1 TradeTheMarkets.com Everything You Always Wanted To Know About Systems but Were Afraid To Ask March 20, 2012 Dr. John F

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TradeTheMarkets.comTradeTheMarkets.comwww.OnlineSystemTrading.comwww.OnlineSystemTrading.com

Everything You Always Wanted To Know Everything You Always Wanted To Know About Systems but Were Afraid To AskAbout Systems but Were Afraid To Ask

March 20, 2012March 20, 2012

Dr. John F. ClayburgDr. John F. Clayburgwww.onlinesystemtrading.comwww.onlinesystemtrading.com

TradeTheMarkets.comTradeTheMarkets.comwww.OnlineSystemTrading.comwww.OnlineSystemTrading.com

Everything You Always Wanted To Know Everything You Always Wanted To Know About Systems but Were Afraid To AskAbout Systems but Were Afraid To Ask

March 20, 2012March 20, 2012

Dr. John F. ClayburgDr. John F. Clayburgwww.onlinesystemtrading.comwww.onlinesystemtrading.com

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Commodity Trading Advisor Commodity Trading Advisor Disclosure:Disclosure:

System trading data presented during the course of this presentation is the result of System trading data presented during the course of this presentation is the result of hypothetical backtesting and does not represent actual trades.hypothetical backtesting and does not represent actual trades.

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR ("CTA"). THE REGULATIONS OF THE COMMODITY COMMODITY TRADING ADVISOR ("CTA"). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THESE DOCUMENTS ARE READILY ACCESSIBLE AT THE CTA’S HIGHLIGHTED. THESE DOCUMENTS ARE READILY ACCESSIBLE AT THE CTA’S WEBSITE. THE CTA IS REQUIRED TO PROVIDE OTHER DISCLOSURE STATEMENTS TO WEBSITE. THE CTA IS REQUIRED TO PROVIDE OTHER DISCLOSURE STATEMENTS TO YOU BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU. YOU BEFORE A COMMODITY ACCOUNT MAY BE OPENED FOR YOU.

"There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

Intellectual Property NoticeIntellectual Property Notice

The material presented in this online The material presented in this online webinar is protected by U.S. and webinar is protected by U.S. and international copyright and international copyright and intellectual property laws.intellectual property laws.

Intellectual Property NoticeIntellectual Property Notice

You are free and encouraged to use this You are free and encouraged to use this information for your own personal use.information for your own personal use.

Redistribution of this material to others Redistribution of this material to others in any form is prohibited.in any form is prohibited.

© Dr. John F. Clayburg 2012© Dr. John F. Clayburg 2012

All rights reserved.All rights reserved.

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Today's PresentationToday's Presentation

Trading in the direction of the major Trading in the direction of the major trend with “unconventional” trend with “unconventional”

interpretation of “conventional” interpretation of “conventional” indicators.indicators.

Actual trading examples.Actual trading examples.


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Before we proceed….Before we proceed….

Consider that when trading using Consider that when trading using technical analysis, we are effectively technical analysis, we are effectively attempting to mathematically predict attempting to mathematically predict

human behavior.human behavior.


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Remember that technical analysis is Remember that technical analysis is not a world of absolute certainty….not a world of absolute certainty….

But a world of probabilities and But a world of probabilities and possibilitiespossibilities


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““Unconventional” Use of Common Unconventional” Use of Common IndicatorsIndicators

Automated Trading Systems Created Automated Trading Systems Created from “Unconventional” Use of from “Unconventional” Use of

Common IndicatorsCommon Indicators


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Automated System ResultsAutomated System Results

Past performance, whether actual or indicated by historical tests or strategies, is no guarantee of future performance or success.

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The Four-Step Trading The Four-Step Trading MethodMethod

The Four-Step Trading The Four-Step Trading MethodMethod

Determine the major trend for the dayDetermine the major trend for the day

Define the minor trend within the Define the minor trend within the major trendmajor trend

Identify a high-probability entry pointIdentify a high-probability entry point

Define logical stop-loss and profit-Define logical stop-loss and profit-taking strategytaking strategy

There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Past performance is not necessarily indicative of future results".

1111

Trend DefinitionTrend Definition

Trend definition can be long term, Trend definition can be long term, medium term or short term.medium term or short term.

Depends on the trading style and Depends on the trading style and objective of each individual or objective of each individual or trading program.trading program.

