Must-Visit Blog: Simplicity in Trading by @FuturesTrader71

I always study the tweets of @FuturesTrader71. I was very glad to hear that he has started a blog! He’s a pro futures trader out of the CBOT building. It’s always great when someone with talent and skill is willing to share it. I’ve added his new blog to my blogroll here, and I’ll be reading every post.

Two Pole Butterworth Filter for Think or Swim

I recently got interested in some of John Ehlers’ filters after reading Richard’s hit pieces on exponential moving averages. In traveling the intarwebz, I found an excellent site by Dave Newberg that had many of the Ehler indicators coded in Easy Language for Tradestation. I started porting them over to Thinkscript to see how they would work.

The first is called the Two-Pole Butterworth filter. It has roots in an analog circuit, but has been adapted to be a digital signal filter. The methodology is found here for the mathematically adventurous: wikipedia article. The basic idea is to try to get smoothing with as little lag as possible.

Here’s a shot of how the two pole Butterworth filter does vs. an exponential moving average of the same period:

Much smoother, better response, and a closer match to recent market prices. All the responsiveness of a much faster EMA, with the smoothing of a much slower EMA. This is going on my charts instead of EMA’s from now on.

You can get the “Two-Pole Butterworth Filter” Thinkscript code from my Google site, under “Released Thinkscript Studies“.

Here’s the John Ehlers book that the code is from:
Cybernetic Analysis for Stocks and Futures: Cutting-Edge DSP Technology to Improve Your Trading (Wiley Trading)

On Deck: Stuff I’m Working On

Just a quick look at some of the million things I’m working on. Comment if you have a vote on priority:

CAT tool for recording and plotting DDE data in Excel

An approximation of Market Profile / Time-Price Opportunity plot

Porting some of John Ehler’s Indicators (Butterworth filter, Super-Smoother, Cycle Periods etc.) to ToS

Signal vs. Noise analysis

Three-Line Break indicator

Auto-Trade plug-in for Ninja Trader: bring auto-trading with ATM templates to your strategy

Greed and Fear Revisited: Outcome vs. Opportunity

In trading, Greed and Fear are often condemned by many people. Greed is thought of as a companion of Fear, and both are considered to be bad when found in traders. I want to propose a different way to think about Greed and Fear. I agree with Mr. Gekko, that Greed is good, and I will go even further to add that Fear is good, also. However, they are only good for you if you are greedy and fearful of the right things. Otherwise, they are vices and not virtues.

My trading psychology in the past has always been this:

A mindset of maximizing my profits (or winning trades) and minimizing my losses (or losing trades) right now on THIS trade.

This mindset is focused on the outcome of the current trade. I believe that an outcome-based mindset (whether it’s P&L focused or win/loss focused) is where Greed and Fear cause us to fail as traders. The flipside is that this same mindset is also the source of profit for many successful traders, as they fade the losers.

I submit that traders SHOULD be greedy and fearful, and that the following should be the mindset for a successful trader’s Greed and Fear:

A mindset of maximizing your exposure to profit opportunities (Greed), and minimizing your exposure to loss opportunities (Fear) at all times and in all trades.

Watching The Market Open

Just a quick follow-on to yesterday’s post on bid / ask spreads. Here’s the chart of the market opening as the spreads of all stocks on the S&P500 come closer together and liquidity comes in: