Trading in 2018 is Objectively Better

I computed my average gain per NQ contract traded in 2006-2008 compared to in 2018. In 2006-08, on average I gained 0.46 points per contract traded or $9.31. Commissions on a roundtrip were $4.80 then. In 2018 so far, I made 3.69 points per contract or $73.74. Commissions are now $4.10 on a roundtrip. So, my trading now is almost an order of magnitude better. The average is brought down by lots of small daytrades I've done. As I plan to do fewer of those, the average should improve, I hope. On the other hand, the level of the index is now nearly 4 times higher than it was in 2006-8 and so a given percentage price move translates to more points.

This graph shows the equity curve on NQ trades - the actual number of trades is half this as there is one data point for each opening or closing of a position. Initially in 2006-7 I had a reasonably good increase in profits, peaking around $10k cumulative profit. Then there was a long slow decline into 2008 of a series of small wins, punctuated with larger losses. The big jump is the start of trading in 2018,  when I had a series of big wins. Since then, things have gone sideways, with losses equal to gains.

Tactical and Strategic Trading

After seeing a big profit disappear again a few times, I think I am going to adopt a combination of strategic and tactical trades now that I am trying to trade two contracts. One contract is always held in the direction of the model for as long as the model is long or short. This is the strategic trade. The other contract is in the same direction but can be closed out for the day when there is a big profit already. That is the tactical trade. Yes, day trading but the kind of daytrading where you put a trade on at the beginning of the overnight futures session and close it at the market open or vice versa. I had planned to do this but deferred it to stage 4 or 5 of the experiment. But I think I need the psychological boost now. I will make trading decisions using a chart with 2 to 3 hour candles. On a chart at that frequency most days break down into a rising and a falling period or a weak (when the market goes sideways) and strong period. I will close the tactical trade if it has made a profit and the next half of the day looks like being weak or going in the opposite direction to the model. Anyway, let's see if this works.

It probably was necessary to suffer through the pain of seeing a big profit on two contracts disappear a couple of times to be willing to have two contracts on overnight Australian time.... I tried adding one contract tactically before but was too nervous about it to set a wide enough stop.

Today the strong period was during the overnight (the market went down, in the model direction) and the weak period was during the US daytime when the market went up in the opposite direction to the model.

P.S.
I was just stopped out by the Google earnings report... Even more wishing I had closed one contract at the market open... This was a "tactical" rather than model stop. So, I got short again (tactically and strategically) at 7425.5 with the stop at 7441. This is very close, but was the second pivot resistance level when the model originally went short and so with the current model stop rules, that's where the stop stays.

Actually, the model is bit ambiguous today, but following the rules for these situations, we should still be short...

P.P.S.
I was just stopped out at the model stop. That means I'm out for today. Tomorrow morning I will re-evaluate the model direction. This is definitely looking like a losing month, similar to April, which was the initial model development month.

This model trade that was initiated on Friday lost 0.86%.

I researched the previous cases of similar ambiguous model signals so far this year.  There were only two previous cases, which were where the signal said to switch to short but was ignored because the turning point was from a value of the indicator that was close to zero. Both those times, staying long was the right thing to do. Maybe, in the absence of getting stopped out, staying short will turn out to be the right thing to do today. We will see. Either way, it is a very small sample to base any conclusions on.

The Kelly Criterion

There is a lot of incorrect information on the web about applying the Kelly criterion in the stockmarket. It is very different to applying it in a card game where you either win or lose a fixed amount. In that context the Kelly criterion tells you how much to bet on each gamble. But whether you are doing short-term trading or long-term investing that is not the case in the financial markets where there are continuous payoffs. In this paper, Ed Thorp lays out the Kelly criterion for investing in financial markets. It results in a rule of how much leverage to use when investing in a portfolio. That portfolio could be a buy and hold portfolio of stocks, or it could be a high turnover futures trading account. To determine how much of total net worth to allocate to a particular asset class or strategy is a different calculation. I think you should maximize the Sharpe ratio for your total portfolio. Where to set the stop loss in trading is a similar calculation - you want to use stop loss rules that maximize the Sharpe ratio for the strategy. I don't think Kelly tells you how much to risk on each trade in the way it can tell you how much to bet on each gamble.

The Kelly criterion isn't a practical rule in the real world as it requires you to continuously change the size of your position as you win or lose money. The suggested leverage for my trading model – this may be exaggerated because of too short a sample of returns and volatility – is greater than that allowed by the futures exchange. This amount of leverage would immediately blow up in the real world and result in huge amounts of commission and bid-ask spread payments...

Very Good Service from Interactive Brokers

We phoned Interactive Brokers about the login problem. They have a system issue. They set up the account so it can accept a temporary security code which they gave to us. We'll use this until they resolve the issue. The questions they asked to confirm our identity apart from a couple of the typical secret questions were what the net asset value in the account was, what position was in the account (short NASDAQ 100 futures), and what bank we use to transfer money to the account. If we had stolen a password we would have know two of those at least, because you can login into the account on a read-only basis with the password.

I managed to use the temporary security code to set up the mobile app which can produce codes even if it can't receive texts.