1212


Downtrend


Uptrend

100 Period Simple Moving Average

1313

Trade SelectionTrade Selection

Identify minor trend exhaustionIdentify minor trend exhaustion

When the trend has been defined, the When the trend has been defined, the entry point can be defined by the entry point can be defined by the “unconventional” use of a number of “unconventional” use of a number of indicatorsindicators

Moving AverageMoving Average

MACDMACD

CCICCI

RSIRSI

1414

Simple Moving AverageSimple Moving Average

2 Moving Average Lines

18 period

9 period


1515


2 Moving Average Lines

18 period

9 period


X

X

X

X XX

X

X X

1616



1717



1818

MACDMACDMMoving oving AAverage verage

CConvergence / onvergence / DDivergenceivergence

The Moving Average Convergence The Moving Average Convergence Divergence indicator calculates 2 Divergence indicator calculates 2

exponential moving averages.exponential moving averages.

The difference between these 2 averages is The difference between these 2 averages is then plotted as the MACD. then plotted as the MACD.

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MACDMACD

MACD MACD Average


2020

MACDMACD

MACD MACD Average


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MACDMACD


2222

MACDMACD


Trade Only In Direction Of Major Trend

2323

MACDMACD


2424

MACDMACD


Using MACD – Short Term Trend Definition

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MACDMACD


Using MACD – Short Term Trend Definition

MACD > 0 = UpTrend

MACD < 0 = Down Trend

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Commodity Channel IndexCommodity Channel Index

Calculations are similar to moving Calculations are similar to moving averagesaverages

Compares an average price to an Compares an average price to an average price x bars agoaverage price x bars ago

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Buy – Sell on Crossovers


2828



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RSIRSI

An “unconventional” use of the An “unconventional” use of the Relative Strength Indicator (RSI) Relative Strength Indicator (RSI)

Signal GenerationSignal Generation

Relative Strength Index (RSI)Relative Strength Index (RSI)

Classic overbought – oversold Classic overbought – oversold oscillatoroscillator

““Classic” interpretation suggests Classic” interpretation suggests buying oversold conditions under 20 buying oversold conditions under 20

– 30 and selling overbought – 30 and selling overbought conditions above 70 - 80conditions above 70 - 80

RSIRSI

3131

RSIRSI

3232

RSIRSI

3333

RSIRSI

3434

3535


200 Day Moving Average LineDefines Uptrend


5 Period RSI

RSI < 25 = Buy Signal RSI > 55 = Sell Signal

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200 Day Moving Average LineDefines Uptrend


5 Period RSI

RSI < 25 = Buy Signal RSI > 55 = Sell Signal

HyperCycle Strategy

3737



HyperCycle Strategy

3838



3939



4040



4141



Four Step Method

1. Define Trend

2. Define Exhausted Counter Trend

3. Define Entry Point

4. Define Exit Point

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RecapRecap

Four-Step MethodFour-Step Method

Determine the major trend for the dayDetermine the major trend for the day

Define the minor trend within the Define the minor trend within the major trendmajor trend

Identify a high-probability entry pointIdentify a high-probability entry point

Define logical stop-loss and profit-Define logical stop-loss and profit-taking strategytaking strategy

4343


An “unconventional” use of the An “unconventional” use of the momentum indicatormomentum indicator

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MomentumMomentum

Simply stated, momentum is simply Simply stated, momentum is simply the difference between the present the difference between the present

price and the price “x” bars ago price and the price “x” bars ago

4545


MomentumMomentum

For our purposes, if momentum is For our purposes, if momentum is greater than zero, the trend is greater than zero, the trend is

higher.higher.

If momentum is less than zero, the If momentum is less than zero, the trend is lower. trend is lower.

