70. OPTIMAL RISK , LIQUIDITY STRATEGIES FOR FAVORABLE GAMES

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69. OPTION PRICING BASED ON THE CONCEPT OF INSURANCE: MARKET MODELS-FREE METHODS THAT GIVE AS SPECIAL CASE THE BLACK-SCHOLES OPTION PRICING.

 OPTION PRICING BASED ON THE CONCEPT OF INSURANCE: MARKET MODELS-FREE METHODS THAT GIVE AS SPECIAL CASE THE BLACK-SCHOLES OPTION PRICING.

https://www.researchgate.net/publication/282943701_OPTION_PRICING_BASED_ON_THE_CONCEPT_OF_INSURANCE_MARKET_MODELS-FREE_METHODS_THAT_GIVE_AS_SPECIAL_CASE_THE_BLACK-_SCHOLES_OPTION_PRICING

https://chuckhughes.com/real-time-results/

68. THE 4 GREAT SIMPLE PRINCIPLES OF LONG TERM SUCCESSFUL TRADING (with margin)

ANYONE WHO WILL TRY TO MAKE MONEY SOLELY BY TRADING AND SUCH SYSTEMS OF TRANSACTIONS SHOULD BE AWARE THAT THERE IS A VERY POWERFUL AND ALMOST UNBEATABLE COLLECTIVE WILL SO AS NOT TO SUCCEED!  NO-ONE WANTS  PEOPLE TO QUITE THEIR JOBS AND MAKE MONEY THIS WAY AS IT IS SOMEHOW PARASITIC. IT IS IN SOME SENSE  UNETHICAL AS A PRACTICE ENFORCEABLE  TO  THE MAJORITY. AND OF COURSE NEITHER THOSE WHO HAVE LARGE CAPITAL  WANT THAT A MAJORITY WILL MAKE MONEY THIS WAY, AS THEY WOULD PREFER THAT THEY WORK IN THEIR COMPANIES FOR THEM. ONLY IN SPECIAL CONTINGENCIES AND SITUATIONS SOMETHING LIKE THIS WOULD BE ETHICAL. AND IN PARTICULAR A HIGHER MORALITY THAT WOULD SUPPORT SUCH A PRACTICE, WOULD BE PROVABLE WITH COLLECTIVELY BENEVOLENT DEEDS FROM A POSSIBLE SURPLUS OF SUCH MONEY!

There is a story that an artist, a painter, was praying to the God with the next words. 

"Dear God, please help me for a greatly inspired artwork. Let me take care of the large quantity of efforts, and many paintings , but please  you take care of the quality in at least a few of my  paintings".

This is related with another saying which goes like this "More than 80% of the results in a project come from less than 20% of the efforts and work!"

A trader may try and experiment with trading for many years some times more than one decade, and he may lose a lot of money till he learns what to avoid and how to gain systematically. His attempts for gain must be a journey towards financial freedom. A financial freedom that strictly speaking all should have the right to it e.g. through a guaranteed subsidy and income for survival. But only very few countries provide such a subsidy, as a basic human right, like e.g. the right to have public health insurance.

A trader also should try to make wealth only till the media of the Pareto or lognormal distribution of the wealth in society. Because until that level he is in right and contributes to lessening of the economic inequality that makes the society to suffer. making wealth above the median is of reverse morality, and contributes to increasing the increase of the economic inequalities. 

After more than 20 years of studying the markets, from the point of view both the scientist and the investor and also after investing and trading, I concluded that there are 4 divine simple principles for the successful and safe trading. These 4 principles are based on sound statistical valid verification, for more than half of century of the behavior of the capital markets. I state them and I comment more about them


THE VALID AND COLLECTIVELY ACCEPTED SCIENTIFIC STATISTICAL  METHODS GIVE A COLLECTIVELY SUPPORTED NON-BETRAYING AND SUSTAINABLE WAY OF BELIEVING, THINKING FEELING AND ACTING, IN OTHER WORDS A VALID AND NON-BETRAYING CREATIVE PATH, SO THAT NO MATTER WHAT THE MARKET DOES AND HOW IT BEHAVES , WE ALWAYS HAVE A VALID WAY TO INTERACT AND RESPOND TO  IT WITHOUT INVALIDATING OUR PRACTICE AND SO AS TO SUCCEED IN THE LONG RUN IN THE REQUIRED GOALS. 

PRINCIPLE 1. 

PERMANENT CONSTANT GROWTH

The indexes of securities have a constant long-term (many decades) growth. This is also the basic assumption of the portfolio theory of the Nobel prize winner H. Markowitz. Measurements of index securities along some decades definitely prove the existence of this permanent growth, which is, after all, an artificial growth of the index rather than a particular enterprise of a security. The alignment with the collective optimism of the growth of the totallity of enterprises  is a basic social metaphiscal know-how for the succesful trading.

 ( From 1950 to 2000, for the American stock indices we discover the next statistics:
 1) There are 12 periods of 3.7 years, that the index grows more than 100% 
 2) There are 11 periods of about 9 months (continuation pattern or standing wave of 3 months half period) that the index goes does about 25%-30%.)

PRINCIPLE 2.

EXISTENCE OF CYCLES  MODULATING TO NON-MARHALLIAN DEMAND-SUPPLY COUPLING..

It is crucial to realize that such cycles may emerge in the price changes , in a random way with a hazard rate of appearance at each period , and furthermore that they may appear not directly on the prices changes but on the rate of growth of prices.We must make clear here that we are not talking of exact periodicity but rather for randomly emerging temporary periodicity.  And the  most predictable effect modulated by such cycles is the reaction to an super-exponential moves (a blow-up at the end of trend in the form of super-exponential move or terminal spike).  (See e.g. https://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis    and http://www.er.ethz.ch/ Such super-exponential terminal patterns of trend may occur usually as result of overgrowth  of the one of the two populations in a demand-supply coupling rather that of domination and not so much of competition or cooperation. See also post 22. For the case of stock indexes, the predator is the fear and population of sellers, while the prey is the optimism and population of buyers. The frequency of emergence and the size of such  super-exponential blow-ups follows the law of inequalities in other words the pareto or Lognormal distribution and is thus by far more often than pure randomness would predict! ). The  indexes of securities have a statistical periodicity of 1-2 days, , 1 month (accounting period and publication of statistical data) with sub-cycle of 10 days with half period moves of 5 days, seasonal (3 months, that financial statements are published) 5,5 years, 11.2 and 22.2 years ( business cycle of the Nobel prize winner S. Kuznets, but also the 22.2 solar cycle of the climate and its effect on the growth in ecology and nature). Careful spectral analysis also proves this fact. Such cycles have a celestial origin, and mainly solar origin. Even the weekly moves of 5 days as half-period moves of 2-weeks sub-cycle of the month are correlated to the 2-fold Parker spiral shape (heliospheric current sheet) of the magnetic field of the sun. (See also http://cycles-of-light.blogspot.gr/2016/09/2-12-celestial-cycles-of-light-in-our.html ) Faster period cycles than the 5 days and 1 day, do exist (e.g. Helioseismological cycles of 3 hours, 1 hour and 5 minutes) but are not strong solar cycles and so also the emergence of such price types of periodicity are not so significant. It is a fallacy to assume that the markets have a self-similar behavior as the fractal theory assumes. By far, the fastest significant celestial cycles are the 1 days and 5 days.  
From the  cycles (see post 5)  (not including their harmonics, that is their sub-multiples of the periods) the order of intensity of effect on the price movements, and therefore the order of predictability also is approximately the next:

Daily (1 Day earth)>> 
1 Year (12 months, earth)>> 
11 years global climate (Sunspots) >> 
Month (4 weeks, sun+moon)>>
2 weeks solar magnetic cycle (Parker Spiral)>>
160 mins Helioseismologic cycle >>
55 mins Helioseismologic cycle>>
5 mins Helioseismologic cycle.

THUS THE ORDER OF BETTER PREDICTABILITY IS 
1) LONG TERM PERMANENT TREND

2) A CYCLE IN THE ORDER OF PREDICTABILITY DESCRIBED ABOVE AND REALIZED AS REACTION TO SUPER-EXPONENTIAL TERMINAL MOVE (OR SPIKE).

