The Pro

Guide to
Trading
Ideas
Professional traders share their
market insights, strategy ideas and
sources of inspiration.

BetterSystemTrader.com
DISCLAIMER: This guide is provided for educational purposes only. BetterSystemTrader will not be liable for
any damages caused as a result of using information contained in this guide. Verify all strategy ideas before
using them with real money. Full terms and conditions are available here.

Jake Bernstein
Episode 1
So we began to put a lot of data into the computer. The data was basically
price trends and time of the year, price trend and date. We found some
amazing correlations, that on certain dates there was a probability that prices
would go higher or lower, specific to certain markets and we found that these
probabilities went all the way back to the late 1800s, which is as far back as
we have data in the stock market. They're impressive, very impressed with the
results. So I'm talking 75, 80% accuracy over the course of many, many years
which certainly was statistically significant and so I began to research prices
based on seasonality and published my results and before you know it, I was
trading very successfully...

Jake Bernstein is an
internationally recognized
futures analyst, trader and
author.

In fact, seasonality is most likely, for me, the primary driving force
behind stock prices, currency prices, bond prices. In fact, the absolute
best seasonal that we have is in the stock market and that begins
approximately the last day of October and carries all the way into the
beginning of the new year. There's a very high probability pattern
beginning the last several days of October into the first several days of
November with probability over 80% all the way back to the 1920s. No
matter what the underlying economic conditions may have been, so
Depression, recession, war, inflation, disinflation, it doesn't seem to
matter.

He has appeared frequently

on radio and television
throughout the United States
and Canada, including Wall
Street Week and CNBC. He
also lectures extensively in
the United States, Canada,
Europe and Asia.

Most people are very negative on the market so this is a classic example of
how knowing the seasonality is very strong and putting that seasonality
together with a trigger can give you an opportunity to buy when most people
are willing to sell. So the most important thing, and I want to make sure I
make this point before we're out of time, is this: It's not just the existence of
seasonality. Remember, even a seasonal at 85% accuracy for 80 years is still
85%. We're still going to be wrong 15% of the time. Is there something we can
do with that seasonal pattern? The answer is yes, and that's what I call a
trigger. So if I know that crude oil begins to move higher late March, early
April, I will come to that period of time and I will begin to look for technical
indicators suggesting that the trend is turning higher. So in the absence of
those technical indicators, I will not take that trade, but if I have the trade
with high probability seasonality seasonally and I get a trigger, any traditional
trigger, moving averages or otherwise, indicating higher prices, that
combination increases my probability of success.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Hes written more than 41

books, along with numerous
research studies and
newsletters on futures
trading, stock trading, trader
psychology & economic
forecasting.

Jake has pioneered numerous

technical, cyclical and
seasonal methodologies.

Jakes websites are:

Jakebernstein.com
Seasonaltrader.com

Page 2 of 26

Cesar Alvarez
Episode 3
Around that time I got to a site called tradingmarkets.com. Run by Larry
Connors and he had lots of good strategies there, he quantified his stuff, I
tested his ideas, they worked pretty well and I definitely started getting more
interested in him and his work.

"Nowadays where I get most of my ideas is I do a lot of reading of blog

posts, thats where I get my ideas and where I find something. I would
see an idea and test it out and if it looks like it has potential I would make
it good by adding my own ideas, my own trading style to it.

Recently whats caught my eye is dual momentum, a very popular ETF topic on
the internet this year. So I definitely have been doing a lot of research in it
recently for my own trading. But again I get it everywhere, I have a huge list of
stuff that I could I could stop taking ideas and spend the next several years
just whittling down that list but Im always chasing the latest, greatest ideas
too.
And for trading ideas, quantocracy.com. Oh man, I just love the
aggregation of things. I get so many of my ideas from them now.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Cesar Alvarez spent nine

years as a professional
market researcher for
Connors Research and
TradingMarkets.com. He has
been at the forefront of
stock market research,
having developed a number
of successful trading
systems now used by
numerous investors and
fund managers in the United
States and internationally.
He has given trading
presentations both over the
web and in person to
hundreds of traders.
Cesar was also a Software
Engineer on Excel versions 3,
4, and 5, helping Microsoft
Excel go from single digit
market share to owning the
market.
Cesar attended the
University of California,
Berkeley where he received
his Bachelors of Science in
Electrical Engineering and
Computer Science in 1989
and his Masters of Science
in Computer Science in
1990.

