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Next Day's Data

Whilst doing a data review recently I happened to chance upon a domestic data supplier who promised to give me “next day's data” for only $15.00 per month. My immediate thought was I would give you $15,000 per month for tomorrow’s data. As a flight of fantasy, consider the value of such information. At the time of writing the current daily range of the Share Price Index (SPI) is 64 points with each point being worth $25.00.

So in the course of a trading week there are 320 points up for grabs. If you managed to capture 90% of these you would take home 288 points per contract. In dollar terms this is $7,200 per week, per contract. So if I had ten contracts I would take home $72,000 per week or $288,000 per month – so you can see why I would be willing to pay $15,000 per month for next day's data. Hell, I might even be convinced that day trading actually works.

It may seem that I am being overly critical of a simple error but this form of lazy language is a perennial problem for traders. Such problems raise their ugly head in both system testing and in the construction of a trading plan.

Within the context of system design this problem is known as post-dictive error - which is simply including information that would not have been available in making a decision. For example, when you designing your trading system for testing you inadvertently include data that is not available at the time the trading design is made. A simple example of this form of mistake is to use today's closing price (or today's high or today's low) in calculations that ultimately affect the way you trade today – in effect the system cheats.

This will result in your trading software producing a beautiful looking equity curve and you entertaining dreams of retiring to Monaco. What is more likely is that you'll trade the system and end up moving to Launceston, which trust me is nothing like Monaco. These errors are quite easy to fall prey to. For an example of how even very bright people can be fooled by these errors, have a read of The Predictors by Thomas Bass. This book describes how a group of physicists looking to generate predictive trading models fell into the same trap during one of their data runs.

Within the context of trading plans lazy language can either provide too many choices for the trader or simply not provide firm enough direction. Last year I attended a trading conference where I was due to speak on the simplicity of trading systems. Before I spoke, a fairly well known US trader presented. During the course of his presentation he stated that when a certain event happens, they then look at one of their eight exit strategies. I happened to be standing up the back when I heard this and the resultant flow of hot tea out of my nose did wonders for my emerging cold. If a position has gone bad, then it has gone bad. There is no point in having a multitude of possible exits. The trap this trader had fallen into was the belief that somehow the imperfect nature of stops could be engineered out of a system by having a multitude of overlapping stops. In reality, what such an approach does is merely overload the trader with decisions at a time when their decision making ability is very poor.

The other potential problem that poor language generates is a lack of true direction. For example, most traders can recite the mantra of riding trends – you need to keep risk small and cut your losses. However, when questioned as to the specifics of how this is done, they are more than a little vague. Take for instance the tendency of traders to rotate through various indicators looking for something that is akin to prediction, when in fact trend following is reactive. This occurs because within their initial trading plan they have said that they will be trend following, but they have not defined what they perceive as a trend.

Is it:

A change in the long term trend as defined as price moving above a given moving average?
Is this moving average plotted a on a weekly or a daily chart?
Is a change in trend defined as a stock making a new 52-week high?
Is it a combination of the above features?
Each step of a trading plan needs to be carefully elucidated and all points of possible emotional and intellectual debate spelled out in fine detail. This is so that when the time comes to enact the plan, the room for internal debate is narrowed. The less room your psyche has to manoeuvre, the more chance you have of following your plan. The more you follow your plan, the more chance you have of surviving. The more chance you have of surviving; the more chance you have of being profitable.

- Chris Tate

 

Great post

Will see how my favouite graph displays.....



TLS the stock everyone loves to hate

I have been trying to pick the bottom of the market as a buy and selling when I belive the profit is right or the peak has been reached. Looking backwards to go forward I did miss january's low and the recent high, I did sell at a profit though and you never go broke taking profits. Holding time is 2 to 3 weeks so not strictly day trading as the volume is not there to profit that much so short.

WES is my sob story picked as the market took a dim view of them and will feel some more pain before it's over.

WOW is my knight in shining armour bought for a long time and been so kind to me in the short time

GUD, WAN and HIL have all been traded for similar profits to what they would of payed dividends. I have the equivalent of two dividends a month short trading. Opurtunity cost so far has been the bigest risk ie WES

Plan is fairly simple buy on the lows and sell on the highs and stick to stocks that have a high LVR for the margin loan. Fairly similar to nav trade and a full days work with quick reflexes and estimates needed at times. Gut feel can't be put into a plan but it works for me so far.

 

so your saying your using trading programs to tell you when to buy and sell...

i had a trail go of one a few years ago i think it was called StockCaddy, anyway the 3 trials i used each one gained 10% within a week, dont know how they did it but a 6k for the program i gave it a miss.. It looked a very similar chart to bundys...

or are we talking about seperate things here??

 

I don't use anything too fancy to pick trades.

BankSA acceptable securities list.

ASX watch list which gives me charts of closing prices I can understand.

Directshares which is Etrade which gives live prices and research on a lot of companies mostly at the big end of the market which suits me just fine. It being linked to my margin loan makes it that bit easier to deal with.

To make my watch list it must make the bank happy to lend at a workable LVR, regualy pay a dividend, appear to be gaining in value and for a short term trade aproaching ex div date.

In an ideal world you buy and wait for a price rise to sell and wait for a price fall and buy them again. Some of the masters of the game get the profits 3 times before it goes ex. My trades arn't big enough to go as short as some will.

I don't know of a program that can pick based on live data and give you the time to make the trade. 6K for a program to pick stocks pfft that would buy me 24k worth of shares.

Days like the last couple you just have to grin and bare it.