Three Trading “Truths” Quantified

I want to discuss three trading “truths” that I often heard but when I finally got into testing ideas found them to be myths. These discoveries were instrumental in turning my trading around.

Build Alpha: For those that know my story, it was not all roses and rainbows – what trading story is?!? I actually “learned” like a lot of traders from online sources, chat rooms, webinars, and eventually found the right circles to roam in after a LOT of trial and error. I was then lucky enough to land a job with a high frequency trading firm. I was quickly made to realized that much of what I thought trading “was” was most certainly false.

In an attempt to show me the light, a few of the quick trading axioms they wanted to disprove to me were simple “well known” trading ideas that have been around for years but were in fact large falsehoods. I quickly realized beyond this list of three examples there must have been many, many more “trading truths” that were causing my account harm and doing my trading aspirations a disservice.

I then realized the value in testing everything and quantifying my entire approach. It wasn’t until this point in my journey did I get out of the “rat race” of trading… the ups and downs, the barely consistent, always doing slightly better but not really getting anywhere trading most of the traders I meet today are going through.

I cannot stress the importance of testing everything and quantifying your edge. Investigate these trading axioms. Otherwise you will be stuck in randomness until your account random walks to 0. For more on my journey check out this podcast I did Below you will find my three favorite trading “truths” quantified.

Trading “Truth” #1 – Bearish Engulfing Candle

This one is great because many are familiar with Japanese candle stick patterns and the name implies such a negative move in price that one cannot help but to shift their bias to the downside. These candlestick patterns are often traders first introduction to technical analysis.

The pattern is defined as a bearish candle that “engulfs” the range of the previous day. I also like to look for a negative close and preferably a close below the previous session’s low. Here are a few pictures of bearish engulfing candles.

BuildAlpha: The truth is that this pattern has been one of the most bullish (not bearish) one day signals for the SP 500 over the past 15+ years. Did you know that the day following a bearish engulfing candle actually closes higher 61.72% of the time in the SP500 futures and 65.33% of the time in SPY ETF? The day following a bullish engulfing candle only closes higher 54.05% of the time in the SP500 futures and 51.70% of the time in SPY. You tell me why they’re named how they are!

Trading Truth #2 – Above a moving average is bullish and below is bearish

Most of the time this is true but it depends on the moving average, moving average length, and the market. I recently came across a few blogs that mentioned using a short term moving average as a sign to exit long market exposure and wait for sunnier days. In reality, this sounds great; however, analyzing the data this can be an extremely misleading “truth”.

Below is a chart plotting the equity curve if you would buy every close when the SP500 is BELOW the 8 period simple moving average (8SMA) and sell the next bar (repeating until above 8SMA). The second chart is if you were to buy every close when the SP500 is ABOVE the 8SMA and exit the next bar (repeating until below 8SMA). Yes, being below this moving average is actually better for long returns.

Of course this is not true for all markets and moving averages, as mentioned. I pointed this out in another post on SeeItMarket where I dissected popular stocks and different moving average lengths here:

The point is that these trading truths like “above a moving average is bullish” and “below a moving average is bearish” need to be quantified and tested. It is important to stop thinking trading truths can be generalized to every market, timeframe, indicator value, etc. and just verify them yourself and you’ll be much better off!

Trading Truth #3 – Overnight Exposure is Risky

Sure earnings announcements and large unexpected news announcements typically happen after market close. Does this mean we should avoid trading overnight, if possible? So many want to day trade and be flat on the close that they miss a lot of gains from the overnight session (sometimes all of them).

Below you will see 30 top stocks where I breakdown their returns in the day session compared to the overnight session. The blue line signifies if you bought the open and sold the close the same day (day session) and the orange line signifies buying the close and selling on the next day’s open (simulating overnight exposure). As expected, there are no generalities in trading truths. Some stocks exhibit that most, if not all, returns come from the overnight.



Don’t get me wrong there are certainly edges to be had from avoiding overnight exposure and there can also be value added by increasing overnight exposure. Again, I am just making the point to dig deep into the data and understand where the edge(s) actually live.

Quick note: You can easily test overnight holds in Build Alpha by setting max hold to 1 bar and setting entry to this bar close and exit to next bar open in the settings menu.

