ANDREA UNGER WORLD CLASS TRADER ASIA TOUR 2013 the ONLY trader to win the WORLD CUP TRADING CHAMPIONSHIPS® 3 YEARS IN A ROW
Profitable Trading
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From Italy to Asia
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Inside Italy
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About me
• Andrea Unger • Born in 1966 • Degree in Mechanical engineering in 1990 • From 1992 to 2001 employed in technical-commercial positions in multinational companies • From 2001 Full time trader
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Some success stories European TopTraderCup 1° place 61%
FIRST Italian book on money management
World Cup Championship of Futures & Forex Trading® 1° place 672%, 115%, 240%, 82% 7
What are we looking for? •We try to understand the markets in order to take profit out of them •We try to find a compromise between our daily life and trading •We try to understand if trading is for us
Don’t dream this!
Try to avoid this! 8
What you think about the markets
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What the truth is more likely to be…
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One trader – two traders
Dr. Jekyll • He sees what’s happening • He doubts about himself • He thinks to apply a Stop Loss • He wants to build a plan for next trade
Mr. Hyde • He feels innocent about losses • He blames the markets for going the wrong way • He blames brokers for “taking” our Stop Losses • He leaves trades open as they “will get back into profit”
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Get rid of Mr. Hyde
•He wants you to be undisciplined •Analyse your trades •Don’t leave anything to decisions of the moment •Use resident orders •Plan your activity and if possible, once you placed your trades simply walk away
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Get rid of Mr. Hyde
•He wants you to trade with no plan •Decisions are hard when calm, imagine what when under stress… •Every event has to be planned •Markets have to be studied before trading not during •Also after trading you can look at the markets but only to understand where your plan might have been wrong
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Get rid of Mr. Hyde
•He let’s you think you are on your way to become rich very quickly •If you take some wins he let’s you think you are invincible •He leads you to risk too much •Risking too much is not the way to become rich, that is gambling •Better rich slowly than poor very quickly…
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What is really trading?
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Trading
There is no particular secret out there Markets need to be studied and discovered Trying, testing, trying, testing Diversification Appropriate risk Money management
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Are markets all the same?
A trading approach is not obliged to work properly everywhere to be considered good Some markets are good for trends and to be traded at breakout Some markets are very bad for breakout as they show a meanreversal behavior To have a general look at some well known markets let’s run a simple test
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Are markets all the same?
Our test consists in buying the breakout of previous daily high and exiting the day after on the open, this is just for test purpose but it will show interesting outcomes:
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Are markets all the same?
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Are markets all the same?
Results on EURUSD show it responds properly to a breakout entry
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Are markets all the same?
Even better GBPUSD which could even be tradable…
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Are markets all the same?
Bad results on GBPCAD, this shows a mean reversal behavior
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Are markets all the same?
Even worse EURNZD which could be tradable taking opposite entries…
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Are markets all the same?
MiniSP 500 future, typical mean reverting
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Are markets all the same?
DAX future, in spite of a strong correlation to EminiSP500 shows the opposite behavior and responds well to breakouts
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Are markets all the same?
It does not depend on the long term trend, same results are there for short entries on breakout of the low (here is EminiSP500)
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Are markets all the same?
Here is short on GBPCAD
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Are markets all the same?
Short on EURNZD
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Are markets all the same?
Be careful, markets change! This is USDJPY and it would tell us it is good for breakout trades…
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Are markets all the same?
Here is USDJPY from 2000, the last period shows a change in the general behavior
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Are markets all the same?
Good for intraday trend
Dax future Gold Silver CrudeOil Copper
Good for overnight trend
Dax future Commodities EURUSD GBPUSD EURJPY AUDUSD
Good fo”CounterTrend”
miniSP Bonds USDJPY GBPCAD EURNZD
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Are markets all the same?
If you develop a method look for solutions in the direction of the type of market you are intending to trade, don’t look for a breakout method on EminiSP 500, it might be there but for sure it is much more difficult than a counter trend approach on that market. In the same way don’t try a countertrend method on EURUSD if you are not experienced, it is better to look for a trend following a breakout.
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Discretional trades or Systems?
You are directly involved in the
You don’t need to keep on
decision
deciding
You can manage stress from
If you trust the system you have
position deciding at the moment
less stress
You got the feeling to keep
You can build a good trading
markets under control
plan
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Discretional trades or Systems?
To the end of Februar it was only discretionary
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So which System?
Psychology
Liquidity
Commissions
• When is a System “good”? • Are all “good” systems “good”? • one System or more Systems?
SYSTEM
Drawdown Margin
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Markets Identification Good for intraday trend
Good for overnight trend
Dax future Gold Silver CrudeOil Copper FTMIB future
Dax future Commodities EURUSD GBPUSD EURJPY AUDUSD
Good fo”CounterTrend”
miniSP Bonds USDJPY GBPCAD EURNZD
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Markets Identification
The same market is not always the same…: Intraday behavior study: Hourly Long Entry with 1 Hour trade length to study market BIAS If there is a tendency found with above approach work with filters Study yearly behaviour to see consistency Use results as a strategy or as additional conditions
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Markets Identification On EurUsd cycles of up and downs can be seen, on GMT hours longs are fine at 2 am and 5 pm, shorts at 8 am and 10 pm (*)
(*) Singapore Time is 8 hours ahead of GMT
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Markets Identification These are the results with this simple approach always in the market reversing positions at previously determined hours
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Markets Identification The equity is rising constantly which means the approach is stable and consistent, it is a good basis for further work!