Cesars website are:

alvarezquanttrading.com
TranquilityTrading.com

Page 3 of 26

Check out this huge

collection of research books,
all containing complete
strategy rules and
performance results.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 4 of 26

AmiBroker & Back Testing 101

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Course objective
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We will code from beginning to end a strategy with a compounded return of more than 20% from 2004 to
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Cesar was been programming and back testing ideas in AmiBroker since 2001. For 9 years, he was the
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For more details visit:

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The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 5 of 26

Nick Radge
Episode 4
Well, in my book, Unholy Grails which was published a few years ago, we discussed
about 8 different ways to look at trend following and built systems around that from
very, very simple things. Youve got your standard channel breakout which everybody
knows, kind of from the Turtles. So we investigated things like okay, longer term
breakouts like if you make a new highest high in the last 100 days and you see the
trend is up, so youre jumping on board.
The lowest low in the last 100 days, well clearly the trend is down and you can jump on
board. Other strategies like buying stocks when they hit new all-time highs. Other
things, a very popular strategy that we created was called the 20% flipper and the
context is very simple. When price moves from a low point up 20%, then you buy the
stock. At the end of the day, if you get a stock that is going to be up 200, then 300, and
400, 500 percent, well its got to travel through that 20% barrier first, and youd just
hop on board and if it reverses by 20%, then you can hop off.

Nick Radge is a professional

trader, analyst, educator
and author.
Hes been trading since
1985, was a floor trader at
the Sydney Futures
Exchange and worked for
international banks in
London, Singapore &
Sydney.
He is an expert in trading
system design and technical
analysis.

Simple things like that, and you can get some volatility based kind of strategies, for
example using Keltner bands or Bollinger bands.
Nicks website is:
thechartist.com.au

In Unholy Grails, the strategy that we did test and showed very
promising results was an entry using a Bollinger band and an exit using
the opposite Bollinger band, but we use 3 standard deviations for the
entry and 1 standard deviation for the exit, just to keep the trailing stop a
little bit tighter. And that showed very, very good results. So its something
like that that in its very basic format that everyone can have access to
and is certainly a good platform to start from.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 6 of 26

Kevin Davey
Episode 5
What I would do is I will have a market in mind so we kind of fix that. So lets
just say I want to develop a system for gold just for example. And then I usually
have a sense of what kind of timeframe I am looking at and if I want it to be
like an intraday system or swing trading system.
So I might have a couple bars sizes in minds so I might do like 60 minute bars
and 240 minute bars and daily bars. So maybe I will test out my idea over those
particular bars like obviously I dont want to do every single possible bar
minute by minute to test them all because then eventually youre going to find
something but I try to just do some general 60, 240, daily to see what happens.
And then I will look at a couple variations of an entry.

Kevin Davey has been

developing, analyzing,
testing and creating trading
strategies for over 25 years,
in every futures market from
the e-mini S&P to crude oil
to corn to cocoa.
He placed in the Top 2 of the
World Cup Trading
Championships from 2005
2007 with the results:
2005 2nd place with a
+148% return,
2006 1st with a +107%
return,
2007 2nd place with a
+112% return.

A lot of times I already have kind of an entry idea so lets just say some kind of
breakout system okay. Well I might just apply a simple stop loss to it just to
see, Hey, does that breakout system work? And then I might also put in an
exit of exit after X number of bars and then I can look at the results and say,
Okay well this entry seems to be valid, or seems to give some kind of edge
for maybe five or six bars or something like that but after that maybe it falls
off.

He now trades full time for

his own personal account
and coaches small groups of
traders to significantly
increase their trading results.
Hes written a book on
building algorithmic trading
systems and has been
featured in a number of
other books and magazines.

Kevins website is:

kjtradingsystems.com

So just looking at that on some limited testing I can kind of come up with a
good idea for an exit possibly and also kind of refine the entry. By the time I
get to the next step which is more detailed testing I pretty much had my
system and I know what timeframe Im looking at.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 7 of 26

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Page 8 of 26

Howard Bandy
Episode 6
About eight years ago I wrote the first edition of my first book Quantitative
Trading Systems. And my feeling at the time had been that so much of the
literature that was available to ordinary retail investors that was not working
for money management firms, so much of the material that was available was
lacking in rigor.

Dr Howard Bandy has

university degrees in
mathematics, physics,
engineering and computer
science, completing
graduate studies and
research in modelling and
simulation, statistics and
some of the early work in
artificial intelligence.
He has over 50 years
experience in research and
applications of modelling
and simulation of financial
systems.
Howard has previously
worked as a senior research
analyst for a CTA firm and as
a consultant to trading
companies and individuals.

I wrote a book called Mean Reversion Trading Systems thats an

extension of the work in the Quantitative Trading Systems book. It has
several unique original transformations. One of them for example
simplifies the RSI indicator and removes the necessity that the look back
period be an integer number of days.

He is a speaker at
international conferences
and is the author of 5 books
on quantitative trading
systems.

Howards website is:

Blueowlpress.com

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 9 of 26

There is some other transformations that are quite helpful and most
recently my latest book is Quantitative Technical Analysis. Its printed and
bound and was published in January 2015. It focuses on risk and has
extensive material on trading system development both from a trading
system development platform perspective and from machine learning,
pattern recognition, and artificial intelligence. It has several unique
research findings, risk normalization, universal objective function and
importantly, a technique for setting position size trade by trade in
response to recent performance of the trading system.