PRINCIPLE 3 (FRONT-OFFICE RISK MANAGEMENT)

CONTROL OF THE MAXIMUM LOSS PER TRADE RELATIVE TO THE FUNDS. PORTFOLIO OF GRID-POSITIONS TO HANDLE THE RANDOMNESS OF THE PATH OF PRICES

Any trading with margin (e.g. of futures or CFDs over the index of securities) must apply the Kelly rule of the percentage of risked funds. This rule also allows for an appropriate decreasing increase of escalation of the size of the open position during the development of the vector of a cycle, as soon as by trailing the percentage of risked funds of the previously open position so far, the risk of individual positions but also in total all of them that have not yet mad break-even, is made zero or always less than a specified percentage of the funds (e.g. 5%-6%). 
The best way to handle the risk of the randomness of the path of prices is to create a portfolio of positions based on the sieve of a dense price grid (open pricely) or open timely (on elementary position per bar) .

PRINCIPLE 4 (BACK-OFFICE RISK MANAGEMENT)

OPTIMAL SEPARATION OF THE FUNDS TO RISKED AND NON-RISKED AND WITHDRAWALS RULE.

Any consumption by withdrawals of the funds, monthly or annually, must follow the rule of optimal separation of traded and non-traded funds, of the portfolio theory. If the actualized risk of the trading as appearing on the growth of the funds is sufficient low, then by the formula of optimal separation we may  have 100% of the funds as traded funds, otherwise we will have less than 100% of the funds as traded. Usually for the American indices , the risked funds as margin should not exceed  about 2/3 of the total funds.  The withdrawals per period  is at most 50% of the period profits of the traded funds. We reset the separation percentage of traded and non-traded funds daily for the cycles and annually for the constant trend position. 




The true abundance of the growth of the funds is found not on the existence of cycles (principle 2) but in the dynamics of the long term trend (principle 1) and the escalation of the nominal leverage of the portfolio of the total positions after following carefully the two risk management principles 3 and 4.

COMMENTS

1) From the principles 1, 2 we have as the only basic patterns of the price moves, that of constant growing trend, and that of  almost cyclic behavior or cyclic with intermittent non-cyclic time intervals. We may form an optimal portfolio of trading of 4 different position sizes , on the same index of securities based on the 1 constant trend and the 3 fastest cycles above the period of the day. If we want to make a portfolio on the e.g. the 3 indices of Dow-Jones, SnP500 and NASDAQ, that will maximize the Sharpe ratio R/s (where R is the period rate of return and s its standard deviation) then , e.g. by measuring from 2009-2017 monthly rates of return, and calculating the co-variances, we results in an optimal portfolio of 29%  of Dow-Jones, 31% of SnP500, and 40% of NASDAQ.  Also the optimal separation to risked and non risked funds, that will maximize in a finite time interval the logarithm of the final value of the portfolio, gives as optimal percentage of funds the R/s^2 (see also post 3) which here it is 86.5%. Nevertheless if we would measure it with annual rates of  return rather than monthly and for many decades back this percentage would be closer to 66%. 

2) The requirement to take advantage of the constant growth trend, restricts the instruments for trading with margin (e.g. futures or CFDs) , to those of indexes of securities , excluding therefore commodities, forex and currency indexes. And we prefer index of securities rather than securities because the index has a guaranteed permanent growth , while a security has only a growth only during young age of its life-cycle. 

3) The constant trend may reverse for a couple of years during strong crises, and during such times the cyclic behavior say of 1 or 2.75=5.5/2 years  is stronger than the constant growth. Waves at the seasonal periods (3 months) are connected to what technical analysis calls continuation patterns, in other words flat channel of standing waves, where the market has not decide yet if it is going to continue increasing prices, or will start for a couple of years to decrease prices. The waves at the period of month or shorter  appear usually as if random noise to the constant trend. From 1950 to 2000, for the American stock indices we discover the next statistics:
 1) There are 12 periods of 3.7 years, that the index grows more than 100% 
 2) There are 11 periods of about 9 months (continuation pattern or standing wave of 3 months half period) that the index goes does about 25%-30%.

4) The 2nd principle of cyclic behavior , is stronger that the usual methods of technical analysis, because, it sets specific times of staring and ending of the periods. It is a non-phenomenological principle, with source of causes , far before the shaping of the demand-supply interplay. The latter is modulated by the causes of the cyclic behavior.
The easiest cycles to observe is the monthly cycle. Then the 5,5 years cycle. Then the seasonal or 3 months cycles, and finally the short term of 5 days and 2 days. But among the various cycles what is readily measurable us a super-exponential bubble usually of seasonal period (3-months) , but sometimes of 1 months. We need to take the logarithm of the prices and apply a least squares line to observe the cycles, especially the extremity of the super-exponential bubbles.  
By far the constant trend is the pattern that makes most of the money, after the leverage and appropriate risk management. The the second best is the spontaneous super-bubbles at some period of the above faint cyclic behaviors. 

Here in the chart below which is with the prices after taking the logarithm, we may watch deviations from the linear moves (super-exponential moves) and their highly predictable reaction lasting in the average 3.75 years. during 30 years!

The Log-Periodic Power Law Singularity (LPPLS) applies as the bubble reaches it point of crashing. In other words faster and faster waves appear with smaller amplitudes. (
see http://www2.math.su.se/matstat/reports/serieb/2009/rep7/report.pdf
https://warwick.ac.uk/fac/sci/maths/research/events/2013-2014/statmech/ght/programme/sornette_2.pdf
http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0165819
https://www.sciencedirect.com/science/article/pii/S187538921000249X 
https://en.wikipedia.org/wiki/Didier_Sornette
)

5) So we look for cycles and we trade along the constant trend  preferably starting only, when a terminal spike against the constant trend appears (the terminal down spike may be at a daily chart but usually it is a whole month going down!) . To realize the emergence of cycles and vectors of them, we only need also to measure statistically the derivative (velocity) and second derivative (acceleration-deceleration) of the prices. But the simplest is the duration of the half-period. We set an initial stop-loss of about 1/3 of the amplitude of the cycle, with position size that is defined by the Kelly rule, of percentage of funds to risk at each trade. We trail by about a quarter of the period. We close the trade after about a half-period of the cycle or again if after one month down move a second continues again down. But as we mentioned in 1) we have a small portfolio of trades at 3  different periods of 3 different cycles and one permanent position  for the constant growth. For the latter position , we buy or sell annually to keep constant the optimal percentage of separation of risked and non-risked funds, corresponding to this position.

6) For the formula of the Kelly rule see post 13 (also  https://en.wikipedia.org/wiki/Kelly_criterion)

where:

• f* is the fraction of the current bankroll to wager, i.e. how much to bet;
• b is the net odds received on the wager ("b to 1"); that is, you could win $b (on top of getting back your $1 wagered) for a $1 bet. In trading it is  the multiples of the stop-loss , that will be the gain of the trade.
• p is the probability of winning;
• q is the probability of losing, which is 1 − p.

There is also the formula f=(p/a)-(q/b) , where p, and q as before but a, b are interpreted as follows. If you win (probability p), having bet or exposed 1 unit of funds you result to  1+b funds , and if you lose (probability q) you result with 1-a funds. In the case a=b=1 we have the previous solution f=p-q. 
From the previous in the first formula above we see that the higher the b is from 1, the less requirements for high probability of success. The less the b from 1, the more demanding are the probability of success of a trade thus the more difficult is to trade successfully. This is why having a Stop-loss (SL)  much ,less than a take profit (TP) , it is better and it will give a positive average profit even with only a 50% probability of win. E.g. with p=q=0.5, and  with SL=(1/2)TP, then b=TP/SL=2 the average profit will be 0.5*SL, while the SL is optimal to be 0.25 of the exposable funds, with average profit 0.5*0.25=0.125 of the funds.

Since the probability of success of trade p, can be measured only after a sample of trades, it is required a starting percentage f* of funds to risk in a trade (in the case of losing based on the stop-loss) which is usually set equal to 2% of the funds, (corresponding to the Kelly formula for b=1, and p=51%). Later when at first a probability p can be measured from the back-office of the sample of past trades, we may set b=1, and even later, we may also estimate a b from the set stop-losses and the profits of the trades.

