TraderWerks. The first part, trader, we can all relate to. The second word , Werks is a German word that means factory.Stupid name at first, but when you think about it, it makes sense.

So now you have a clue to why I named this site TraderWerks. This post has been a long time in the making. Mainly because it is not just an answer for the curious, but an insight into the way I look at trading. I am by no means the worlds greatest trader, I just want to share my thoughts.

TRADING IS BORING

Trading is a lot more like working in a factory than you might think.

I focus on short term auto mated trading. Day trading you might say with a computer. When you are running systems it can be very, very boring. Really it is, since your systems make all the decisions, you are just along for the ride. Factory work is boring because it is factory work, trading is boring because it like like factory work with a better view.

On the setups I use most often, I have programmed an alarm sound when it comes time to place a order and open/close a position. Maybe 10 alerts over 6 and a half hours ( my current system anyway ). Of those ten alerts, maybe five trades will actually be signaled. I have semi automated my system, and I will fully automate one day, but for now, I am the human that makes sure a false signal is not generated by a Federal reserve speech or just a not a head fake from the ES. Most of the time, I just let the system do what it is programmed to do.

So here I am , pressing a button like a trained monkey every half an hour to an hour or every couple of hours. It doesn’t hurt my feelings to be called a trained monkey, since I am the who built the button I am pushing. But the time in between waiting for the the setup to occur is ‘downtime’. I can read email and such, but I still want to stay close to the system during trading hours.

LIKE A FACTORY

Day trading for me is not  the helter skelter of ‘Trading Places‘ ( One of my favorite Eddie Murphy movies ).

You go to the factory, do the best you can making widgets and go home and have a beer. No theatrics.

For me, my trading day is pretty much the same. I make sure my computers are running, checking out the systems, checking the previous day’s trade, updating my trading journal. Even though I auto trade, I still keep a trading journal which gives me  ideas on how to improve my systems. My trading consists of following my trading plan and following my system.

SO WHAT DOES TRADING BETTER HAVE TO DO WITH A FACTORY?

Both trading and working in factory have to do with following a plan. In trading, we have our trading plan, in a factory we have a work schedule. In a factory,  follow the work schedule and worry about your execution. In trading you follow your trading plan, and you worry about following that plan. I am sure you already have a trading plan, but in case have not written it down yet…….

A trading plan is a personal thing, so everyone’s trading plan will look different. IMHO, it should have at least three parts.

1. Entries – Your setups
2. Exits – Profit targets, Stop Losses
3. Money Management – Risk management

The first step to following a trading plan is writing out your trading plan. The key is writing it out. A trading plan is something you could actually explain to another person. The process of writing it out helps clarify our trading plan. A lot of us have vague trading plans in ‘our head’, but that is not a trading plan, that is one step from random trading. So, put together your trading plan, trade it like you are working in a factory, and you trade better.

SO REALLY, WHY TRADERWORKS.COM?

Because TraderWorks.com and TraderFactory.com  were already taken.

TIMELINES
This is a favorite ‘indicator’ of mine. I often forget my rules on time parameters. Such as trading over lunch and not trading around 2:00 p.m..

Timelines are indicators the draw lines across the bottom of a screen to give you a visual indication of the time during the trading day.

They can display many things, such as when different markets open and close or specific periods during the trading day.

DIFFERENT STROKES FOR DIFFERENT FOLKS

Different traders use timelines for different reasons. Currency traders will want to know things such as the time of the European open or the asian close.

Index traders usually look for periods during the day such as the open, lunch, and pre-market.

At the end of the day, timelines help you trade better by knowing what time you are in in the trading day.

TIMELINE FOR THE ES

This is my version of a timeline for the ES. The only parameter is the time-zone. By default, it is set to CST ( Chicago time ) and has settings for PST and EST.

This indicator is a little different in that it gives you a 5 minute warning before a change. When I am watching a trade, I want to know BEFORE the change. It gives me more time to prepare to enter/exit a trade.

If you click on the graphic , you will see a light green bar before the open. That is a color change that appears 5 minutes before the color changes to red. That little bit of warning helps me, I hope it helps you too.

The 5 minute bars are different sizes because I am using tick charts and they can have a different number of bars in a 5 minute period.

TIME TABLE

TW Timelines only has two colors, Red and Green. The light Green and light Red mark the transition times between two time periods.

The times for the indicator to go red are:

Opening : 8:30 A.M. Central Time
Lunch Break : 11:00 A.M. Central
Bond Market Close : 2:00 P.M. Central

These times are my preferences. The Bond pit closes at 2:00 P.M. Chicago time, and that may influence the stock market. Some people pay attention to that, others do not. If you have any ideas for other timelines, drop me a line at blog @ traderwerks.com

DOWNLOAD TIMELINE INDICATOR

I have put a banner ad up on the site for you to download this indicator when you sign up for the mailing list. I do not send much on the mailing list, but I put any updates to my free indicators there so it is a good thing to be receiving when I update indicators.

If the offer has expired, is because the free download has been cancelled, changed, folded , spindled or mutilated ( Just kidding ) . I do rotate the free indicators, so if the offer is gone, AND you are on the mailing list, email me and I will see about getting you a copy.

THINK LIKE A TRADER

Some scientists decided to do a study on how do people trade ‘like a trader’, and do they perform better when  people trade better when they ‘Think Like A Trader”.