Disregard previous knowledge of what may or may not work, identify an

objective function that when satisfied the trades that fit the objective function
are already ones that the trader knows he or she will be comfortable with and
then open up all opportunities to look long-term and short-term to look at
what we would typically call mean reversion or trend entries or pattern entries
or seasonality entries. But they have a very open view of what the possibilities
are.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 10 of 26

Rob Hanna
Episode 7
I do a lot of studies on the market There would be little seasonal things or it
will say the markets been down three days in a row and we are hitting the 20
day low and we are above the 200 day moving average, how has the market
performed in the next 3, 4, 5, 6, 7, 8, 9, 10 days from that? And so you can see,
All right, it's been up 60% of the time" or 70% of the time or whatever it is 4 or
5 later and just by doing the little studies like that I am able to set my market
bias.
When people are trying to come up with ideas on what they should test
or understand what the market is doing right now, that's the easiest way
to start; just look at what the market did today and describe it. "Oh, it
was down 1%. It hit a 10 day low or a five day low or its coming off of a
50 day high. Breadth was this, volume was high, volume is low anything
you can use to describe the market action whether it's what happened
today or what's happened over the last week or two weeks; anything
you can use to describe it you can then test.
So just taking notes or make little observations about what the market is
doing whether that's whatever market you are trading it doesn't really
matter and then what may be some correlated or inversely correlated
markets are doing as well and you can see, you will come up with a lot
of ideas to go ahead and test things.

Rob Hanna has been a fulltime market professional

since 2001.
He first began publishing his
market views and research
in 2003. From 2003 to 2007
his column Rob Hannas
Putting It All Together
could be found twice a week
on TradingMarkets.com. In
2008 Rob began
Quantifiable Edges and in
2012 Rob opened his 2nd
website, Overnight Edges.
Overnight Edges is now part
of the new InvestiQuant
site. Both sites use historical
analysis to assess current
market action and odds.
Rob utilizes price action,
volume, breadth, sentiment,
seasonality, liquidity flows
and more to conduct his
research.

So you look for extremes in the data. Whether it's the highest volume in 10
days, whether it's the highest high price wise in 10 days, whether breadth is the
In 2010, Rob published his
strongest in 10 days, whether measures of volatility are reaching the highest
book The Quantifiable
level in 10 days or maybe reaching the lowest level in 10 days you've got this
Edges Guide to Fed Days
real contraction going on; both of those are giving good information.
So it's a matter of just kind of looking at things and trying to see where the
extremes might lie and keeping your mind open to it can be an extremely
exciting thing that's happening like, Wow, it had the biggest rally in 10 days."
Or it could be an extremely I could say boring thing that's happening, Oh, it's
been the tightest range we have seen in a month", the market did nothing
today. So what normally happens after you get those really tight range days so
those are the kinds of things I would look at.
I use three measures, I look at price action, I look at internal and I look
at seasonality. If one of them is lining up okay that's a nice thing but if on
average or if all three are saying, Hey it looks like you've got a really
bullish edge right now," that's a great signal. So if you can take different
looks at the market that are unrelated, seasonality is normally a good
thing to use. Price action however you want to define it could be a price
based system. You could look at breadth as a separate thing, you could
The Pro Guide To Trading Ideas www.bettersystemtrader.com

receiving high acclaim from

many in the industry.
His work has been widely
referenced and quoted over
the years. He has also
served as a guest speaker at
a number of speaking
engagements.
Robs websites are:
Quantifiableedges.com
Overnightedges.com
Investiquant.com

Page 11 of 26

look at volume analysis, you can do volatility analysis. There is a lot of

different ways
At Overnight Edges, we call looking at the three systems and call it an
ensemble system and it is actually something that weather forecasters
use a lot; not that theyre the best at what they do but like traders, they
are going to be wrong sometimes, they are going to be right sometimes.
But they will take computer systems and what they have found is that if
you use multiple systems and then look at kind of the averages of what
those systems are saying you are better off than any singular system.
So from a trading perspective, what that is saying is that if you have
seasonality strong and you've got bullish evidence from price and
volume you're much better off than if you are just looking at one thing,
you are just trying to trade seasonality, you're just trying to trade price
and volume.

So the idea behind Overnight Edges it was something that was the end of 2004
or so I first ran a chart of the SPY, the US ETF for the S&P 500. And I wanted to
see how much money it made if you bought the open and you sold the close.
And I also did it from buying the close and then selling next day's open. What I
found was fascinating to me and that was that all of the money and more has
been made at night when the market has been closed. If you bought the open
and sold the close every day you would have lost money for many, many years
even during most bull markets.
Well what Overnight Edges does is it tries to break it down to determine when
are you more likely to get a gap up and more likely to get a gap down and it
looks at different things like I mentioned price action, seasonality and so
forth. So what I do at Overnight Edges is I look to get long at the close of
trading if there is a bullish edge or I might look to get short if there appears to
be a bearish edge and then I would get out the next morning assuming my stop
or target hasn't been hit before then.
"I did some studies with the S&P 500 breaking out and what I found was
that if it breaks out on volume that is lower than the day before youve
got a better chance of seeing it follow-through over the next week or
two than if it breaks out on higher volume. And that kind of blew my
mind at first but it's held over the years and I continue to see it.