The Kelly rule also may suggest that is may be sufficient profitable and easier to trade at larger scale, where the cyclic patterns are more clear and with higher probabilities of prediction/ E.g. if for a daily  cycle the probability of prediction of the cycle to integrate is even 51% only , and we set a stop-loss SL at 1/3 of the amplitude, with take-profit TP=A, then the expected profit is 0.51*A-0.49*A/3=0.346*A. While the optimal percentage of funds to expose is at most 34% only. But if at a weekly or monthly scale the probability of the cycle to integrate is higher , say 60%, then with the same settings, the average profit is 0.6*A-0.4*A/3=0.466*A, while the optimal percentage of funds to expose is at most 46%. Notice that we say at most 34% and at most 46% and not equal because , we are not only interested in the maximum speed of growth of the funds, but also with constraints of risk of at bankruptcy at most  at a level, which requires less percentages.

When the percentage of risked funds is f, and [f] is the integer part of it, while q=1-p is the probability of loss of each trade then the probability s of bankruptcy is s=q^[1/f] =(1-p)^[1/f] ( ^ is raising in power). E.g. if the risked funds is 2% and the probability of success of trade is 0.51, then a bankruptcy may occur if we lose [1/0.02]=50 times in sequence which has  probability  0.49^50=2.2*10^(-16), which is very small! 

7) For the optimal separation of traded and non-traded funds as we utilize it here, we take as maximization rule the logarithm of the final funds at the end of a time interval. See [1] below. If the risk-less non-traded funds have zero deposit rate of return, then it is proved that the percentage of funds to trade is R/σ^2 if it is less than 1 and 100% if it larger than 1. Where R is the rate of increase per period of the traded funds and σ the standard deviation of R. For the formula R/σ^2 of the optimal separation see post 3  or [1](also http://www.albany.edu/~bd445/Economics_802_Financial_Economics_Slides_Fall_2013/Separation_Theorem.pdf , 
[1] "Stochastic Differential equations" by B. K. Oksendal (Springer editions) page 223, example 11.5 . 
[2] James Tobin. Liquidity preference as behavior towards risk. Review of Economic Studies, XXV(2):65–86, February 1958. HB1R4.)
In general if the risk-free rate of return of  non-traded funds is Rf, then the formula is 
(R-Rf)/σ^2
As a default starting separation percentage we may set 2/3 of the funds as traded, and 1/3 of them as non-traded. (This corresponds to an assumed initial annual rate of return of the funds of 10%, with standard deviation of it 36%, which is the usual for buy-and-hold of securities).

8) Principles 3) and 4) make the magical mix of high risk of uncertainty, with the low risk of certainty (of non-trading) producing the psychologically and economically acceptable and safe risk of uncertainty. Principle 3) is doing it at the frequency of every trade, while principle 4) is doing it at the frequency of withdrawals (annually usually). Since in principle 4) the separating of the funds to non-traded and traded is clearly of information nature and does not require transaction costs , it can be done daily, but it will take effect at every new trade, and mainly it will become highly effective each time we withdraw funds for consumption. The adjustments of principle 3) are effective obviously at each new trade. 

9) We may compare the above techniques with the  legendary Turtle trading system of the 80's (See also the book by M. W. Covel "The Complete TurtleTrader")

At the decade of the 80's it was a legend the systematic profits in the markets and even in the commodities of the turtle trading system. Actually there are the fast or monthly  and the slow or seasonal turtle trading systems. The fast turtle trading system opens positions at the break out of the 20 days Dochian channel (in other words at breakouts of the maxima or minima of 20 days bars) when the previous trade was not a win. Notice that the turtle trading system misses a significant entry at the highs of the bars of the  down spike  waves of the 20 days Dochian channel as B. Williams and even A. Elder suggest with his 2-days force index! This spike may appear as spike in th weekly or nomthly charts although only as a move with high slope in the daily charts. Definition of the start of seasonal trend within a constant tidal-trend by a spike makes the hysteresis of the measurement of a seasonal trend zero!  It pyramids or escalates at N/2 price volatility intervals ,(see post 44 for the definition of N by the 20 days ATR, and with position size so that N price change corresponds to 1% change of the funds of  the account). As an optimization we may prefer the psychological levels of decimal system , that is by intervals of 100 or 50 points.  E.g. in the index NASDAQ and Dow-Jones the 50 points are closest to the N/2 changes while in the index SnP500 10 points are closest to the N/2 changes. From this point of view the turtle-trading is a Grid-trading. A grid-trading like a sieve creates a portfolio of a large number of positions that handles the randomness of the path of prices in the best way. The idea of escalation is of course to build gradually the position with densest reasonable grid, so as to risk always not more than an optimal little , here the 1% and then eliminate this risk with a break-even and proceed escalating as much as the margin and risked stop-loss allows in the available funds, while remaining at a quite early position of the total trend-move. Notice that the turtle trading is missing here that the escalation is done also with less risk at the   down waves of the Dochian channel as A. Elder  suggest with his 2-days force index. !  The initial stop loss but not subsequent trailing is at 2N (thus 2% of the funds)  price interval. When  a new position is opened , the next day and in general the first next day that it is possible we to move the initial stop loss to a break even. In order to keep total position risk at a minimum, if additional units were added, the stops for earlier units were raised by 1⁄2 N (trailing). This generally meant that all the stops for the entire position would be placed at 2 N from the most recently added unit. However, in cases where later units were placed at larger spacing either because of fast markets causing skid, or because of opening gaps, there would be differences in the stops.  The System has an alternate stop strategy that resulted in better profitability, but that was harder to execute because it incurred many more losses, which resulted in a lower win/loss ratio. This strategy was called the Whipsaw.   Instead of taking a 2% risk on each trade, the stops were placed at 1⁄2 N for 1⁄2% account risk. If a given Unit was stopped out, the Unit would be re-entered if the market reached the original entry price. If the position does not close by stoploss , an exit rule is that it is closed if prices hit the opposite side of a 10 days Dochian channel. This fast system obviously is tracking and utilizes the monthly cycles. The slow turtle trading system is the same as the fast except as entry rule is used the 6 weeks or 55 days Dochian channel with exit by 20 days Dochian channel.. This system system utilizes seasonal cycles of 55-60 days. The turtle system was utilized mainly in the commodities markets. 
 There is also the faster "Parker-spiral"  variation of the monthly turtle trading system where it is  utilize the 10 days Dochian channel with exit by the 5 days Dochian channel.
We may notice that the Bill Williams system is approximately as the seasonal turtle trading, except that the initial entry (of long positions) is only at a (down) terminal spike so as to have less risk at the initial stop loss which may be way less than N/2, and  that the escalation is decreasing and not of constant rate, while it is avoided as the seasonal trend while still with positive first derivative it acquires nevertheless negative second derivative. Also the trailing-out is not by the 20 days Dochian channel but by the 5 days Dochian channel. 
Alternative better exits can be timely rather than pricely, based on the timing of the half-period moves of the 5D, 10D and 30D or 6 weeks (See principle 2 above) for the seasonal turtle trade, or 10 days for the monthly turtle trade, and 5  days for the "Parker-Spiral" turtle trade. We may also combine timely exits with an at least  80% trailing of the floating profits at each position. Notice that in general an exit-trailing rule based on percentage of floating profits for each position e.g. 66%, 80% etc (individual position not group of positions profits) will create a portfolio of different speed of trailing-outs which like a portfolio of time-scales of turtle trading, thus more robust to the risk! Older positions stay more in fluctuations while new positions may close and reopened more often.
Portfolios approach to handle more risk.: The best way to handle the uncertainty that a single index may exhibit, is to implement a portfolio of 33% allocation of the funds for all the three different cycles and time-scales of  the turtle trading, namely Parker-Spiral cycles, Monthly cycles, and Seasonal cycles. The fact that all these turtle systems use charts of the daily bars and same parameters of initial stop-loss , and escalation, based on N, helps even better for the portfolio of trading systems.

