Bond Trading Strategy Refined

Bond Trading Strategy Refined

In the last blog post we looked at creating a bond trading strategy which created to 90% win rate.  But as noted in that post, 44 trades or 29% of all trades taken, did not either immediately result in a win or a loss.  These are the trades that require additional homework to fine tune the strategy.

When looking at these trades there were

  • 16 trades that had three ticks of adverse excursion
  • 8 trades that had four ticks of adverse excursion
  • 10 trades that had five ticks of adverse excursion
  • 9 trades that had six ticks of adverse excursion

What was not looked at in the first blog entry or Excel worksheet was whether or not it would remain profitable to stay in the trade and ride it out to either a profit or loss. The same criteria of five ticks for a win and seven ticks for a loss was used to determine wins and losses. A copy of the worksheet can be found here.

There were 16 trades that had three ticks of adverse excursion and an eventual winning record of 11 wins and 5 losses. By staying in the trade this resulted in 25 ticks of additional profit or $390.

There were 8 trades that had four ticks of adverse excursion and an eventual winning record of 6 wins and 2 losses. By staying in the trade this resulted in 16 ticks of additional profit or $250.

There were 10 trades that had five ticks of adverse excursion and an eventual winning record of 8 wins and 2 losses. By staying in the trade this resulted in 26 ticks of additional profit or $406.

There were nine trades that had six ticks of adverse excursion and an eventual winning record of four wins and five losses. By staying in the trade this resulted in the 15 ticks of additional loss for a loss of $234.

As you can see from these figures when there was between three and five ticks of adverse excursion it did remain profitable to stay in the trade resulting in an additional total profit of $1046 for the three week period. When there were six ticks of adverse excursion these were clearly trades that needed to be exited at breakeven or at minor support and resistance.

This brings the three-week trading record to 119 wins, 19 losses and 9 trades exited at breakeven. That is still an 86% winning trading strategy and even though there is a 4% drop in the percentage, there is a $1046 increase in your profit. The previous net profit for the three weeks was $5896 which is now adjusted upward to $6944 or $2314 a week for a single ZN contract.

The purpose of this post is not to suggest a bond trading strategy that you should be following without more testing.  The purpose of this post is to describe how to use ZoneTraderPro and create a viable bond trading strategy that addresses all of the issues that you will see during the trade. This is why ZoneTraderPro is different from other software. ZoneTraderPro does not repaint anything and when it indicates a trade those arrows do not disappear. They remain exactly where they were seen in real time. No other software allows you the ability through back testing to create a viable and workable trading strategy.

Todays Trades

To underscore the information presented in this post we don’t have to look any farther than the first two trades today. The first trade had three ticks of adverse excursion and became a winner in the second trade had four ticks of adverse excursion and became a winner. Nice day, again.

Bond Trades from 2/25/15
Bond Trades from 2/25/15

 Disclaimer

THIS IS NOT A TRADING PLAN.  More work has to be done to fine tune this idea and if you trade it without doing your additional homework, you do so at your own risk.

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight.

Information herein has been obtained and prepared from sources believed to be reliable; however no guarantee to its accuracy is made. Comments contained in these materials are not intended to be a solicitation to buy or sell any of the commodities mentioned. Past performance is not indicative of future performance results. Opinions expressed herein are the options of the author only and not the opinion of any firm the author may be affiliated or associated with.

Developing a Bond Trading Strategy

Developing a Bond Trading Strategy

How do you develop a bond trading strategy using ZoneTraderPro?  One of the major advantages of ZoneTraderPro is its ability to back test and develop a trading plan and strategy for the market that you are interested in trading.  This is the first in a series of posts which look at how you develop a profitable bond trading strategy using ZoneTraderPro.

This post is going to look at 15 days of trading a strategy on the 10 year bonds, the ZN futures contract.  The trades took place between January 26, 2015 and February 13, 2015.  The first trades were taken after any 830 EST news event and positions were closed at 1615 hours for the day.  The ZoneTraderPro Forex currency tool  was removed from the pictures to give a clearer picture.