Those Fed days, I went back to 1981 and they have consistently done
substantially better than the market to the tune of like seven or eight times
better as far as the expected amount that you would see the market move up
on a fed day versus on any other day. But they are not all like that. So what the
Quantifiable Edges Guide To Fed Days does is it breaks down the fed days, it
breaks down what happens leading up to a fed day, what happens actually on
the Fed day. The most interesting part to me is the fact that these Fed days
have done so well over the years but most of the edge, the upside edge
happens between the close the day before and the actual announcement.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 12 of 26

Generally if you get weakness going into a Fed day that means people might be
having anxiety about what the Fed is going to say and they might be exiting
positions ahead of the announcement. And what happens is most of the time
the announcement isn't like worst-case scenario or as bad as they fear and you
get a nice little rise. But if people push the market higher into a Fed
announcement because they are anticipating something wonderful happening
normally it is not as wonderful as their imagination either and you don't get as
strong of an upside edge although it is not the downside edge, it is still, you still
get a smaller upside edge for those fed days.
Well one indicator I like to use that I have shown on the blog years ago
and it is part of market timing course now is NASDAQ versus the S&P
relative strength. So that's an interesting one for me. What it does is it
looks at how strong the NASDAQ has been over the last 10 weeks versus
how strong the S&P has been. And generally when the NASDAQ has
been the leader, the market has done well and when the NASDAQ has
lagged the market has done poorly.
So now you would expect so when the NASDAQ is leading, the NASDAQ
has done well right? So that's pretty self-explanatory. But when the
NASDAQ has been leading, the S&P has actually done well. The S&P has
made since 1971 when the NASDAQ came into existence, the S&P has
made almost all of its gains when the NASDAQ has been leading it. Part
of it is due to higher beta of the NASDAQ; it is going to be more extreme
up moves, more upstream down moves. But part of it I think is also due to
the fact that when investors are bullish and they are pushing money into
the market and you've got a positive bullish market atmosphere you're
going to get more money going into aggressive type stocks and those
are the ones you find are the NASDAQ versus the S&P 500.
And whatever you can do this with country analysis, you can do it a
number of different ways but the idea that when more aggressive type
stocks are doing better it's a better thing for the market most of the
time.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 13 of 26

If you take an RSI-2 system, you can do something simple like say, All right I
want to go Long the market anytime the RSI-2 goes below 25 and then get out
when it moves back about 50 or 60 or 70 or whatever the number you want
and then you can do the reverse on the short side. If you are in an
environment where there is a lot of mean reversion that we work great. If you
are in an environment where there is a lot of daily follow-through, short-term
follow-through you actually want to the reverse of that. You'd be saying, If it
gets down to 25 I want to go short. And I want to hold it until it goes back
above 25 or 30 or 40 or 50 or whatever.
So I was looking for basically extreme selloffs in S&P 100 stocks. And the
reason I just use the very largest cap stocks here is that if you're going to
build a system that's buying into extreme selloffs you want to have
institutional support. So if when you're dealing with these real large cap
stocks, they've got tons of institutions that own them. When you are
dealing with a small-cap stock you might have one or two institutions
that own it. So if one of them decides to get out that could cause the
capitulation and then there is no one there to cause it to bounce. But if
you've got a lot of institutional support there is always someone else to
buy it back and cause it to bounce. So this is a long winded way of
saying that I am looking into by real oversold conditions in individual
stocks.
And what I have found is that when you've got a large number of these
individual stocks all capitulating at once they are all likely to bounce; the
market is likely to bounce and it becomes very likely to bounce and it
becomes a real reliable indicator for me over the years. So what I do, the
CBI is just basically a simple count of the number of catapult triggers I
have on at any one time and what I found is that when it gets over 10 or
so you've got a real strong indication that the market is going to put in a
good bounce in the next few days and that's not only a short-term
bounce, a lot of times an intermediate term bounce.

One I liked recently was Jay Kaeppel - Seasonal stock market trends. Jay has a
lot of interesting work and I felt that was a neat book as well.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 14 of 26

Gary Stone
Episode 8
Well what Im putting forward is to time the market, not to ensure that you are
in for the best days but to ensure that you are out for the worst days. So some of
the techniques that I have used over the years is to And there are many
technical analysis techniques but to use weekly momentum indicators, so to look
at things like the MACD, to look at momentum, to look at We have an indicator
which is a momentum indicator or trend/momentum indicator called SIROC which
stands for Smooth Index Rate Of Change; that is a technique that can be applied
but apply it to weekly charts, not daily charts.
The other indicators that I would say people need to look at is the concept of
relative strength; so comparing one index or in the case of exchange rate funds or
indices or even stocks to compare the movement of one price action to another
price action to get a relative movement, relative strength on those and the
indicators that I have spent quite a bit of time researching of late is swing charts.
So to look at peaks and troughs that are done on three, four, five days swings and
what that does is cuts out a lot of the noise.
There is another one called average true range which measures volatility to bring
that into your research as well and apply a trailing stop, a ratcheted trailing stop
to using volatility. So those are the main ones. There are others out there that
people would use and I would throw some acronyms in for people that are in the
game of looking at technical analysis, is the ADX or the DMI, the Directional
Movement Index invented by Welles Wilder, another one that could be used that
also builds in a bit of volatility as well. So a combination of those or one or two of
those, people with some time and putting some time into research and
preparation should be able to work out a basic timing mechanism that will achieve
being out for the worst days.

Gary Stone has been trading the

markets since 1989.
He has spent 1000s of hours
researching the market, stocks
and technical analysis criteria to
understand what worked and
what didnt, using his
mathematics and computer
science skills to come up with a
way for the computer to do the
analysis and heavy lifting.
His work has been widely
referenced and quoted over the
years, has been a guest speaker
and has been featured on TV,
Radio and Print, including Sky
News, ABC Radio, Your Trading
Edge, Switzer Daily and the ASX.

Garys website is:

Sharewealthsystems.com

If the markets start becoming highly volatile and you just look at a
two or three or four week period, the range of the bars are starting to
widen so they begin to get much deeper and wider, those are the
periods you want to be out because those are the periods where the
best and the worst days over the long term are going to occur and if
you can avoid those youre going to be avoiding the worst periods in
the market.

so to actually beat the fund managers all you have to do is invest in an index
ETF and reinvesting the dividends and youre going to put yourself in the top 15 to
25 percentile of fund managers worldwide. It is that simple.

The Pro Guide To Trading Ideas www.bettersystemtrader.com

Page 15 of 26

Gary Antonacci
Episode 9
About five, six well actually six or seven years ago I stumbled across some
of the research papers on Momentum and I was familiar with Momentum
because I had read about it back in the 1970s. There was Bob Levies' book
on Relative Strength and I was intrigued by something like that. So it
resonated to me and I looked at all the body of research that had been
done since the early 90s in Momentum and I thought, This is a true
anomaly that can be and should be exploited." And I saw that people were
not exploiting it in a way that made the most sense. Whatever was being
done with Momentum was being done on an individual stock level. And
Momentum was only good in certain ways, in other words they would give
you enhanced returns but it did very little or nothing to reduce downside
volatility or tail risk.
So I give it some more thought and I figured that by combining things other
than just stocks into a Momentum portfolio, things such as fixed income
and other diversifying assets you would be able to get out of equities at the
appropriate time when the relative strength of these other assets was
better and so I did some research on it and then I did a couple of research
papers. The first one was a second place winner of the Wagner award in
2011 given by the National Association of Active Investment managers.
Then my next paper on Dual Momentum was the first place winner in 2012
and it laid out a basic methodology of using relative strength and absolute
Momentum which is trend following in order to enhance return and
mitigate downside volatility.

Gary Antonacci has over 35 years

of experience as an investment
professional focusing on
underexploited investment
opportunities. His award-winning
research on momentum investing
combines relative strength price
momentum with trend following
absolute momentum.
He is recognized as a foremost
authority on the practical
applications of momentum
investing. He serves as a
consultant and public speaker on
asset allocation, portfolio
construction, and advanced
momentum strategies.

Garys websites are:

optimalmomentum.com
dualmomentum.net

And in order to get the benefits of diversification, and the relative

strength application of Momentum, with equities you have to have
more than just one kind. So the natural split to me seemed to be US
equities which has offered the very best returns historically and then
the rest of the world, the All world without US equities. So I figured that
would be the basis of any investment approach that I had. That
would take care of relative strength Momentum, to enhance returns.
Now in terms of reducing tail risk and volatility I needed to have a
different way of doing that and that's looking at Absolute Momentum
which Relative Momentum is comparing one asset to another and
going with whichever is stronger.
Absolute Momentum is looking at an asset compared to its own past
performance. They are both trend following in the sense that Relative
Momentum is looking at trends of one asset versus another whereas
Absolute Momentum is looking at the trend of the asset itself over
time. So typically one year is a look back period that a lot of
researchers use and that has been shown to hold up well out of
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sample and in sample. So just for the sake of simplicity, let's say we
are comparing US stocks to non-US stocks over the past year and we
pick whichever those is stronger and that will be our investment
choice. Let's say it is US stocks. What we also look at is what has been
the trend of US stocks over the past year; has it been up or has it
been down relative to a benchmark like treasury bills?
If it's been up that means Absolute Momentum is positive and we
can feel confident that the trend should continue into the future so
we can go ahead and buy US stocks and continue to hold them as
long as the trend over the past 12 months has been positive. Once
the trend is no longer positive then we step aside and we exit into
something of a more conservative nature. In my book I use
aggregate bonds as a safe harbor in times when we are not in
equities.