Also a portfolio on the 3 indexes Dow-Jones, SnP500, and NASDAQ by 29%, 31% and 40% respectively is  a better practice that trading just one index of them, e.g. only NASDAQ. 
As the above system of turtle trading (with the extensions based on the A. Elder system, B. Williams system, break-even, decimal price levels of escalation, and cycle based timely exits) is quite solid-complete and deterministic in conduction, probably the only discretion is 1)  the percentages of allocation of the above two portfolios of 3 indexes and 3 time scales and 2) the adding or not based on the strength of the first derivative of the seasonal trend, and sign of the second derivative or the percentage of the half-period of the relevant cycle (5D, 10D, 30D). 
For the profitability of  manual such conduction on daily bars, we may notice that for strong seasonal trends, there may occur a more than doubling of the funds within a season (that is about 25% per month) if the utilized margin-leverage by CFD's is 200 or more while with ordinary margin-leverage of 20 of futures contracts is at least 10 times less, that is about 2.5% per month, as recorded by many turtle-traders since 1980. For non-leveraged trading it is hardly worth the time and effort compared to buy-and-hold investment.  \When the constant trend-tide is absent and the market is in a seasonal stationary-continuation pattern, practically the profit for one or more seasons may be zero.

Here we summarize an enhancement and improvement of the turtle trading, based on the above remarks from the systems of A. Elder and B. Williams and my discoveries of random celestial cycles in the markets. We may call it the 3-cycles turtle-grid  portfolio  system, or in short THE CELESTIAL SIEVE.

The perception and conduction of the system is 4-fold, and it is applied on daily bars.

1) (TIDE) At first we have identified in monthly (and weekly) charts the perpetual constant trend or tide (usually lasting at least 2 or 3.7  years , principle 1 above in post 68 ) on the 3 indexes Dow-Jones, SnP500, and NASDAQ. For the sake of simplicity in writing we assume it here that it has been identified as upward, good for long positions.

2) (WAVE) Within that, occur seasonal moves with trend, that start after a seasonal continuation flat channel pattern or  by a down spike in the weekly or monthly chart , whichis about one month down so no momentum measurement hysteresis is necessary in detection (B. Williams). Such moves  end timely (principle 2 above in post 68 ) (5D, 10D, 30D) or by going to zero of the 1st statistical derivative with earlier sign negative 2nd statistical derivative or by a  terminal spike or by a down spike that results to  one month down move and the second month continues down! They also may start usually by timely pattern recognition, that is as reactions  of same half-period  (5D, 10D, 30D) moves in the opposite (down) direction.The  most predictable effect or pattern , after the long term permanent trend , modulated by such cycles is the reaction to an super-exponential moves (a blow-up at the end of trend in the form of super-exponential move or terminal spike).

3) (ENTRY, STOP-LOSS , ESCALATION)

We open positions up at the starting spike (B. Williams) or backwards ripples signals by the 2D force indicator (A. Elder) or forwards break-outs of the decimal based N/2 grid (Turtle trading, and fractals by B. Williams) or even simpler we open timely that is at every daily bar one (elementary) position , as long as the total virtual exposure, by open positions that have not yet have break-even , as percentage of the funds is upper bounded (e.g. 5%-6%) and the open positions are with initial stop loss between 2N, N, or N/2 , when N by the appropriate position size is 1% of the available funds (principle 3 above in post 68) . N is the average true range of 20 periods.  Tis is as in the famous turtle trading system We do not open positions by the Grid if the 2nd statistical derivative is negative or the 1st statistical derivative close to zero, or timely (principle 2 above in post 68 ) we are more than 80% of the duration of a half-period that is 5D, 10D, 30D etc.

4) (EXIT, TRAIL-OUT). We trail-out either timely (Turtle, B. Williams) e.g. 5D, 10D, 30D or pricely (A. Elder) by X% of the floating profits (which is better as it creates a portfolio of time scales and positions) e.g. 50%, 66%, 80%, 90%  which may be changing and increasing as the seasonal trend reaches its maturity etc

or we close timely (principle 2 above post 68) by expiration or maturity of half-periods e.g. 5D, 10D, 30D etc or a down spike of one month and the second month continues down. 

Therefore 
1) by knowing   what we want with clarity  (desire for a road to financial freedom) 
2) by knowing why we want it (so as to exist better with less inequalities  and evolve collectively faster) 
3) by establishing a rapport to or tuning with the collective consciousness through  valid statistics and also the law of growth (in other words utilizing index funds  that have stable for ever long term increasing trend)
4) by applying the right perception (of the existence of cycles)
5) and by having the desire for applying with determined persistence the particular optimal strategy of risk management (optimal Kelly rule and optimal separation of funds)
6) we get the ultimate divine simple and profound formula of success. 

And although we may teach the know-how of this simple method, to others there is no guarantee, that they will also succeed (the 6)) , because there is no guarantee that they may also have the persisting desire for this (the 1)) , the right motive or cause ( the 2)) , the correct embedding to and tuning with the collective consciousness (the 3) ) , the subtle perception of the reality of the cycles (the 4)) and finally the desire that gives determination to persevere with consistency to the particular right optimal risk management policies (the 5)).  The desire must exist not only for the goal and cause but also for the particular method and way.

When we are dealing with margin trading, the risk is high and it should be monitored carefully. To see the difficulty of it here is the relevant quantities, and formulae, e.g. for the index funds CFD's of  Nasdaq , SnP500, Dow Jones etc

STARTING WITH EFFECTIVE LEVERAGE<=1 Sometimes trading with margin (leverage >1) may give worse results than trading with leverage =1, when we do not know ho to handle in risk of the leverage. One way is to start opening positions with effective leverage  (see below for definition, effective or nominal leverage=total value of the position/total balance of the funds) <=1, and once we have break-even , and insure that we will not lose any money with a stop-loss , only then to try to open a next position with leverage <=1 etc. In this way we may escalate to leverage larger than 1, but the non insured positions by break-even always have leverage at most =1, and so we succeed that our account will not crash.  Even if the market will not allow very significant escalation, by closing positions at  waving backwards, this method allows  to invest to index funds starting with little money and using the CFD's instead of the index funds itself or futures on it. Having little money should not mean that we are forced to lose them before reaching an almost buy-and-hold tactic. And the current method shows  how even with little money we can have at  an investment at least as profitable as the buy-and-hold scheme. We escalate in this way till as long as the used margin of all the positions does not exceed the optimal separation ratio of the Markovitz Portfolio theory, which for US-indices and for daily bars is 100%, Thus here the total margin should not exceed 80% of the balance of the funds, as the remaining 20% is left for the maximum exposure when opening individual or elementary positions. After  reaching this  maximum  escalation we do not apply buy-and-hold, but we apply the sell-buy adjustments so as to keep this ratio stable . Initially we put a stop loss when we open a position (with effective leverage <=1) at 4N or 5 days low, and then we break-even. After that we trail at 50% of the profits , and when the psoition is deeply in profits with 66% of the profits. Position that close by the above rules are reopened with the 2Days High

So in overall the system goes as follows:

CONSTANT GROWTH TRANSACTION SYSTEM  

 ( From 1950 to 2000, for the American stock indices we discover the next statistics:
 1) There are 12 periods of 3.7 years, that the index grows more than 100% 
 2) There are 11 periods of about 9 months (continuation pattern or standing wave of 3 months half period) that the index goes down about 25%-30%.)

ANYONE WHO WILL TRY TO MAKE MONEY SOLELY BY TRADING AND SUCH SYSTEMS OF TRANSACTIONS SHOULD BE AWARE THAT THERE IS A VERY POWERFUL AND ALMOST UNBEATABLE COLLECTIVE WILL SO AS NOT TO SUCCEED!  NO-ONE WANTS  PEOPLE TO QUITE THEIR JOBS AND MAKE MONEY THIS WAY AS IT IS SOMEHOW PARASITIC. IT IS IN SOME SENSE  UNETHICAL AS A PRACTICE ENFORCEABLE  TO  THE MAJORITY. AND OF COURSE NEITHER THOSE WHO HAVE LARGE CAPITAL  WANT THAT A MAJORITY WILL MAKE MONEY THIS WAY, AS THEY WOULD PREFER THAT THEY WORK IN THEIR COMPANIES FOR THEM. ONLY IN SPECIAL CONTINGENCIES AND SITUATIONS SOMETHING LIKE THIS WOULD BE ETHICAL. AND IN PARTICULAR A HIGHER MORALITY THAT WOULD SUPPORT SUCH A PRACTICE, WOULD BE PROVABLE WITH COLLECTIVELY BENEVOLENT DEEDS FROM A POSSIBLE SURPLUS OF SUCH MONEY!