This strategy looked at trading just a single pattern in the bond market and there was 148 documented trades in the three-week period.  Since a win or a loss is based on decisions you will make in real-time, I did not include total wins and losses on the worksheet.  The worksheet contains the date and time, whether the trade was long or short, maximum favorable excursion (MFE), maximum adverse excursion (MAE) and four other columns used to determine and fine-tune a strategy.  You can download a zip file of the Excel worksheet and chart pictures here.

 Maximum Favorable Excursion

 Number of Winning Trades  Favorable Excursion Total Ticks Total Profit
 106  >= 4 Ticks  424  $6622
 94  >= 5 Ticks  470  $7341
 76  >= 6 Ticks  456  $7122
 57  >= 7 Ticks  399  $6232

When we look at favorable and unfavorable excursion is very important understand what ZoneTraderPro has consistently used to develop any statistic.  If the trade was a long trade the numbers were developed from the top of the zone and if the trade was a short trade the numbers were developed from the bottom of the zone.  Additionally in this worksheet you will see a -1 in the MAE column.  This means that the market came within one tick of the blue countertrend zone and did not touch it.  A zero in the column means that the market touched the blue countertrend zone and there was no adverse excursion. 53 of the winning trades had NO adverse excursion and 75 had 1 tick or less.

Statistics
How statistics are figured

 Counter Trend Trading Pattern

What is the trading pattern that we are looking at in this post?  In the eSignal version of the software there is a countertrend trade pattern.  This pattern was not included in the NinjaTrader version due to the risk reward in trading the S&P futures contract.  The trading pattern says this.  When the market trades to a blue countertrend zone we have defined a trend in that direction.  The market should retrace to the intermediate trend zone and the trend should resume.  In looking at the above table of maximum favorable excursion there is a reason that 5 to 6 ticks appears to be the sweet spot for taking profit.  The reason is found in the definition of the countertrend trade pattern.  There is generally about 5 to 6 ticks between the blue countertrend zone and the intermediate zone where the trend should continue.  What this study does not look at are the trend trades that follow the pattern we are looking at today.

So why are we looking at the countertrend bond trade and not a countertrend S&P trade?  Is my opinion that there is less adverse excursion in the bond market then there is in the S&P futures contract.  This is not to say the countertrend trade is not profitable on the S&P.  Tick divergence trading pattern is the countertrend trade pattern that has an exceptional risk to reward ratio.  This is because of the tick divergence.  The emphasis is upon quality risk to reward trades rather than quantity.

 Maximum Adverse Excursion

 Number of Losing Trades  Adverse Excursion Total Ticks Total Loss
 35  = 5 Ticks  175  $2733
 25  = 6 Ticks  150  $2343
 16  = 7 Ticks  112  $1749
15  = 8 Ticks  120  $1874

So do we have a winning strategy?  If we look at taking 5 ticks of profit from every trade, placing a stop at 7 ticks, and factoring in the commission cost of $352, we have a profit not including any slippage of $5240 for a single contract over a three-week period.

So if we take a 5 tick profit every time and a 7 tick loss every time, do we have a trading system?  Answer is no.  If you’ve read this blog, approximately one year ago I created a three-part series on how you created trading plan.  This trading plan addresses the entry into a trade, the exit out of a trade, and what you do when you are in a trade.  This is not been addressed yet.  When you realize that wins and losses account for only 110 of the 148 trades, the real strategy involves the 38 trades that are neither wins nor losses. (Note: 38 is going to change because of strategy)

The first thing to address is what you do when it trade is favorable by three or four ticks.  There are 30 trades that went 3-4 ticks in your favor.   Of these 30, seven of these trades went on to be a full loss after favorable excursion.  What is very interesting is that all of these losses went in your favor before they became losses.  Six of the 30 went 4 to 5 ticks against you but allowed you to exit at breakeven or better.  Probably the most interesting statistic of these 30 trades is that if they went against the trade initially after touching the zone, 15 out of 15 return for a small profit at the minor or intermediate zone.  These have been highlighted in light blue on the Excel Worksheet.