Well when you're dealing with stocks what the typical procedures is to
skip the last month so you don't get caught up in that mean reversion on a
short-term basis. I don't deal with individual stocks. I deal with broader
asset classes where that's not such of a big problem. And because we have
a 12 month window we are not subject to short-term volatility affecting our
decisions on what to do as much as if we had a shorter window.
Well I use the social science research network SSRN a lot to uncover
new research and new working papers that have come out that
have all kinds of interesting ideas in them. I also use Morning Star as
part of my research. I follow a few sites like Quantocracy and
Abnormal Returns to keep me up on some of the interesting things
that are going on in the investment world. And I also can
recommend that people go on to Twitter and find some people who
invest in a way that is like-minded to you and connect to them in
Twitter. You can connect to me in Twitter and I repost a lot of things
that I find interesting.
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Perry Kaufman
Episode 10
When a new country comes on board like a country with a stock index, it is
very easy to trade with a very short trend program because they represent
what our markets were in the 1960s and 70s; very low participation, mostly
commercials and they tend to have very strong trends. And you can watch
them as they get participation over a few years they become not so easy to
trade with the short-term trend and you have to extend the period of your
trend out a little to avoid the noise that's developing in that market.
So if you rank all the index markets in the world you will find that the US
markets are the noisiest and in this case "noisy," I am measuring with my
Efficiency Ratio which measures how much back and forth movement there
is given the net change over time. So the US markets are the noisiest
followed by most European and then Asian and Latin America, South
America. So the markets that are newer, less developed, less participation,
will have stronger trends.
Now that's a useful piece of information because if you are developing a
trading strategy or trying to decide how you trade them, the markets with
the most noise are best traded at short-term mean reversion and the
markets with the least noise are trend following. So it can be very useful for
finding your strategy.

Perry Kaufman began his career

as a rocket scientist, working
on the navigation systems which
were later using in the Apollo
missions. In 1971 he became
involved in the futures market
and in that time has worked and
consulted to a number of
successful CTA, investment and
prop trading groups, creating
systematic trading and hedging
programs.
Perry writes extensively on
markets and strategies. His
seminal book, Trading Systems
and Methods + Website, now in
its fifth Edition, has been called
remarkably insightful, the
most authoritative and
comprehensive work in the
industry; it puts the process of
research and development into a
cohesive framework. He has
published fourteen books, some
translated into Chinese, Russian,
Italian, Spanish, and Japanese. He
continues to lecture to economic
forums, investor groups, and
graduate students.

Perrys websites are:

perrykaufman.com
kaufmansignals.com

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I do like the efficiency ratio I had originally developed it for a very

short-term reaction trying to use as few days as possible to give me a
longer view of the trend so I can be in faster. I have discovered over
the years that it's actually better in a longer term view and in that
when you use 40 or 60 days as the period instead of 8 or 10, it
outperforms any one longer term moving average which is nice but
it's still a trend system and it's still a longer-term trend system and it is
still going to have swings that are typical of a trend system.

In the 1950s George Douglas Taylor came up with a three day cycle system
and it said if the market goes up two days in a row and opens higher the
third day you sell it on the open and you hold it one additional day. So if
you sell it on Wednesday you exit on Thursday on the close. If the market
goes up two days in a row, does not open higher but closes higher, you sell
the close and you then exit the next day on the close. So you have either a
close to close trade or an open to the next day close I have looked at
those recently on the SPY, the Q's, IWM.

I also am just working on volume spikes. A volume spike is when the

volume of the day is at least twice the average volume and there
has been a direction, notable direction in the last week so that the
volume spike represents a change of direction, a mean reverting
change. And I have found that if you take advantage of a volume
spike in stocks, individual stocks as well as futures, it seems to work
across the board, and you are buying from the spike, the spike
occurs when the trend had been down, you want to hold that trade
for about four days. If you are selling on a volume spike you want to
hold it for about three days.

John Ehlers has produced a number of indicators recently one of which I

found fabulous and it is called roofing filter. It transforms data into cycles
and you then take that transformed data and stick it into a stochastic
momentum indicator. And what it does is it smooths it out tremendously
with virtually no lag. I have used it in a number of programs very nicely, it
really outperforms any other momentum indicator I've ever seen and the
nice thing is it goes from 0 to 100 so you can use buy and sells or indicators
at 5 or 10 versus 90 or 95.
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Ernest Chan
Episode 12
Some of the ideas are just based on kind of straightforward market
observations. You could say that it is based on logic. We categorize this sort
of any market into two types, is it mean reverting or is it momentum? And
so for any market we go into that's the first question we can study, if it is
momentum then you can explore strategies to benefit from this
momentum.
Now it depends on over what period of time it is trending, over what
regime that it might not be and so forth so that those are the details. But
once you decide that a market is momentum you can focus on using
different kind of momentum strategies to extract profit.

Ernie Chan is an expert in the

application of statistical models
and software for trading
currencies, futures, and stocks.
He has built and traded
numerous quantitative models
for investment banks and hedge
funds.
He is now the Managing Member
of QTS Capital Management, a
commodity pool operator and
trading advisor, managing a
hedge fund as well as individual
accounts.
Ernie is the author of 2 books,
maintains a popular quantitative
trading blog and teaches courses
and workshops in trading and
finance.