1)                We start opening positions , each one with maximum-exposure 1%-2% and in total all of them 10% -20% (more than 10% better only rarely in high success probability occasions. We also ensure that we have sufficient funds, and the size of the position is small enough so that the effective leverage (effective leverage=value of the position/total Balance of the funds) is at most equal to 1 (un-leveraged).

2)                 We start insuring profits (by trailing the stop loss) at first with a 5-Days Low. (Parker magnetic solar spiral) . We set at first Break-even then 50% insurance of profits, and finally 66%=2/3 insurance of profits.

3)                In case of backwards moves that it closes positions wit exit rules as in 2) , we re-open with the 2-days High rule (Parker magnetic solar spiral) . The volume size is determined by the maximum exposure rules.

4)                We proceed as before till the maximum optimal separation ratio of the instrument as projected to the margin used in the funds of the trading account. Funds=Closed positions , as Balance which is less than the Equities e.g. in MT4 platform. The inverse of this ratio in MT4 is calculated and displayed as Margin Level.  For daily monitoring frequency (sampling rate) and instruments like US index funds or Bitcoin the optimal separation ratio is 100%. But even this for the margin-trading means that here the optimal separation ratio is about 80%, as the 20% is left for the maximum exposure at the re-opening of the positions (thus Margin -Level 125%).

5)                Constant Optimal Separation ratio rule. In the case again that the margin increases above the 80% then we close positions , which will increase the balance of the funds, due to floating profits and will decrease the margin percentage. We close the minimum number of positions to restore the constant optimal ratio of 80%, which is a rule different logic and optimality from the maximum exposure percentage rule.  In case we have margin equal to 80% of the balance of the funds, and the maximum exposure is realized by a turn of the market, again we close positions , the minimum number that is necessary, so as to restore the optimal constant separation rule of 80% , and also a 20% available for maximum exposure at reopening positions.

6)                The closing and reopening of the positions as in 2)-3) is different from the closing of the positions as 5). In the case of 2)-3) it is unwillingly an involuntary and of size determined by the maximum-exposure rule, while in the case of 5) it is willingly and voluntary , and of sizes based on the constant optimal separation ratio.

7)                The closing and reopening of positions by the voluntary optimal constant ratio rule 80% , can be done also for closing by utilizing the backwards moves of the market and the 5-days lows rule (Parker magnetic solar spiral) and for opening by the 2-day highs   (Parker magnetic solar spiral), instead of just percentage of ratio deviation trigger. The size of the closing-reopening is the minimum to restore  the constant ratio rule, and I may be position sizes less than the sizes suggested by the maximum-exposure rule. E.g. e may close at every 5% deviations from 80% , while the maximum-exposure rule may suggest 10% exposure positions. Therefore  the final and long term constant ratio rule, has at reopening positions less risk than the maximum exposure rule.

8)                The 5-days lows 2-days highs rules is because of the celestial cycle of the solar magnetic Parker spiral.

9)                The nominal leverage or effective leverage , in other words the value of the total position compared to the balance of the funds, denoted by LE at the optimal separation ratio of  OSR=80% is LE=((OSR))*LM, where LM is the margin-leverage of the account. E.g. LM=200 OSR=0.8 then LE=160. For

LM=500, OSR=0.8, LE=400, which is really high to my practice so far.

10)           SUMMARY

10.1) THE NON-WAVING BUY-AND-HOLD TREND PART OF THE LONG-TERM TREND ON US INDEXES. 

Before reaching the optimal constant separation ratio, the exposure  reaches the maximum preset, at opening the positions. At  the optimal constant separation ratio (e.g. 80%) it is less. Both cases can be triggered by the 5D/2D lows-highs rules. The front office procedures are simple the backofice a little more complicated.

The maximum exposure level and maximum leverage and also maximum margin can be measured not only as percentage of the margin to the funds in the account (Balanace) but by including levels of floating profits, that have been secured by raising the break-even to higher levels of stop loss. Thus with part only of what the MT4 platform shows as free-margin. In this way we have a re-investment of secured profits with leverage and position sizes that go on increasing as long as the index fund goes on increasing (of course always less that the maximum position size that the platform and account type allows). 

Thus we may apply the previous formulae either

a) to a system of re-positioning the portfolio with a constant ratio of separation, and user predefined maximum margin level 

OR

b) we may go on increasing the position and margin by re-investing secured  floating profits by stoploss. The MT4 platform allows for the latter re-investment system too. In the latter case the rules for e.g. the US indexes are the next

b1) We open position with leverage=1 over the free-margin of the MT4 plaform (minus the swaps or overnight charges , if they exist when we are at CFD, while for futures they do not exist)  , and as long as all other positions are with break-even or better. We need not put a stoploss or we may put a stop loss at 30% lower for US indexes.

b2) We break-even the new position when the price goes higher than plus 10%-30%.

b3) We repeat the b1) b2) ).

We should apply these two methods,  better on futures on the indexes rather than with cfd's on the indexes. 

This is because of  the swaps or overnight charges that are charged daily in the CFD account and sometimes due to long waiting may take a great percentage of the profits. The futures do not have swap-overnight charges and we simply rollover them at large time intervals. 

If the entrance of each new position is at a good dradown and the market does not hit very often the breakeven stops by escalating the reinvestment of profits as above, and rolling over the futures , the total leverage of the position may reach the number 10 or more therefore in this escalating way we may have considerable rate of profits at the end of the year! 

THE PROTOCOL FOR TRENDING INSTRUMENTS.

 

 

1)        In the trending instruments (US indexes mainly possibly cryptocurrencies in limited time) we always take positions only up. 

And for the trending instruments the requirement that in the background there is a super-exp move supporting the up position is not so important as there is always a permanent up background propensity. We enter at the extreme of a "lightning"  panic superexponential  spike down  (that is to be seen not only at the daily but mainly   at the 4-hour charts and the alligator as Bill Williams describes in his book Trading chaos, which is super-exponential growth  spike) and it is about 3%  H4 up retrace till the redline of a  10% down D1 move. As a spike is can be of  the 4 types , continuation, stationary, initial or final type. The choice of entering at a superexp spike move either as retrace or going-on as superexp, is optimal in the sense of fast superexp move. It would work also  belter if it was a down terminal spike but also it works if it has background at a slower time frame another super-exp move which supports at the same direction up.  If it is an initial up spike or stationary  spike then we wait till the 3rd wave to enter up. Entering at a super-exp spike guarantees that we take pieces of a trend either during the spike or from the beginning of a new trend. For a short term only trade till the red line of the alligator , the most important factor for the success of the retcace of the superexp move is not so much if it is terminal or initial or continuation or stationary type e but if it is really a strong and extreme superexpmove. The 2nd best is to be a terminal superexp-spike. The first position size is 1/5 or 1/10 of the normal and main which is position (effective) leverage 10 at H4  , thus the experimental starting would be a position  leverage=2 or 1. The improvisational escalated-descalated  following of the market (we follow faster than and anticipating  the moves of the market) is like these proportions 0,5, 1, 1,5 , 2 (=5) , 4, 3, 2, 1. or in integer values 1+ 2+3 +4(=10) + 8+ 6+ 4+2.  We diminish the position at bad conditions and expand at good and more predictable conditions. Also we open-close repeatedly when the market is locally stationary oscillating to get smaller gains. This is the art of faster following-anticipating  the market profitably by improvisational escalation-descalation in situations of superexps that are more or less predictable.Simultaneously we put a stop inverse order one tick away from the current extreme, with an appropriate trailout for, so if the superexp spike goes on, we eventually we cover losses and even possibly gain from that too. The position leverage depends on the initial stop loss which should be less than 10% usually 2%-5%. The initial stop loss is not more than  2N, where N the averge true range of 20 days which is the month. At H4 it can be not more than 3N (3 bars H4 is half a  day) where N is the average true range of H4 of 5 days thus 30 H4 bars. This determines the maximum position leverage that usually it can be up to 10 when at H4 .  We may also put the stop loss at D1 by the Donchian=5 days , or at H4 by the Donchian=12 (2 days) . . Obviously the priority when scanning for oppurtunities is the trending instruments at all scales. And within the trending instruments the short-term retrace only (till the red line) M1-M5-H4-D1 has priority to the  longer trend trailout D1- H4-M5-M1. When we scan the trending instruments and again within the trending instruments the short-term retrace only (till the red line) M1-M5-H4-D1 has priority to the  longer trend trailout at M5-M1 or at H4   according to the personal availability of time.  The  short protocol with exit at  the red-line of the aligator has priority to the long protocol beyond the red line  We allow  the trend trail out long protocol beyond the red line (for trending instruments)  at M5 or M1 , also but it has to be essentially identical to a short (till the red line) favorable superexp spike at H1 or H4 . When assessing the favor-ability based on the dynamics of larger time frames, we must not forget that only the superexp movements are essentially of predictable retrace and move. Especially for such M5-M1 long protocol, the case of the terminal spike or superexp is the most favorable. In such a case of terminal superexp-spike,  (which is essentially identical with a short term till the red line  favorable superexp at a larger time frame)  and in paticular at  D1 , we may allow the long protocol beyond the alligator red line  for trending instruments at H4 time frame.    The spike may be either terminal or initial or stationary ,but  the terminal spike  ,is better. We enter at the reversal either by a divergent-hummer bar or by looking at the next faster scale. 