It is a very interesting pattern and possibly a tradable exit strategy to deal with positions that go both for and against your entry.  So let’s assume that you use this strategy to deal with adverse and favorable positions while you are in a trade.  This would eliminate 6 losing trades and would allow an exit at breakeven or better for all 30 trades.  This strategy added one extra loss for a trade that went six ticks against you but did not stop out initially, but then resulted in a full loss.  That leaves us with the strategy that has won 94 times, had 10 losses, and was stopped out at breakeven or better for a small profit 30 times.

That leaves 14 trades that had between 0-2 ticks of favorable excursion and 3-6 of adverse excursion.  Again we see a very interesting pattern.  13 of the 14 returned to the minor support or resistance zone for either a breakeven trade or a small profit.  The remaining trade only traded to breakeven.  There is a follow on strategy here.  Why not reverse the trade at minor support or resistance once it has gone against you?

We now have a strategy that can be further back tested and adjusted based on the homework that you can do using NinjaTrader and ZoneTraderPro.  The strategy resulted in a win loss record of 94-10-44.  This is why you could have a smaller profit and a larger loss because the win to loss ratio is 90%.  But a win ratio of 90% is only achievable if the trader properly handles the 44 breakeven trades.

Do you need to buy any other indicators for a system that works this good? No.

With those numbers there was a theoretical profit of $7341 and a loss of $1093.  Factoring in the $352 in commissions, that leaves a net profit for three weeks at $5896, not counting any slippage.

And that is the purpose of a written trading plan; to be able to plan to deal with those 44 trades as they occur in real-time.  By having that written trading plan, the psychology of greed and fear is removed from the trade.

One of the other factors that I placed on the chart and noted on the worksheet was whether or not the ZoneTraderPro currency tool was a factor to be considered.  43 of the 94 winning trades did not agree with the direction of the trade.  To understand the reason why, you need to understand the theory of the countertrend trade.  When a market trades to the countertrend zone, that by definition is a trend in that direction.  It makes sense that the currency market which is following the bond market is not always in agreement because the bond market along with the currency market have both been in an established trend.

One of the other huge advantages of using ZoneTraderPro is its ability to predict buy and sell zones in advance of the market actually trading there.  In these three trades you can see how much slower the bond market moves, especially in the afternoon as compared to the ES futures contract.

Disclaimer

THIS IS NOT A TRADING PLAN.  More work has to be done to fine tune this idea and if you trade it without doing your additional homework, you do so at your own risk.

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight.

Information herein has been obtained and prepared from sources believed to be reliable; however no guarantee to its accuracy is made. Comments contained in these materials are not intended to be a solicitation to buy or sell any of the commodities mentioned. Past performance is not indicative of future performance results. Opinions expressed herein are the options of the author only and not the opinion of any firm the author may be affiliated or associated with.

Bond Trading

 Bond Trading with ZoneTraderPro and Order Flow Analytics

Since creating ZoneTraderPro for over for my personal use almost 10 years ago, I have only purchased one other software package.  The software I purchased was from Order Flow Analytics.  I have been a customer of theirs since 2010.  I purchased this software due to the fact that it gave me additional real-time information about the order flow in the market.  Recently Order Flow Analytics introduced several upgrades to their product, which I also purchased.  These upgrades included a customizable momentum indicator, a customizable exhaustion indicator, and a volume profile.

In this post we are going to look at Bond Trading using the 10 year bonds and a series of trades that have occurred over the last two days.  Then we are going to look at what the OFA software told us specifically, using their exhaustion indicator.  The only other indicator you will see on the ZoneTraderPro chart is the ZoneTraderPro currency tool.  The default colors on the currency tool have been reversed, as the bond market is an inverse of the equity market.