This paper specifically takes a look at traders and loss aversion. If one ‘Thinks Like A Trader” will they be less risk averse and trade better. The answer is yes. I posted a link to the paper below.

For simplicity sake, I will define loss aversion as:

losses hurt more than gains feel good

That is taht people feel a lot more pain from losing $100 than from making $100. Thus, we make based decisions based on not making loses.

What the study did was ask the guinea pigs subjects to “Think Like A Trader” and not to worry about the losses. It seems to have worked. They have a lot of graphs and charts in the paper that you can check out in your free time.

SIM TRADING

A lot of people can sim trade better than they can trade actual money. I could have titled this post “Why I Am Great In Simulation Trading And Suck In Real Life” but that would have been just too long.

For most people, when we sim ( trading in simulation mode without money on the line ) we take more risks and tend to do better. When it comes to actually trading, we tend to suck. Time seems to slow down while we are watching every tick.

The reason some of us ( most of us ) , sim trade better than than real life trade is that were are in a better state emotionally to trade our systens and not second guess ourselves. We are thinking like a trader because we do not fear the losses.

AUTOMATED STRATEGIES ALWAYS THINK LIKE A TRADER

That is the beauty of an automated system. It is mechanical and it does think like a trader.

You should see my face when I watch the strategy trade. My strategy will make a trade and I will watch it and just want to close out the trade before I lose too much or lock in a profit. Most of the time, my strategy proves me wrong and stays in the trade. My strategy trades like a machine because it is a machine.

CONCLUSION

When I read an academic paper, I usually read the conclusion first and work my way back from there. I also read the ends of novels first, but considering how many novels I read now ( pick a number between nil and zero ) , it does not matter.

In real life, you need to fear and respect losses but not let them overwhelm your trading. Try to ‘Think Like A Trader” and don’t let the losses affect your trading or your system.

So when you can trade on a sim, and you move to trading a live account, remember to try to keep the same detachment you had when you were trading on a sim.

NOTES

The image is by Sakurako Kitsa, is a Bento box in the shape of a Starbuck’s Green Tea Frappuccino .

You can read the whole paper herepnas-2009-sokol-hessner-0806761106

3 Bar Reversal Pattern ( Strategy Wizard )

        This strategy is from an article  by Thomas Bulkowski ”Are Three-Bar Patterns Reliable For Stocks?” . It was in the  January,2000 issue of Stocks&Commodities magazine. As an aside, I want to mention, that there are a lot of things called “Three Bar Reversals’, but I am just looking at this particular one.

        This strategy was done in strategy wizard using NinjaTrader so those who are not into C# programming, can fool around with it. You can import this strategy with File->Utilities->Import NinjaScript. Ninja expects a zip file when you import so don’t unzip the file after you download it, just import it as is.

THREE BAR REVERSAL

        I coded this up in NinjaTrader ( Sorry Tradestation people ) for use on daily charts and then I tested it on one stock. I chose AAPL for two reasons (1) I love Apple computers (2) It comes first alphabetically. I also like to trade AAPL stock, it is one of my favorites trading stocks.

        It is a stop and reverse system, which means it is always in the market. When it gets a buy signal, it goes long, when it gets a sell it closes the long position and goes short. Some people like this style of trading system, some people do not.

Rules :

- Day two of the three-day pattern has the lowest low / highest high of the three days.

- Day three  must have a close above the prior day’s high/low.

- No DoJi’s

If you want the full details , you can order a reprint from the net.

I discovered this gem of a pattern while prospecting for ideas in a recent issue of STOCKS & COMMODITIES.In the interview with Kevin Haggerty was the following pattern description: One example [to determine a change in direction ]is a three-bar pattern,which is the same one that futures traders use.The stock establishes a low price as a swing point.Once the stock closes above the high of the low day,to me,that is a change of direction for an undetermined period. Using this description as a guide,I decided to formalize the shape and behavior of the pattern.

-Thomas Bulkowski

        So I tested this system from Jan 1, 2008 to today, April 4, 2009. No particular reason why I picked that date, I just wanted to start on a Jan 1. It ran for 16 months in backtesting, and the results are in the image about. You can click it for a larger image.

        Now admittedly, AAPL is a very volatile stock, that I do like to trade, so this probably does not represent your average stock. However, it has been a very volatile period and a lot of equities have been trading like AAPl stock.

        The strategy returned $84 a share over the 16 monhts, and had a win/loss ratio of 53%. Just a little better than flipping a coin but the profit came from the win /loss ratio. The wins were 50% greater than the losing trades. Average trade was over a week, which is a doable rate for the retail trader who cannot watch the market all day. The profit percentage was 4.41% percent a month.

WHAT CAN BE DONE TO IMPROVE THIS STRATEGY

        I think there is a lot to be said for this strategy. However, it is an ‘always in the market’ kind of strategy that can get caught in a downdraft. So here are some suggestions ( If you try any of these, let me know and I will update this post )

1. If used on a portfolio, use a portfolio normalization scheme for position sizes.
2. Stop Loss at support and resistance levels.
3. Profit Stop.
4. Test performance on ETF’s

WHERE CAN I DOWNLOAD THIS

        You can download this here,3 Bar Reversal Strategy . Enjoy

None of this is investment advice. This is just a strategy I coded for entertainment purposes only. Nothing more. Whatever you do with this is up to you. There is no warranty expressed, adumbrated, implied, insinuated, inferred, implicated, aspersed, or otherwise in existence.