 

2) We  escalate only at the final rally of the move when it is sufficient low risk while at the beginning we are very careful with low positions sizes as we do not know if the superexp has finished or not, and essentially that is why it is more probable to win grom the continuation of the superexp move at the beginning. We escalate forward with the Bill Williams fractals which is almost equivalent to the Donchian 5 days channel (as in the turtle trading system too) and also escalate backwards after the force index of Alexander Elder of 2 days. If the action is at 4-hours bars or M5 , then Dochian=6 bars (1 days or 1 hour). If in M1 again by fractals or Donchian =5.  The escalation is decreasing after the 2nd buy signal proportional to the numbers 5-4-3-2-1. Thus in total position leverage is at most 2-10-8-6-4-2. The example practice of 1MDS shoes that a good cycle will have an escalation 3-4 times the initial main position leverage which at H4 it is 10, and will in total give an increase to the account of about 11.2%. As we escalate the total risk of the position at each time should not be more than 10% of the funds, thus all but the last position have break-even. This rule of 10% essentially determines the unit of the position leverage. If the whole process would instead be at hourly H1 , or 5-minutes  M5  the rule of 10% risk by stoploss might raise the leverage to 50 or 100 correspondingly  , which would be possible only for professional accounts. For time frames M5, M1 we may allow the same action even for non-trending instruments, with background superexp at H1 or H4 or not  as there is almost always very local trend. 

 

3) And we exit (for the longer protocol ) with a trailing-out of the donchian 5 days channel and if the action  is  at 4-hours bars at donchian=12 bars (2 days) or at an upward terminal super-exponential spike. If the action is at H4 we may exit  also at the redline of the alligator of the D1 timeframe.  If it is at M5 either for non-trending instruments then we exit usually by donchian=6 (1 hour) and at M1 by Donchan =5 (minutes). For the short protocol at D1, H4 we exit at the red line of the alligator (appropriate adjusted to eigenfrequencies of the time frames ,and with parameters sequence by dividing by 2) or trailout as before but at the next faster timeframe. Nevertheless in such cases we may more easily reverse at the stoploss to follow more spike before we enter inversely the spike. For the non-trending instruments at M5, M1 we may allow the long protocole and exit as before.

 

 4) The main leverage unit of the position should be high e,g. at H4 10 or more  , but the stoploss very tight so that the initial drawdown of the leverage=2 positions should not be more than 10%. This  leverage corresponds to that of the minimal allowed size of call options positions on the micro-index SnP500. This whole system , much simplified of course can be done  in a lot more safe way,  and easier by buying call options on the US index instead of futures or CFD-futures much as described by Chuck Hughes. It also corresponds to the required sufficient number of trades of nominal size 50K or more that the professional accounts require to me maintained.

THE PROTOCOL FOR NON-TRENDING INSTRUMENTS.

 

 

1) We enter at the extreme of a "lightning"  panic superexponential  spike (that is to be seen not only at the daily but mainly   at the 4-hour charts [when there is a background superexp at D1 supporting the same direction we will continue beyond the red line if not we stop at the redline]  and the alligator as Bill Williams describes in his book Trading chaos, which is super-exponential growth  spike) and it is about 3%  H4 retrace till the redline of a  10% D1 move. As a spike is can be of  the 4 types , continuation, stationary, initial or final type. The choice of entering at a superexp spike move either as retrace or going-on as superexp, is optimal in the sense of fast superexp move. It would work also  belter if it was a terminal spike but also it works if it has background at a slower time frame another super-exp move which supports at the same direction. In non-trending instruments if he background is stationary and the spike very intense it is a very good opportunity.  If it is an initial spike or stationary  spike then we wait till the 3rd wave to enter. Entering at a super-exp spike guarantees that we take pieces of a trend either during the spike or from the beginning of a new trend. For a short term only trade till the red line of the alligator , the most important factor for the success of the retcace of the superexp move is not so much if it is terminal or initial or continuation or stationary type e but if it is really a strong and extreme superexpmove. The 2nd best is to be a terminal superexp-spike. The first position size is 1/5 or 1/10 of the normal and main which is position (effective) leverage 10 , thus the experimental starting would be a position  leverage=2 or 1. The improvisational escalated-descalated  following of the market (we follow faster than and anticipating  the moves of the market) is like these proportions 0,5, 1, 1,5 , 2 (=5) , 4, 3, 2, 1. or in integer values 1+ 2+3 +4(=10) + 8+ 6+ 4+2.  We diminish the position at bad conditions and expand at good and more predictable conditions. Also we open-close repeatedly when the market is locally stationary oscillating to get smaller gains. This is the art of faster following-anticipating  the market profitably by improvisational escalation-descalation in situations of superexps that are more or less predictable.  Simultaneously we put a stop inverse order one tick away from the current extreme, with an appropriate trailout for, so if the superexp spike goes on, we eventually we cover losses andeven possibly gain from that too. The position leverage depends on the initial stop loss which should be less than 10% usually 2%-5%. The initial stopp loss is not more than  2N, where N the averge true range of 20 days which is the month. At H4 it can be not more than 3N (3 bars H4 is half a  day) where N is the average true range of H4 of 5 days thus 30 H4 bars. This determines the maximum position leverage that usually it can be up to 10 when at H4 .  We may also put the stop loss at D1 by the Donchian=5 days , or at H4 by the Donchian=12 (2 days) . When we scan the non-trending instruments and again within the non-trending instruments the short-term retrace only (till the red line) M1-M5-H4-D1 has priority to the  longer trend trailout at M5-M1 or at H4 only if at D1 a super exp moves support the same direction,   according to the personal availability of time.  The non-trending the short protocol with exit at  the red-line of the aligator has priority to the long protocol beyond the red line  We allow  the trend trailout long protocol beyond the red line (for non-trending instruments) only at M5 or M1 but it has to be essentially identical to a short (till the red line) favorable superexp spike at H1 or H4 . When assessing the favor-ability based on the dynamics of larger time frames, we must not forget that only the superexp movements are essentially of predictable retrace and move. Especially for such M5-M1 long protocol, the case of the terminal spike or superexp is the most favorable. In such a case of terminal superexp-spike,  (which is essentially identical with a short term till the red line)  favorable superexp at a larger time frame and in paticular at  D1 , we may allow the long protocol beyond the alligator red line also for non-trending instruments at H4 time frame.    For non-trending instruments like crossrates of currencies, we enter at again at a super-exp move detected by the angulating alligator (usually at D1 or H4) but the expected up economy must be better than the crossrate economy. The spike may be either terminal or initial or stationary ,but  the terminal spike  ,is better. We enter at the reversal either by a divergent-hummer bar or by looking at the next faster scale. 