Ernies websites are:

epchan.com
epchan.blogspot.com

So a lot of these ideas are just basically based on logic. So that's how I came
up with them and there are a lot of creating hypothesis and testing these
hypothesis based on this logic. Now of course there are others that I also
read many academic papers and basically every day you can read about
academic research that suggest this or that in marketing inefficiency in
futures, in Forex, in equities and bonds and what not and a lot of these
strategies are just very academic in the sense that they do not for example
produce high enough Sharpe ratio or they produce too much drawdown or
they don't stand up to transaction costs but occasionally some of these
strategies will stand up to these stringent tests that a practical trader would
need to apply and we would absorb them into our trading system.
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Some recent ideas that I have is perhaps you can use order flow
into a sector and to compare it. I have not tried it but that seems like
a new potential avenue is to compute the intraday order flow into all
the stocks in one sector and then aggregate them and see whether
they are these tell-tale signs of mutual funds buying into a sector. But I
don't know if it really works, just an idea.

The easiest place to look for trading opportunities that are not already
taken up by bigger firms is in strategies that have low capacity. I have often
times in my first book for example I talk a lot about those seasonal future
strategies, trades that you might only get triggered once a year "buy
natural gas ahead of the winter" or something or, Buy gasoline before the
summer or that sort of trade that is driven by some sort of global
consumer demand for heating and for driving.
Well those trades are well known but they are not arbitraged away by the
big firms because they are not terribly interesting to a firm that needs to
make money every quarter, who wants to make money just once a year.
But for independent traders, especially if an independent trader has a fulltime job and just trades part-time as a hobby or as a supplement to their
income, well this is the perfect trade because who cares if it trades once a
year as long as it is profitable?

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Andreas Clenow
Episode 13
I mean keeping it realistic is the most important thing for me, I mean
trading a broad concept and not some over optimised you know I seek to
many trading system ideas that are based on take these 10 indicators and
optimise all these parameters and find some amazing pattern where you
buy and sell with all these indicators these things are never stable, they
are never robust over the time. Also look at very broad concepts, start with
a broad concept I mean it doesn't have to be over optimised. I mean
trading momentum for instance or trend following futures those are very
broad concepts. If you implement them in a simple way it doesn't matter
exactly how you do it, all the details, you are trading a broad concept, not
the tiny details.

Andreas Clenow is a hedge fund

manager who specialises in
developing and trading
quantitative strategies across all
asset classes.
He is currently a principal at
ACIES Asset Management, which
he joined after having
successfully established his own
hedge fund. Prior to his role as a
hedge fund trader he had a
lightning career with Reuters,
where he, as Global Head of
Equity and Commodity Quant
Modelling, was one of the
youngest ever in such a role. He
was also the Global Head of
Institutional Charting and
Technical Analysis for Equis
International before departing for
the hedge fund world.
He is the author of two books,
the first being international best
seller Following the Trend and
the second Stocks on the Move
has just been released.

Andreas website is:

followingthetrend.com
I started out like everyone else, building one system for one market
and it's not a realistic way to do things. You open a trading magazine
and there's a new, simple way to trade the NASDAQ way for
instance, that's not really the way you work on my side of the fence.
You need to start with a portfolio perspective. Position perspective
doesn't matter any single position, who cares about a single position,
the only thing that matters is your portfolio as a whole. I think that's
the major difference between hobby traders developing trading
systems and professionals, the portfolio thinking. That's the key thing
that I would recommend people start looking at, develop portfolio
models and not position models.
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talk about stocks for instance. Every single position you buy, it doesn't
matter whether it gains or loses all that matters is what happens to your
portfolio as a whole. That means starting at the wrong angle and if you
start by picking your stock and then try to develop a super trading model
for this particular stock and timing the entries and exits... good luck! I mean
some people can do it but it's not something I would recommend. Try to
build something where youre constructing proper portfolios hopefully
without your bias

I start off with concepts that I know work, something that I have
been trading for many years. I start with a reasonable version of a
broad concept that is very well known in the market, in this case the
momentum effect. I show a variation, numbers I think more or less, I
wouldn't say random, but numbers that are based on what makes
sense, what I want to accomplish. I want to have medium term
strategy, I want to have positions that behave a certain way. I don't
want to have too high gaps because gaps make me nervous for
various reasons. I start out with things that make sense, I show the
strategy, I show that it works and I vary some parameters of the
strategy, and show how does it change, what parameters are
different or not. What I don't do here is run optimisation on part of the
data set and do walk forward to see how it works on the remaining
data set and so on. It's not that kind of strategy that I need to do that
on. I show a broad concept, not an over optimised model on a
certain data set.