4646


Zero Line


4747


Zero Line

Momentum > 0 = Uptrend

Momentum < 0 = Downtrend


4848



4949



5050



5151



5252



5353



5454



5555


Another “unconventional” use of the Another “unconventional” use of the RSI indicatorRSI indicator



Classic overbought – oversold Classic overbought – oversold oscillatoroscillator

““Classic” interpretation suggests Classic” interpretation suggests buying oversold conditions under 20 buying oversold conditions under 20

– 30 and selling overbought – 30 and selling overbought conditions above 70 - 80conditions above 70 - 80

RSIRSI

5757

RSIRSI

5858



Unconventional approach using RSI to Unconventional approach using RSI to pinpoint the entry after the trend is pinpoint the entry after the trend is

defined by momentumdefined by momentum



1.1. Following the trend definition by Following the trend definition by momentum:momentum:

2.2. Buy RSI cross over 60Buy RSI cross over 60

3.3. Sell RSI cross below 40Sell RSI cross below 40


Momentum plus RSIMomentum plus RSI

Buy signal:Buy signal:

1.1. Momentum greater than zeroMomentum greater than zero

2.2. RSI must cross below 60RSI must cross below 60

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Momentum / RSI Buy SignalMomentum / RSI Buy Signal


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6464



6565



6666



6767



6868



6969



7070



7171



7272




Momentum plus RSIMomentum plus RSI

Sell signal:Sell signal:

1.1. Momentum less than zeroMomentum less than zero

2.2. RSI must cross above 40RSI must cross above 40

7474

Momentum / RSI Sell SignalMomentum / RSI Sell Signal


7575



7676



7777



7878



7979



8080



Separate Parameters for Buy Separate Parameters for Buy and Sell Sideand Sell Side

Efficiency and profitability of the Efficiency and profitability of the strategy benefits significantly with strategy benefits significantly with separate settings for the long side separate settings for the long side and the short side.and the short side.

8181


The long side and the short side are The long side and the short side are two totally different markets.two totally different markets.

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8383

You must feed a bull every day…


8484

… but a bear can go all winter


8585


8686

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8888



8989



9090



9191



9292



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Four-Step MethodFour-Step Method

Basic setup theory for all systems.Basic setup theory for all systems.

1.1. Define the trend – momentumDefine the trend – momentum

2.2. Define the exhausted countertrendDefine the exhausted countertrend

3.3. Define an entry point – RSIDefine an entry point – RSI

4.4. Exits Exits

Seven distinct exit routinesSeven distinct exit routines

9494

System TradingSystem Trading

EXITS!!!!!!!!EXITS!!!!!!!!

Entries are the easiest part of a trade.Entries are the easiest part of a trade.

Ultimate success depends largely on Ultimate success depends largely on structure and efficiency of exit structure and efficiency of exit

routinesroutines

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System TradingSystem Trading

EXITSEXITS

1.1. Specific targetsSpecific targets2.2. Specific stop loss per contractSpecific stop loss per contract3.3. Equity outEquity out4.4. Trailing stop on runnersTrailing stop on runners5.5. Move stop after target oneMove stop after target one6.6. Breakeven after target oneBreakeven after target one7.7. Day lossDay loss

Universal System InputsUniversal System Inputs

Number of contracts or lotsin initial position


Target 1 value in pointsNumber of contracts thatwill be liquidated atthe target 1 price

Remaining contract is openuntil reversed, stopped outor end of day exit


Long 2 Contracts

Exit 1 at Target 1Reverse to Short 2


Target 2 and Target 3are set up insimilar fashion


Target 2 value in points





Targets are inactive


Targets are inactiveuntil a positive numberis entered here


Initial Position = 4 ContractsTake 1st off at 30 point target

Take 2nd off at 45 point target

Take 3rd off at 60 point target

4th contract is open until itis reversed, stopped outor end of day exit


Long 4 Contracts

3 Target Exits Reverse to 4 Short


4 contract system report


Multiple contractexample


Numbers represent remaining opencontracts

30 contract system report

30 contract equity curve


1 = on; 0 = off

Trail amount in points

Position 2 Trailing StopPosition 2 Trailing Stop

New Trailing Stop on 2nd position

112112


Trailing Stop activates only after target 1 hit

113113


Trail Amount is in Points

Measured from the highesthigh of the position aftertarget 1 is hit.


Trail amount in points

115115


20 Points


Previous Configuration


New Trailing Stop on 2nd Position

Tighten Stop after Target 1Tighten Stop after Target 1

Stop loss in $ per contractfor initial position

Stop per contract for all remaining contracts after target 1 hit

1 = on; 0 = off

Don’t use stops & targetsDon’t use stops & targets


150 point target

50 point stop

150 point initial stop


Target 1 stop only used as a stop after Target 1 stop only used as a stop after target 1 is hit and only works as a target 1 is hit and only works as a stop loss.stop loss.