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Why Are Expert Analysis Tool Vital In Stock Market ?

One should invest in the right manner to get the appropriate return nowadays. A lot of hard work is put in to earn and in achieving your goals, which may not be sufficient for leading a comfortable lifestyle. In order to fulfill your dreams, the investment should be made appropriately to make your money work hard. Money lying in your bank is not earning anything, so you must trade or invest your money smartly to earn a return.

Investing in an equity market, one must have the proper knowledge of its technical as well as fundamental analysis. Both technical and fundamental analysis will tell you some about the movement of different stocks but how can you be sure? Quantitative analysis can be the missing piece. That is, using historical data and statistics to find the best opportunities.

This enables you to better decide on entering and exiting from the market. BuildAlpha is devised to help in making your investment decisions. Technical analysts tell you the movement of the prices of the various stocks and seemingly guess when to buy or sell a stock. But it is not always possible to take the support of human “experts” all day long, but now with the help of this analytical software, it has become possible. The software does not comprise a single expert knowledge but knowledge of various experts (that is, the historical data).

Stock Market

Types of Analysis by Software

Software, like Build Alpha, are best suited to serve the quantitative analysis, stock screening, and thereby provide the right base to start strong in the market, especially for someone new to the market. Once the investor sets a tracking portfolio of corporations (or commodities or forex), then the analysis tools become valuable. Once the investor has created the group, portfolio tools will present all the right techniques to achieve these funds efficiently, thereby helping you succeed in the complex stock market easily as the analysis tool helps in drawing out expert assumptions by drawing in various price patterns. Also, for technical analysis, they offer an excellent and interactive charting platform for clearing up your queries. An investor can quickly get to know about which indicators and moving averages work best on a particular market and can customize these to meet their desired plan.

Primary Functioning Of the Expert Tools

The primary function of Build Alpha is to allow the trader and investor the ability to find what price patterns, fundamental analysis and indicators work best in providing the best risk return. There are many advanced statistical tests like Monte Carlo simulations and noise testing that help the trader and investor decide if an investment strategy is robust and will likely show similar returns moving forward. This is the key to any solid investment strategy – not how it has done historically but how we expect it to perform going forward. Without being able to determine this then one is destined for failure.

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Improving Strategies

A crazy cool way to use Build Alpha. I have to admit that I did not come up with this idea, but it was suggested to me by a potential Build Alpha user.

He was wondering if Build Alpha could help come up with some rules of when he should avoid trading his existing strategy or even when to fade his existing strategy. Heck any improvement is a plus, right?

**Please note Build Alpha now accepts data in this format:  mm/dd/yyyy, hh:mm, open, high, low, close, volume, OI. Please refer to page for adding own data instructions**

*I say we found one strategy but we actually found tons that would be an improvement to his original strategy. Him and I only spoke specifically about one so that’s why in the video I slip and say we found one strategy. Did not feel like making a new video to clarify this minor point.*

He had a day trading system and compiled profit and loss results for that system in the following (Build Alpha accepted) format. Date, time, open, high, low, close, volume.  (*note BuildAlpha now accepts the time column as intraday capabilities are becoming fully operational*).

Below is his sample file. We purposely left the open (high and low) columns as all 0’s. The close column contains the end of day p&l from his original strategy.

We then set Build Alpha to have a maximum one bar holding period and to ONLY enter on the next bar’s open and to the ONLY exit on the next bar’s close. I will explain why this is in a minute.

We then chose the underlying symbol the original strategy was built on as market2. So for example, his original strategy trades ES (S&P500 Emini futures) so we only select Build Alpha signals calculated on Market2 which is set for ES.

So now if Build Alpha calculates a rule on ES-like close[0] <= square root(high[0] * low[0]) then we would “buy” the next bar’s open of market1 (again his results – which are 0) and “sell” the next bar’s close of his results which is the original strategy’s p&l for that day. This would essentially say that if this rule is true then go ahead with a green light to trade the original strategy the next day. If the rules are not true, then don’t trade the original strategy the next day. Ideally, we can find rules that increase risk-adjusted returns for the original strategy (which we did).