This first series of trades occurred today on 2/09/15.  I have placed the exact same chart label on the ZoneTraderPro chart and the OFA chart.  The first trade on the ZoneTraderPro chart is a short trade at intermediate resistance.  The second trade covers that short and reverses long off of the blue counter trend zone.  The third trade, which is a ZoneTraderPro trend trade pattern, reverses the long trade and goes short.  The last trade is then covered at the blue counter trend zone.  These trades by themselves are unremarkable, until we look at the OFA chart.

ZoneTraderPro Bond Trading Chart
ZoneTraderPro Bond Trading Chart

Besides giving the trader the ability to see the order flow and volume, the OFA chart plots a white box around a pattern, which is called an exhaustion pattern.  The interesting part in this series of trades is that when the ZoneTraderPro traded at support or resistance, the bond market formed a distinguishable pattern and gave us three bond trading opportunities.  These were opportunities that offered a very low risk after the pattern had formed.  The risk on each trade would be as small as 2 to 3 ticks per trade.

Order Flow Analytics Bond Trading Chart
Order Flow Analytics Bond Trading Chart

 

Bond Trading the Jobs Numbers

The next series of trades occurred on 2/06/15 after the 0830 EST release of the jobs numbers.  None of these trades at the release of the numbers.  They start 30 minutes later when the news has been completely digested. The first pattern occurs at approximately 0858 hours after ZoneTraderPro had identified that the market was in a strong bearish trend, as defined by price touching the pink strong trend supports zone at 0855 hours.  The ZoneTraderPro theory about how a market trades when in a strong trend, says that price should only return to the minor support or resistance level.  This is what happens in the 0858 hours trade and when profit taking from that move starts at 0905 hours.

ZoneTraderPro Bond Trading Chart
ZoneTraderPro Bond Trading Chart

The next trade occurs at 0921 hours when the market trades into intermediate support and the currency tool turns dark green.  Profits are then taken at the blue counter trend zone when the currency tool turns red.  Trade number 2 is a long trade from intermediate support after the currency tool has turned green.  This is also a typical ZoneTraderPro trend trade.  Profits are either taken at the blue counter trend zone or the pink strong trend resistance zone.  The next trade is a short trade from the pink strong trend resistance zone when the currency tool turns red.  There are two arrows on the chart to point out where the OFA chart indicated exhaustion patterns.  The next short trade is a ZoneTraderPro reversal trading pattern which occurs when the market retraces back to intermediate resistance.  The last trade occurs at 1036 hours where ZoneTraderPro indicates an exhaustion trading pattern. Again the OFA charts confirm the support and resistance zones, the ZoneTraderPro patterns, and the ZoneTraderPro currency tools with exhaustion trading pattern boxes at each trade.

Order Flow Analytics Bond Trading Chart
Order Flow Analytics Bond Trading Chart

The ZN chart is an excellent chart to use these techniques because it is a very liquid issue, and is less subject to stop runs you see in thinly traded contracts such as oil, gold, Russell 2000, and the Dow. These strategies also work on the ZoneTraderPro ES charts.  Below is a series of trades, including multiple tick divergences where the OFA charts indicated exhaustion patterns.

ZoneTraderPro ES Trading Chart
ZoneTraderPro ES Trading Chart

 

 

New Forex Currency Tool From ZoneTraderPro

The New ZoneTraderPro Forex Currency Tool

ZoneTraderPro is pleased to announce the ZoneTraderPro Forex Currency Tool which has been designed to provide very powerful real time information about the Forex currency market.  The Forex Currency Tool measures the strengths and weaknesses of currency pairs which have a direct correlation to the stock and bond market.

All ZoneTraderPro customers have access to this powerful tool at no additional cost.  Contact ZoneTraderPro via the contact page and the software will be emailed to you.

The Forex Currency Tool displays as both an indicator on the bottom of the chart, and colors the chart background the same color as the indicator, giving the trader instant information while reading the chart.  Here is an example from Friday of a Tick Divergence / Exhaustion trade.