 

2) We  escalate only at the final rally of the move when it is sufficient low risk while at the beginning we are very careful with low positions sizes as we do not know if the superexp has finished or not, and essentially that is why it is more probable to win grom the continuation of the superexp move at the beginning. We  escalate forward with the Bill Williams fractals which is almost equivalent to the Donchian 5 days channel (as in the turtle trading system too) and also escalate backwards after the force index of Alexander Elder of 2 days. If the action is at 4-hours bars or M5 , then Dochian=6 bars (1 days or 1 hour). If in M1 again by fractals or Donchian =5.  The escalation is decreasing after the 2nd buy signal proportional to the numbers 5-4-3-2-1. Thus in total position leverage is at most 2-10-8-6-4-2. The example practice of 1MDS shoes that a good cycle will have an escalation 3-4 times the initial main position leverage which at H4 it is 10, and will in total give an increase to the account of about 11.2%. As we escalate the total risk of the position at each time should not be more than 10% of the funds, thus all but the last position have break-even. This rule of 10% essentially determines the unit of the position leverage. If the whole process would instead be at hourly H1 , or 5-minutes  M5  the rule of 10% risk by stoploss might raise the leverage to 50 or 100 correspondingly  , which would be possible only for professional accounts. For time frames M5, M1 we may allow the same action even for non-trending instruments, with background superexp at H1 or H4 or not  as there is almost always very local trend. 

 

3) And we exit (for the longer protocol ) with a trailing-out of the donchian 5 days channel and if the action  is  at 4-hours bars at donchian=12 bars (2 days) or at an upward terminal super-exponential spike. If the action is at H4 we may exit  also at the redline of the alligator of the D1 timeframe.  If it is at M5 either for non-trending instruments then we exit usually by donchian=6 (1 hour) and at M1 by Donchan =5 (minutes). For the short protocol at D1, H4 we exit at the red line of the alligator (appropriate adjusted to eigenfrequencies of the time frames ,and with parameters sequence by dividing by 2) or trailout as before but at the next faster timeframe. Nevertheless in such cases we may more easily reverse at the stoploss to follow more spike before we enter inversely the spike. For the non-trending instruments at M5, M1 we may allow the long protocole and exit as before.

 

 4) The main leverage unit of the position should be high e,g. at H4 10 or more  , but the stoploss very tight so that the initial drawdown of the leverage=2 positions should not be more than 10%. This  leverage corresponds to that of the minimal allowed size of call options positions on the micro-index SnP500. This whole system , much simplified of course can be done  in a lot more safe way,  and easier by buying call options on the US index instead of futures or CFD-futures much as described by Chuck Hughes. It also corresponds to the required sufficient number of trades of nominal size 50K or more that the professional accounts require to me maintained. 

 

Here is the table ofthe lower risk priorities P1 , P2, P3, P4 

LOWER RISK PRIORITIES	US INDEXES (Continuation type of the 7 types of  superexp)	NON-TRENDING  (2 reversal types of the 7 types of superexp)
SHORT RETRACE ONLY PROTOCOL	P1    (M1-M5-H4-D1) ( is  always up. Only if no opposite superexp reversal factor in the background. eg. terminal up)	P3 (M1-M5-H4-D1) (Only if no opposite superexp reversal  factor in the background)
LONGER TRAILOUT PROTOCOL	P2 (D1-H4-M5-M1) ( is  always up. Only if no opposite superexp reversal factor in the background e.g. terminal up)	P4 (M5-M1, H4) (only if there is favorable super-exp reversal move at the background!)

Obviously the short retrace only protocol has higher probability of success but lower rate of return and vice versa with the longer trail-out protocol. 

 ( From 1982 to 2000, for the American stock indices we discover the next statistics:
 1) There are 12 periods of 3.7 years, that the index grows more than 100% 
 2) There are 11 periods of about 9 months (continuation pattern or standing wave of 3 months half period) that the index goes down about 25%-30%.)

3) There was a long period 1966-1982 that the DJ30 and SnP500 were mainly falling (cold-war , strict credit rules by federal reserve, and not very low inflation rate).

  

ALL THE EFFECTIVENESS OF THE PROTOCOLS IS BASED ON THE NEXT:

 

1)    COSMIC-SOLAR-PLANETARY CYCLES

1.1)        Sunspots 22.2 y    11.1 y  5.5 y  2.75 y

1.2)        Also observations of solar coronas mass emanations, solar flares, and geomagnetic storms , that affect the volatility only during summer and spring!

1.3)        Earth 1 y, 3months

1.4)        Solar months (20 trading days)

10 d   5 d 2.5 days and 48 hours.                                                                                                       

1.5)        Earth day  , 8h, 6h 3h

1.6)        Helioseismology   H1=3h 1,5 h   H2=1h, 30min H3= 5min

In the next the utilized pairs of time-frames for the protocol  W1-D1 D1-H4, M30-M5 have the corresponding solar scales as below

W1-D1  (Solar month)

D1-H4  (Solar month-day)

M30-M5  (Helioseismology 3h -1h-5min)

 

2.       STRICT SEPARATION OF TRENDING (IN THE ALL TIMES LONG TERM) AND NON-TRENDING INSTRUMENTS

2.1)        Trending=US indexes , possibly crypro currencies also (exception these years the usdtry too) (Law of momentum conservation)

2.2)        Non-trending=forex, commodities, VIX (Law of action-reaction)

 

3.       THE HIGHEST PREDICTABILITY OF THE REACTION TO SUPER-EXPONENTIAL MOVEMENTS

The only acceptable predictability for the non-trending instruments is the reaction (1/3, 2/3 etc) to super-exponential movements that are visible to the bollinger band (D1 n=20 month s=2σ  or at W1 n=4 s=2σ, or M30, n=6 s=2σ )  as spikes that go outside the boundary. And even for them the exact time of reaction is highly unpredictable, but with a stoploss-and-inverse-more       the worst case   scenario, which usually is at least 51% probable,  may turn to an even better than the initial goal scenario! We handle the stop and reverse with Donchian channel trail-out at shorter timeframe , e.g. when at the daily timeframe then trail-out at hourly H1 n=6.  

And which superexp are traded at the next shorter cycle (correspondingly D1-H4, W1-D1, M30-M5)  as angulations to the alligator adjusted to the period or sub-multiples of the cycle. We prefer obviously flat Ballinger bands, in which case we end the trading cycle at the red middle line of the alligator . A clear case of flat Bollinger band is the VIX which is again traded as above at D1-H4. If the Bollinger band is trending or there is a favorable supper-exp at larger scale cycle, then the spike must be  temporary reverse direction and we may trade beyond  the red line but trail-out with the Donchian n=5,6. The latter applies very well for trending instruments like US indexes in which case the scale is usually the W1-D1 or D1-H4. The very fast scale M30-M5 is only when I have full free time , and usually it has high leverage 50 or more. Of course all the above require a broker with high leverage 100,300,500 e.g. at new Zealand , Australia etc. (like Vantage) and an ECN account .

 

4.       FUNDAMENTALS

The spikes for the non-trending instruments of forex are best for small economies that usually have large volatility like CHF, JPY, AUD, CAD, GBP , TRY, etc.  And of course it is better if the down economy is the better, so that reaction is more probable.

 

 

 

5.       BASIC RISK MANAGEMENT

We put of course stop-loss or equivalent inverse stop-to-open position,

At <=10% of the funds. The reverse stop-to-open is as we do not know if the super-exp move is complete or not. With a stoploss-and-inverse-more       the worst case   scenario, which usually is at least 51% probable,  may turn to an even better than the initial goal scenario!  We handle the stop and reverse with Donchian channel trail-out at shorter timeframe , e.g. when at the daily timeframe then trail-out at hourly H1 n=6.  We trade mainly with CFDs, but the W1-D1 on SnP500 with vanilla call options too. 

 

 

6.       IMPROVISATIONAL INTERCATIVE ESCALATION.

For the case of D1-H4, we start with position leverage 1, and if consolidated (e.g. first line of alligator) we increase to 10. Then we escalate decreasingly with leverage 8,6,4,2 . Similarly with such ratios but different leverages for the other scales. We take advantage of stationary oscillations by closing and re-opening positions.

 

7.       THE EXPERIMENTALY ACHIEVED  1MDS.

Even with non-trending instruments, but with trending Bollinger band at D1-H4, and with exiting with trail-out beyond the alligator red line, it has been achieved at least 3 times the 1MDS, with 4-6 parallel positions and about 11.1% gains at each cycle with about 2 cycles per week. This is still feasible with the new perception of the Bollinger band at D1.

