing price direction is one of the single most important factors in trading success. The simple truth that knowing price direction gives us direction sometimes gets lost in the noise. If we only knew where price was going to move to over a specified period of time, then trading would be much easier & more profitable. Because price direction is not easy to understand there are many who undermine its importance and instead help you get lost in the weeds with confusing indicators and impotent strategies.
In this book we are dedicated to using a real compass based on empirical facts and not opinion to help predict price direction. A tool we can rely on to show us the nature of the behavior of price conditions in the past. To get to this level of truth we must only look at empirical evidence found in certain types of price patterns viewed with the right price mapping. Mark Twain famously said: “History doesn’t repeat but it does rhyme”. While nobody can predict the future, we can gain strong insights from correlating past behavior.
The beauty of this approach is that it follows nature. There is natural order in numbers. If we can find highly correlated behavior across different time frames and volatility levels, then we are very likely to continue to see a similarly high probability that the same behavior will repeat again over similar conditions in the future. This is the work of Quantitative Directional Trading.
Quant trading can seem intimidating. It appears very complex, sophisticated and used by only highly experienced traders working at trading desks of top institutional traders. Simply put however Quant traders are using “quantitative methods” that allow them to separate empirical truth from subjective fiction – something every trader risking real capital should want to be doing. While most traders would agree with these obvious statements, the realization of the quantitative approach has been out of reach for most retail investors and even some professional (non-institutional) investors – until now.
With the integration of big data & analytics with cloud services, these capabilities can be brought together within a platform that can be used by retail traders. When we employ Quantitative Analysis in this endeavor our approach leads us to statistical probabilities of moves occurring across similar conditions. From this we can assess risk, gauge time frames, proforma returns and just generally make better trading and investing decisions.
This book is about a methodology to make price direction more knowable and a way we can make this method accessible to the Retail Trader. A Quant Trader seeks to find truth from select bits of information and either corroborate or ignore piles of other information that the rest of us might drown in.
While Quant trading is very commonly used by institutional traders in many forms to lower their risk of loss and improve their outcomes. This book is about a simple method & resources that can be effectively used by the everyday Retail Trader, trading full or part time, and those lacking resources of the larger institutional traders.
Level the Playing Field
Technology has brought tremendous innovations for the retail trader. The advent of Globex’s first online Trading platform in 1992, and then followed by E-Trade for retail investors, revolutionized retail trading. With these great innovations, retail traders had more tools than ever to navigate the perilous waters of the markets – but one critical thing has been missing to level the playing field – a quantitative analytics platform as a service that is easy to use and affordable.
Available on Amazon Books & Kindle, Barnes & Noble, Rakuten Books, & Google Playstore
140 pages ISBN 979-8-88627-271-0