ES Trading Examples

The 1st thing I notice on the chart above is the divergence of the currency market leading into the trade.  The indicator is telling you the market is getting weaker, not stronger.  It is really important to note that the theory behind both Exhaustion and Tick Divergence is to identify situations where the market rising or falling without justification at the NYSE in the underlying cash market.  In 1 minute the ES rises with no buying at the NYSE, which gives us Tick Divergence and the light red colored bars on the Currency Tool indicator tells us the Forex Currency Tool is saying the Forex markets are falling.  The trade is good for 3.5 points.  As noted in previous posts, a great place to put a target is just above the blue counter trend support zone, because 50% of the time, price does not trade through that zone.

Here is a 6.75 point Tick Divergence trade from Thursday.

20515 ES Tick Divergence Trade
20515 ES Tick Divergence Trade

Here is what the 20 point sell off on Wednesday afternoon looked like.  ZoneTraderPro and the currency tool both got you short with a Tick Divergence / Exhaustion trade before the news hit.  The indicator turns green both times the market traded at the 2031 lows.  This is not pointed as a trade opportunity even though there is a tick divergence pattern there, but as a reason to exit a trade.

20415 ES Tick Divergence Trade and a 20 Point Selloff
20415 ES Tick Divergence Trade and a 20 Point Selloff

 Avoid a Losing Trade with the Forex Currency Tool

Here is how the tool avoids a losing Exhaustion trade.

Losing Trade Avoided
Losing Trade Avoided

 And the ZoneTraderPro Forex Currency Tool is not just for the ES

The ZoneTraderPro currency tool also works on the bond market and in the pre-market.

20615 Bond Market Trades using the Forex Currency Tool
20615 Bond Market Trades using the Forex Currency Tool

The colors for the bond market are reversed because the bond market is inversely correlated to the stocks and currencies.  So when the colors are red you want to buy bonds and when they are green you sell the bonds.  The currency tools does allow you to customize the colors, but for purposes of this picture, I wanted to emphasize the inverse relationship.  This chart above is from Friday after the release of the jobs number.

20615 Bond Market Trades using the Forex Currency Tool
20615 Bond Market Trades using the Forex Currency Tool

Here are two more ZN Bond Market support and resistance trades at about 1030 EST that same day.

 

 

Exhaustion Pattern Trade – 10 Year Bonds 9/23/13

Exhaustion Pattern Trade

The Exhaustion pattern trade is meant to call a market top and a market bottom.  The trade following is your opportunity to buy in at the test of the low.  It is even more powerful when combined with the ZoneTraderPro filters.  The trade is further confirmed with a chart of the 10 year bonds with ZoneTraderPro applied.

9/23/13 ES Exhaustion Trade Pattern
9/23/13 ES Exhaustion Trade Pattern

This Exhaustion pattern trade is setup very nicely by a TICK divergence of 200.  The previous low was -627 and at the area of the trade is was only -428.  Additionally the Euro trade filter was moving in the favor of the trade.  The risk on this trade was 4 ticks, and the market never moved against the trade.  The maximum favorable excursion was 4.5 points.

The trade also illustrates the use of the TICK filter and the trend trade.  There was a trend trade which immediately followed the exhaustion trade pattern.  However as the market price dropped to the entry point the TICK low was 78 lower than the previous low, thus the trade was filtered out.  You can set this filter to a higher number than the default zero, once you become familiar with the filter and the patterns.

Bond Chart Trade Pattern

The bond charts had setup perfectly to confirm this trade.  As you can see from the chart, the bonds touch resistance just as the long ES exhaustion trade pattern is being indicated.  Notice how the Bonds price is very accurately contained in the support and resistance of the software after the trade.  These setups occur every day, but without ZoneTraderPro you do not know what these price levels of support and resistance are.

9/23/13 Bond Chart Trade Pattern
9/23/13 Bond Chart Trade Pattern