 

 

QUANTITIES-MAGNITUDES OF RISK-MANAGEMENT OF ESCALATION AND THEIR SYMBOLS.

L_T : Effective (or nominal) leverage of the Portfolio. That is the ratio of the value of the open position by the portfolio and the balance (closed positions) of the funds which may include the margin . 

L_{0 ,} l₀ : Effective (or nominal) leverage of the Portfolio of single elementary position.

L_M : Margin leverage of the instrument in this account.

M₀ : margin of elementary position P₀

M  : Size of the portfolio in number of elements or positions

P₀ : Elementary position in volume size of contracts

V(P₀): Value (nominal) of the open elementary position  P₀ .

Ind: Index fund or instrument in general.

Pr(Ind): Market price of the Index fund or instrument in general.

M_max : maximum number of elementary positions in the portfolio, by escalation till optimal separation ratio reached.

R_s or X_s: Optimal separation ratio for the instrument for the chosen time units or bins (usually days).

N: average true range of a bar (day) in price units.

R_N: The previous N, as percentage of the price of the index or instrument.

F₀ : Initial balance of the funds for transactions.

m: Contract size, at the symbol specifications of the instrument or constant multiplier to convert price changes into money changes for the instrument.

CS: Constant contract size in forex

e₀: Maximum exposure percentage of the Balance of the funds , per elementary position P₀ , usually 2%-10%.

HYPOTHESES

  

    1)    Escalation spacing N of the grid, which remain constant during the escalation

     2)     Stop-Loss 2N

     3)    e₀: corresponds to 2N exposure.

     4)    We assume funds remaining constant for  the procedure escalation

     5)    We assume leverage l₀ constant during the escalation.

For FX instead of index funds  Contact size/Pr(ind)=m(t) which is variable while for index it is constant.

If the starting size of the elementary position (for indexes) is based on having the effective leverage equal to 1, then instead of the formula P(0)=e(0)F(0)/(2Nm) as above we use another by solving the equation P(0)mPr(Ind)/F(0)=1, which gives

P(0)=F(0)/mPr(Ind)   



THE PREVIOUS ESCALATION AND TRAIL OUT CAN BE EITHER WITH SPOT MARKET INSTRUMENTS E.G. CFD'S OR EVEN CALL OPIONS .

AN ALTERNATIVE SIMPIFICATION OF THE MATHEMATICALLY OPTIMAL  METHOD OF CONSTANT RATIO ON INVESTED AND NON-INVESTED FUNDS:

An alternative simplification of the constant ratio method to handle mathematically optimally a trending in the long run, instrument (e.g. US indexes etc) is to define  A PRTOFOLIO OF TW OPARTS, ONE BUY-AND HOLD AND ONE SHORT-ERM TARDES AT EXTREMT CASES OV VERY HIGH PREDICTABILITY  UP. 

In other words: 

A) A LONG-TERM STRINCTLY BUY-AND-HOLD LONG TERM PART AT X% F THE FUNDS. WE ESCALATE AFTER BREAK-EVEN AS ABOVE BUT WE DO NOT TRAIL OLY SET A TAKE PROFIT ABOUT 1 OR  2 TIMES THE STOPLOSS RISK.

B) AN UP ONLY  SPORADIC SHORT-TERM TRADES PART AT Y% OF THE FUNDS (X%+X%=100%). (NORMALLY IT SHOULD BE TIME PERIODIC SHORT TRADES IF THE MODELOF THE TREND IS A DRIFT , BUT THE SUCCESS RATE IS BY FAR HIGHER WHEN THEY ARE SPORADIC WHEN OPPORTUNITIES APPEAR BECAUSE TRULLY THE TREND IS NOT JUST A DRIFT BUT INVOLVES LINEAR NON-MARSHALLIAN DEMAND-SUPPLY COUPLING)

IN THIS 2-PARTS PORTFOLIO ,THE HIGHER THE VOLATILITY THE HIGHER THE Y%, AND THE LOWER THE TREND OR DRIFT THE LOWER THE X%. 

(E.G. UTILIZE THE ALIGATOR INDICATOR OF BILL WILLIAMS AT VARIOYS SHORT TERM SCALES, AND OPEN POSITIONS WITH VERY TIGHT STOP LOSS AT DOWNWARD  PANIC MOVES THAT ARE EXHAUSTIVE OR FINAL SUPER-EXPONENTIAL (LIKE END-TREND  SPIKES)  , AND CLOSING THE POSITION WHEN REACHED THE MIDDLE RED LINE OFTHE ALIGATOR. FINAL SUPER EXPOSMENTIAL EXTREME MOVES ARE DETECTED VISUALLY OVER THE ALIGATOR "OPENING" OF ITS LINES AND ANGLE WITH THEM AS THEY APPEAR ALMOST LIKE SPIKES. BOTH BILL WILLIAMS AND DIDDIER SORNETTE (SEE ABOVE IN THIS POST) HAVE DISCOVERED THIS AS HIGHLY PREDICTABLE SITUATION. DIDIER SORNETTE CALLS SUCH FINAL SUPEREXPONENTIAL MOVES THAT REACT CONVERSELLY AS SUPER-BUBBLES. EXPERIMENT SHOWS A SUCCESS RATE HIGHER THAN 80%. STILL A PARETO RULE HOLDS: MORE THAN 80% OF THE TIME  OCCUR LESS THAN 20% OF THE OPPORTUNITIES OF FINAL SUPEREXPONENTIAL MOVES. CHUCK HUGHES HAS APPLIED IT WITH BOUGHT CALL OPTIONS WHICH IS BY A FAR A BETTER INSTRUMENT TO DO THE B) PART OF THE PORTFOLIO  WITH A MONTHLY RATE OF RETURN OF ABOUT 10% AND SUCCESS RATE HIGHER TO 95% .  )


In order to conduct successfully an intra-day system of transactions , that is successful in the long run and easy to keep on applying it the next points must be met.

1) It must be relatively utterly simple! Only the "eye of simplicity"can put order and tame the chaos of intra-day price patterns! It must be manual and not automated!
2) Therefore it has to be one only pattern among the 4 price patterns (see post 32) 
3) To deal with this one only pattern, we may apply simplifiers like , velocity or rate of change of prices, acceleration, support-resistance.
4) Celestial periodicity will give the long-run stability, but it need not be one only frequency or period but a few neighboring frequencies or periods in  the spectrum of celestial frequencies or cycles.
5) But most of all the strongest simplifier is that , when measuring the velocity or rate of change , by a stratified sampling hypothesis test, then it has to be an extreme value , which will indicate a reaction or closing of the cycle. This in particular means that we entirely avoid the parametric predictive models of econometry that assume predictability at every time step, as for such to be succsesful they would need to be pod stochastoc coeficients and there practically no such econometric models,  and we resort to the more robust and with less assumptions non-parametric statistics and in particular of a single non-parametric  measurement of the velocity of the prices, with stratified sampling. 
The stochastic model that is relevant is again the simplest possible one, e.g. starting from that of the Portfolio Theory of Markowitz, where for the rate of return R we postulate R(t)=R(0)+R(s,t)+e(t) where the R(0) is the  constant average rate of return in time of the Markowitz theory of portfolio (constant trend) , R(s,t) is the seasonal part ,with average value non-zero , and on which we apply the above hypothesis test at various frequencies or sampling horizons or with stratified sampling , and e(t) has average value zero , it is normally distributed and is the random excitation part. The stochastic model has no-memory and for the sampling each step gives independent observation. From the above equation we may derive with the exponential function the final stochastic process of the prices and volumes that will be log-normally distributed.
6) It must be a phenomenon tested scientifically with valid quantitative procedures , with sufficient good (intermittent) predictability , for many years.
7) The financial result should be adequate (e.g. >= 1MDS).
8) The financial result, in my case, is to be used not only for economic freedom, but also for a worthy goal e.g. so as to finance my innovative research in the new millennium digital mathematics. 


9) One of the solutions to the above requirements is the best (vanila) options spreads strategy of Chuck Hughes as in post 41, which woeks only when the market has high volatility (thus implied volatility too)