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Breakout development
CrudeOil is one of the most volatile markets, an intraday trend following strategy can be looked for. Simple breakout rules are used and and End Of Day Exit Closes the positions together, eventually, with a Stop Loss
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Breakout development
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Breakout development
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Breakout development
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Breakout development
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Breakout development
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Breakout development
Breakout entries work on 60 minutes CL The principle works but not always we delimited the hours during which we take entries Market conditions change during the day and the same type of entry may loose strength in a different moment of the day
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Breakout development Working all day does not add significant profits, it adds only trades lowering the average trade
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Breakout development
The equity line is much less “rising” then the case where we limited activity during determined hours of the day
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Breakout development
In our strategy we used a Stop Loss of 1500 USD /contract Is it true the Stop Loss needs to be very small? Is it true no Stop Loss at all is better? Let’s run a test using Stops from 0 (no Stop Loss) to 3000 USD step 100 !
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Breakout development
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Breakout development
We chose a value in between not aiming for the best return overall Tight stops don’t work! Market needs a bit of freedom to move… No stop or large stops actually lead to better results… No Stop could be acceptable in this strategy as there is a time stop in place, yet in case we decide to apply position sizing based on the largest loss we’d have some problems
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Breakout development
Here are the results with position sizing on the version without Stop Loss
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Breakout development
Here are the results with the same position sizing model on the 1500 USD Stop version
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Money Management means:
•Always use StopLoss •Use dynamic Profit Targets •Use goo Risk-Reward Ratio
Money Management means: HOW MUCH to put in each Position 56
How to work?
Martingale: To increase units after a loss and to decrease after a win
AntiMartingale: To decrease after a loss and to increase after a win
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How to work?
Martingale: It is based on the psycological aspect that leads to thing a winning trade is hard to come twice or more in a row and so should a losing trade. There is the belief that after a losing streak the probability of a winning trade increases a lot.
In reality every event has the same probability!
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How to work? AntiMartingale: This method tries to take advantage of winning periods and to protect the capital in losing periods, an easy approach is to use a constant percentage of risk.
To use for example a 2% risk on the capital is equivalent to increasing exposure after a win and to reduce it after a loss (after the win the capital increased so the 2% of it will, after a loss the capital decreased and so will the 2% of it).
Let’s see some effects flipping a coin 59
Head or Tail 100 flips and 1000 flips, starting capital 100 €
Martingale: Betting percentace 1%, 2%, 3%, 4%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50% The percentage is multiplied by a desired factor after a loss and brought back to initial value after a win.
AntiMartingale: Betting percentace 1%, 2%, 3%, 4%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50% e 51% The percentage is kept constant throghout the entire series of tosses (as explained before this will increase the absolute size of the bet after a win and decrease it after a loss
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Head or Tail
Better winning% leads to unusual worse results
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Head or Tail
In this case better win% lead to better results
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Martingale example
No Money left
First bet Second bet Third bet Martingale would make sense only in case of infite capital; but would we waste our time here in that case?...
Fourth bet 63
How much? Having seen the results an Antimartingale approach is chosen The concept is based on using a fixed percentage of risk in every trade.
• Is there a better percentage? • How can that be determined?
Kelly equation and “optimal f” yes or no?
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How much? Kelly equation gives us a purely theoretical answer
K% =
(R+1)*W−1 R
Percentage of capital to use in every trade Average win to average loss ratio Winning % of the system 65
How much? Kelly equation looks at the statistical aspects of the system, it takes into account the average values and does not consider eventual peaks. A real world as trading is too dangerous to be “averaged” down, it would be better to take into account the negative aspects of the system, take maybe the worst of them, and basing calculations on this determine which risked percentage would have led to the best results. To do this different percentage will be taken for calculation and the growth of the capital will be considered as the value to maximize, the percentage which maximises the end capital is the so called “optimal f” where “f” stays for “fraction of the capital”.
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How much? Pn – Profit of trade number “n” HPRn (Holding Period Return of n) – Capital multiplier linked to trade number “n” WCS (Worst Case Scenario) – Highest losing trade of the analysed data TWR (Terminal Wealth Relative) – Multilplier of starting capital to determine end capital f – fraction of capital risked at every trade
HPRn = 1 –f*(Pn/WCS) TWR = HPR1 * HPR2 * HPR3*…HPRn
Optimal f is the value that maximises TWR
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How much? The method works on a series of historical trades, it calculates the TWR with various values of f and calls “optimal f” the value that maximises TWR
Kelly equations is based on statistical data of the system, averages calculated to give a global picture of the behavior of the strategy
If historical data and statistical data are identical also the Kelly Portion and optimal f will be the same
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Are these the number to use?
• No statistical value can perfectly picture the future • No past behavior will replicate identically in the future
• Real trading is “disturbed” by external events It is highly recommended NOT to use either Kelly portion or optimal f to determine what percentage of the capital to use as risk exposure!
??? So what??? 69
Are these the number to use? Any newbie to trading, due to:
• inexperience • Limited capitalization • greed Normally takes excessive risk. Kelly criterion and optiomal f give us an idea of what extreme levels of risk can be, the values used in real life must be a small portion of those values yet it is important to identify where the “phisical” limits are
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