Fail-Safe Or Not Fail-Safe? - January 26, 2012

[TraderD]

The rally started around Dec 19, which was an EOY Santa rally and nothing else.
Then, the MF stayed very weak until Jan 18.
So, I believe that if money started moving in, it was on Jan 18.
However, nothing really impressive at that date: more like a "European no-bad-news" relief rally than anything else.

Then, yesterday's announcement, which does not say clearly that we have QE3. However, zero interest rates implies QE3. So, we are trading this implication. However, we start to hear Obama talking about new taxes then next step might be spending cuts/protection against imports. These policies are also what is being pushed out in Europe. These policies will take a long time to be played out... Much longer than stealth printing. So the market is probably trading a short term event first.
Pascal

I suppose one could never know whether Jan 18 MF strength is due to a European relief rally vs speculation (or knowledge) of extending zero interest rates to 2014. Regardless of explanation, it would be re-assuring to know that MF can effectively (pun intended) capture it.

Trader D

[Billy]

Hi Billy,

Pascal just sent out the 20DMF rt, which shows that no buyer is buying into the bounce. But the tick data shows that the tick is keep going up while the SPY price is going down since this morning. How do you interpret the tick divergence? (20DMF is for big buyer and tick is for market maker? and they disagree at the moment?)Attachment 12477

Wei,

After comparing daily Cum TICK and the RT 20 DMF for more than one month, RT 20 DMF is infinitely a better predictor of price action. Large institutional players are the true controllers of price action. Cum TICK seems more indicative of very short term “manipulative” moves by market makers HFT programs when liquidity is low like during lunch hours.
A good way to appreciate the real power of cum TICK strength is to compare it with the Up-Down Volume of the exchanges which are negative today with a weak MF. The lunchtime HFT (cum Tick) strength was sold into by large players and bodes for a weak afternoon.
Billy

[Wei]

Hi Billy,

Thank you so much for your insight. Truly appreciate it.

[Billy]

I appreciate very much to work and the time you guys take to keep on improving the robot technology.
Also a very warm “thank you” to you both for the answers that you both keep on deliver in these difficult times.
I speak for myself as a novice trader: it is very hard to keep a positive mind after a series of negative trades.
The statistics are in favor of these positive thoughts, so I will keep on going and give it my best.
The most difficult part for me is the position sizing.
I will follow the “subjective” advice from Billy and will start today with a quarter of my normal position size for a new limit short order, following the IWM robot.
What (subjective?) guidelines should I follow to increase this initial position size, if the trade goes well?

PdP

PdP,
Unfortunately, there is no universal rule of thumb for position-sizing. Searching for “position-sizing” on the internet will give you as many different guidelines as you can imagine by yourself.

For novice traders, it is best to always first learn the tricks of the game for many months with small positions only. Junior traders at the top trading desks have small size allocations for a good reason. It is only when small unleveraged positions show a consistent and repetitive success (in being disciplined and following exactly the strategy rules independently of the return) that juniors are progressively allowed to trade larger sizes. For novices traders robot followers, I would say that one year of disciplined trading is necessary before venturing into double leverage and probably one more year before trying triple leverage.

Position-sizing decisions for the robot signals are mostly discretionary. You can have a subjective Fed bias like today. Or you want to pocket the compounding effect from a series of good days on leverage before losing it all through time-decay in a consolidation or pullback, while unleveraged positions may be kept intact. I always try to keep a very tighter stop on my leveraged portions, because not doing so usually leads to disaster. But the techniques I use are numerous (I’ve shared some here) and sometimes changing during the day in RT.

Frankly, I think that once the RT 20 DMF will end its beta period and will be available to subscribers, it will be much easier to make such discretionary decisions like a day trader for leverage, but like a swing overnight trader for unleveraged robot trading.

Finally, for experienced traders, position-sizing is essentially a matter of inner confidence or doubt in the ongoing environment based upon reminiscences of past similar trades. The more time you spend “tape reading” in RT, the easier it becomes to notice confirmations or warning anomalies in price/volume behavior.
Billy