The experiment has involved going back to my research and identifying robust, replicable patterns in the ES futures contract and SPY ETF. I specifically selected patterns that play out over a multiday period, with average holding times of several days. The patterns demonstrated a distinct edge in 2012 and 2013 trading and then were tested independently on 2014 data as an out-of-sample test and then were further tested independently on 2015 data to date.
Now it's time for live trading.
There are three general patterns:
1) Failure Pattern - A market advance loses breadth and momentum and reverses.
2) Reversal Pattern - A market decline leads to broad weakness and expanded volatility, resulting in a reversal bounce higher.
3) Momentum Pattern - A market rise occurs with solid breadth and momentum and continues higher in the short run.
In the experiment, I will only trade those patterns. That means plenty of days of not trading and sizing up days when patterns occur. Each pattern is defined by a scorecard of criteria; if all criteria are not met, no trade is taken.
A first unit of risk is entered when the signal fires; further units are added on evidence that the signal is playing out as expected. Entries and exits for those further units are discretionary, based on intraday trading patterns.
A journal will track all signals and trades and how I traded them, with observations translated into goals for continuous improvement. The experiment is thus also an experiment in self-coaching. I hope to share lessons learned via the blog.
At the craft beer networking event a week from Thursday (May 21st), I will discuss the project further with interested traders. A notice about that event will go out this coming week.
Imagine if a group of likeminded, dedicated traders conducted their own experiments and shared results. That would generate quite an accelerated learning curve. There's a big difference between years of market experience and a single year's experience repeated many times over. That difference is deliberate practice and a structured learning from experience.
Further Reading: Identifying Trend Days
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