Now, what is even cooler is if we set Build Alpha to find short strategies we would essentially be “fading” his original strategy or finding rules of when to go opposite his original strategy.

Build Alpha found some good short/ “fade” rules to use as well. Here is an example that did quite well fading his original strategy (even out of sample – highlighted section).


After emailing him the results here is what he had to say in his email response:

“There are 2028 negative periods in my data with a gross loss of -1,217,880.26. That’s the theoretical maximum a short rule can achieve, if it were to find all losses. Your graph seems to show 380,000 short rule profits. That’s already 31% of all losses. If I don’t trade on these days, my net profit would go up by 380,000, a 46% increase.”

I thought this was a really unique way to use BuildAlpha and I wanted to share. I think the same analysis can be done on strategies with longer holding periods too. I would just import daily marked to market results of the original strategy and Build Alpha would essentially find rules of when to hedge your strategy or fade it for a day or two. I think this is certainly a unique approach to add some alpha to performance.

Anyways, thanks for reading as always and keep a lookout for some MAJOR upgrades coming to Build Alpha very soon!

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Perks Of Using Trading Software

Stock trading has become a significant market segment. Every third person is dealing with the same trend. This segment of the market serves a great set of the potential to make a lot of money. There are instances where you will observe some of the wealthiest persons in society have made their estates in stock markets and investments; they have earned tremendously from this asset class.

However, most do not have a financial background or business degrees. It is not just their own expertise that has led them to such success in the market, but it is the assistance of trading and investment software. Software like Build Alpha can help guide traders and investors through tricky markets and identify the biggest trends that lead to wealth accumulation and a better understanding of the market.

Trading Software

This software, Build Alpha, helps them gain an entire overview. Beginners will be guided on the underlying trend of the market as well as advanced traders and investors who can find specific trends for stocks of interest. There are several thousands of people who are contemplating to make money in the stock market by analyzing a mixture of approaches. There are also, unfortunately, many business organizations that create lies, false narratives and sell misinformed ‘courses’ to naïve investors. Build Alpha software allows the investor to research the data himself and only trust the numbers, not some lie a business is selling.

This is the primary cause that stock trading software has become so popular with investors as the software can allow investors to execute their trading strategy quickly, based on facts and systematically. There are several goods of utilizing an automated trading system or stock investing software to make money in the stock exchange.

Let us investigate additional benefits of the stock trading tool.

One of the most significant benefits of using these systems for stock consideration is that it reduces the tremors of humans; it solely depends on the market trends in the trading process. It has often been observed that this software comes into the scene when most people spend money on the stock exchange when they give into their sentiments when they shouldn’t have. Traders have a much more comfortable time adhering to their investment plan when they control their emotions, passions, and the automated trading system helps in managing their emotions and taking a data first approach.

Many traders are helpless when they want to place the trade automatically, but now it can happen with the software. This execution by the software is quite exceptional and produces very reliable code.  Following a defined trading system based on data can help those who are nervous about investing and can also help those who are too eager to invest at every perceived opportunity. Automated trading systems created by powerful software like BuildAlpha can help both types of investors only act when data tells them.

Stock trading software like Build Alpha also allows traders to backtest their trading strategies. This automatic trading system is free from interpretation, and all the rules need to be met to perform the business, which expects traders can examine their buying procedures on actual data.

Imagine looking at your investment portfolio and knowing that each stock has been found using powerful software and has data to back up the decision. This would make for one relieved and happy investor.

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Edge Ratio or E-Ratio measures how much a trade goes in your favor vs. how much a trade goes against you. The x-axis is the number of bars since the trading signal. A higher y-value signifies more “edge” at that step in time.

BuildAlpha: Measurements are normalized for volatility; this allows us to use e-ratio across all markets and regimes. Once normalized for volatility, 1 signifies that we have equal amounts of favorable movement compared to adverse movement.

In other words, the y-axis is an expression of how many units of volatility more or against you your trade gets. A measure of 1.2 would indicate .2 units more of favorable volatility and a measure of 0.8 would indicate .2 units more of adverse movement.