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Andrea Unger
Episode 16
I watch the charts, I notice things. Sometimes I get a headache looking at
the open equity drops in some positions, so I wonder why does this
happen, why does this happen always after lunch? So I may try to devise
some behaviour in that specific market in a short period of time, in the
afternoon for example, and when I have some doubt, some ideas, I just sit
down and I write the code and I look to see what a system is doing and
what it did in the past. From the results I get some information and from
that piece of information I can start building if I see an edge in that.
If for example if you look at the Euro based on central European time you
may notice normally in the morning it has a bearish behaviour and in the
afternoon it has a bullish behaviour. It's not gospel, it's a behaviour which is
repetitive over the years. So based on that you can try to build something
and this is something you may find in many other markets as well, and you
may try to take advantage of that. And sometimes ideas also come from
mistakes, I made a mistake writing a code and I got a very good
performance, thats why I noticed and I built something out of it.
My approach to forex is very similar to my approach to futures. So
my ideas are developed the very same way. I use trend following
principles, I use counter trend principles, all similar development
process on forex as well as on futures. And what I do, same as I do in
futures, I study every single market as a separate entity. So I am not
looking for a system working for example on EURJPY and on NZDCAD,
no. Each market is studied on its own. Some of the articles about the
most robust system are those which work for every market, every time
frame, this is in my opinion, bullsh!t really. Because first of all I don't
think the markets are fractal, so I don't think that something that
works on a daily basis will work on a three minute basis because of
the noise in the market changes completely in those conditions.
Second, this might be true to a certain extent if you base your
choices on indicators but I don't work with indicators mostly. Many
people think that trading systems are a clever mix of indicators, I
don't think so. I study the behaviour of the markets, I study what they
do and then I put this information into the code. I don't study markets
based on indicators which are a mean value of what a market might
do. I might use indicators as filters but not as a decision maker.

Andrea Unger is the only

trader to ever win the World
Cup trading championships 3
years in a row, with returns
of 672% (2008), 115% (2009)
and 240% (2010). In 2012 he
also took out first place in the
Q4 contest.
In 2005 he won the
TopTraderCup in the Futures
division with over 60%
performance in 3 months.
That year he also won the
monthly race of the Tcup
organisation with over 50% in
one month.
He is an honorary member of
the National Investment
Consultant Organization and
graduated honoris causa in
Portfolio Management and
Asset Allocation.

Andreas website is:

Oneyeartarget.com

And also the forex pairs have different behaviours. For example, the
GBPCAD has a typical mean reverting behaviour. Also the USDJPY
sometimes, until it changes then its very dangerous. But the EURUSD,
the GBPUSD for example, all these markets have a very trend
following behaviour. So the first thing to do is to identify the pair you
want to trade, what kind of main behaviour it has and what kind of
reaction it has to a certain input. So if you want to develop a trend
following system you better choose GBPUSD for example and then
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you will have an easier life and if you want to build a mean reverting
system buying at the bottom and selling at the top you might choose
something like EURNZD or GBPCAD and then you will certainly find
some better edge. So you have to screen your forex pairs and make
a decision depending on what kind of system you want to trade.

Based on my style of trend following systems which is my bread and

butter, I prefer to work on forex pairs on 60 minute charts or 30 minutes.
Sometimes I use the 5 minutes but it doesn't mean the 5 minutes were
building my conditions, 5 minutes were simply to fine tune a single move
during the time but I was still considering larger periods of time to make my
decision. So I was for example, filtering the days on a daily basis as I
mentioned before at the beginning of my interview, and the 5 minutes bar
was just to have a very clear picture of what was happening during the day
but not to make my decision out of it. If I want to make a decision using
single bars I have to start with a 60 minute chart minimum 60 or 240. I
don't use daily because it's always a bit tricky on forex you never know
when the day starts, if it's the New York open or London open or Australia,
so I prefer to use the 60 or 240 bars.
As I mentioned in the earlier part of the interview I use some daily
patterns and filters, and obviously these daily patterns have
sometimes, mirrored from long to short if, for example, I decide to
enter long only if the close of yesterday was smaller than the close of
the day before, the short end of the decision would be the opposite
so the close would have to be greater than the close of the day
before. And with this point of view, the conditions would have to be
different so I run the optimization separately in order to study the
market. I stress this. I run optimizations to study the market not to find
the best way to trade it. I study to see how it reacts to certain
conditions and then I make my decision on what to use.
Sometimes I find out that for example, for long trades you have good
results with a number of filters while with short trades you have good
results only with a couple of them. And this is a very dangerous
situation where you have to consider that all the positive results of the
long side may just depend on how the market moved in the last
period. And those are very critical situations where you might
consider either to take only long trades which is bad in my opinion as
a decision unless you are trading in a very specific market such as
mini S&P or Bonds where the situation is a bit different from a
structural point of view. Or you might decide to put into the system
conditions which lost money in the past but that you expect that if
the market changes from bearish to bullish or the opposite, those
conditions you chose which lost money in the past might make
money in the future because the market changes to the opposite. So
that is the most delicate, but I start the long and short separately to
try to understand what the market is telling me.

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