This input will not accept a negative This input will not accept a negative number number


If you wish to use a stop to specify a If you wish to use a stop to specify a profit point for all positions after profit point for all positions after target 1 is hit use the breakeven stop target 1 is hit use the breakeven stop and enter a point value in the and enter a point value in the be_plus input.be_plus input.


No negative numbers here

This configuration sets the exit for all remainingcontracts to entry plus 20 points


20 point profit set after target 1 is hit


Position 2 trailer and target 1 stop loss Position 2 trailer and target 1 stop loss can be used concurrently.can be used concurrently.

The system will exit the position when The system will exit the position when the ‘closest’ stop is hit.the ‘closest’ stop is hit.


For example if the position 2 trailer is For example if the position 2 trailer is set to a high number the resulting set to a high number the resulting exit may be a greater loss than the exit may be a greater loss than the stop specified by the target 1 stop.stop specified by the target 1 stop.

In this case the higher target 1 stop In this case the higher target 1 stop will exit the position.will exit the position.


Buy Side RSI LengthSell Side Momentum Length

Sell Side RSI Length

Buy Side Momentum Length


Higher values for these inputs will result in fewer trades over identical time periods


1 = on; 0 = off$ Amount necessary to Trigger trailing stop

$ Trailing stop ondaily equity curve


Equity Floor = $850Equity Trail = $100

Daily equity > $850Trailing stop exit


If “Equity Out”

All trading disabled for remainder of session


1 = on; 0 = off

When toggle_be_tgt = 1then stop is automaticallymoved to breakeven whentarget 1 is hit


Number of points to“fade” the breakeven stop


For next chartstop moves to breakevenafter target 1 is hit



Breakeven stop after target 1


Stop goes to 10 pointsbetter than breakeven


“Stop Loss” to breakeven plus 10 points


Stop to breakeven + 10 points


Breakeven Disabled


Breakeven disabled

SummarySummary

Breakeven

Disabled

Enabled

Enabled + 10 points

Net % Profitable

$4,655 62%

$5,355 52.5% *

$5,920 71% *

* TradeStation does not consider a “breakeven” trade as “profitable”for percentage profit calculations


1 = on; 0 = off

Loss per day in $$

All trading disabled for remainder of session

If “Day Stop” is hit


Limits Number of Trades Per Day

Default = 1000 Effectively Disables This Feature

Unlimited Trades Per Day

5 Entries Only

“Toggle Day Limit” Label

Still Just 5 Entries Today

155155

Automated System TradingAutomated System Trading

Here’s what a system trade actually Here’s what a system trade actually looks like on a chart…looks like on a chart…

156156

Universal SystemUniversal System

Short 2 Contracts

Exit 1 at Target 1

Reverse to Long 2


Exit 1 at Target 1

Exit 1 on Close

157157

Universal SystemUniversal System

Long 40 Contracts

3 Target Exits

Reverse to 40 Short


Reverse to 40 Long

2 Target ExitsClose Time


Efficiency and profitability of the Efficiency and profitability of the strategy benefits significantly with strategy benefits significantly with separate settings for the long side separate settings for the long side and the short side.and the short side.

158158


Effective strategy parameters for Effective strategy parameters for momentum and RSI can vary momentum and RSI can vary significantly from day to day.significantly from day to day.

159159


The challenge is to select the proper The challenge is to select the proper variables early in the day.variables early in the day.

160160


Enter:Enter:

Parallel Function Technology.Parallel Function Technology.

161161

Trending / Non-trending














Parallel Function TechnologyParallel Function Technology

Parallel functions are a complicated Parallel functions are a complicated process to design and trade.process to design and trade.

More Info:More Info:

169169

Parallel Function TechnologyParallel Function Technology

Parallel functions are a complicated Parallel functions are a complicated process to design and trade.process to design and trade.

More Info:More Info:

170170


This week’s trades:This week’s trades:

171171


172172February 13. 2012 + $757


February 14. 2012 + $935

Contact InformationContact Information

Dr. John ClayburgDr. John Clayburgwww.clayburg.com

[email protected]

[email protected]

712.830.5062712.830.5062

512.266.8659512.266.8659174174

Documents

1 TradeTheMarkets.com Everything You Always Wanted To Know About Systems but Were Afraid To Ask March 20, 2012 Dr. John F