Build Alpha: The blue line is for the selected strategy’s signal and the red line is for a “random” strategy for the same market. The red line is to serve as a baseline to beat. Ideally, you’ll want to see a blue line above 1 and above the random line.

You may find many “good” strategies, but they may have an E-Ratio less than the red baseline or less than one. This would make us less confident that our signal will withstand the test of time.

Additionally, if E-Ratio falls off a cliff at bar 6… then it probably does not make sense to hold for 15 bars!

Another tool to make sure Build Alpha + Trader = Success.

How to calculate:

  1. Record Maximum Adverse Excursion and Maximum Favorable Excursion at each time step since signal.
  2. Normalize MAE and MFE for volatility. To compare across markets we need a common denominator. Let’s use ATR or a unit of volatility.
  3. Average all MFE and MAE values. Now you should have average MFE and average MAE at 1 bar since signal. Average MFE and average MAE at 2 bars since signal…
  4. Divide Average MFE by Average MAE at each time step.

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Wall Street Cliche Or Trading Edge?

BuildAlpha: What is Turnaround Tuesday? Is it a Wall Street cliché, media company selling headline, or verifiable trading edge? Maybe all of the above, depending on its usage.

But it has also been a simple trading edge over at least the past 15 plus years or so. Below you will see how the equity indexes perform on Tuesdays.

Turnaround Tuesday

Build Alpha: The idea is that the market tends to reverse a Monday selloff or down day with a strong rally on Tuesday hence the name “Turnaround Tuesday”. If this is the case then we can test this idea and add a simple edge to our arsenal.

Tranding Edge

First, let’s define our “Turnaround”. If Monday’s Close is below Monday’s open then Tuesday should – based on our theory – show positive performance across the stock indexes. On the other hand, Tuesdays following a neutral or positive Monday (close > open) should fare only about randomly or without a strong trading edge.

BuildAlpha: In the charts below, you can see equity curves for Tuesday trading across the major stock indexes. The first chart follows an up Monday, while the second chart follows a down Monday – or our “Turnaround Tuesday” performance. The blue line represents the S&P 500 futures since 2002.

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Trading Trends with Build Alpha

Trading is basically buying and selling of things to capture a change in price. There are many types of trading activities which are there in the market. Due to the development in the technology, there are many softwares and tools made for the convenience of different trading activities. Among all trading activities, trading in stock market requires the utmost help. For this purpose, Build Alpha helps the trader the most. It is one of the leading softwares in the trading market which has done wonders with its expert skills.

With the changing trend of the market every now and then, the human expertise and knowledge is not efficient to analyze all the trends keeping in mind all the factors that affect the trend. This is how the human expert’s evaluation turns vague in front of the software analysis.

Trading software helps in trading and analyzes the movement of the various stocks, currencies and commodities worldwide. Many brokerage houses provide their clients with trading software to buy and sell different financial products like equities, commodities etc. on their own. Many brokerage houses are now itself indulging in the expert assistance of BuildAlpha tool.

This tool does not only provide expert assistance to the ones who have knowledge about the market, but it has proved to be very useful for the ones who are starting from scratch. It has proven to be the best tool for the one who have very little or no skills about trading in the stock market. It gives assistance from starting, if you are someone who is at the intermediate level in the trading world, the software guides you through each step of strategy development.

buildalpha Software

Build Alpha: Trading software can be easily downloaded on your laptop or desktop. Some of the important features of the trading software are discovery of edge, technical and fundamental analysis of the various stocks, commodities, foreign exchange and even cryptocurrencies. Money spent is an investment made on the software and it would be worth every penny.

It has better analysis skills and capabilities than many can do on their own and requires no programming. So if you are entering the stock market and want to invest your funds get yourself a proper tool to give yourself the best chance to succeed. Without guidance operating in the market is never a good idea. There are various patterns you need to know and it will guide you in finding the ones that can help you increase your chances of success.

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Combining Trading Rules To Smooth Performance

The market is “overbought” or “oversold” are common phrases you will hear across the finance space. However, it is actually extremely rare for these conditions to be true.

Today, we’ll attempt to show how trading rules can provide a better picture of the market while enhancing trading performance.

BuildAlpha: First, let’s simply define overbought as a 14 period RSI of greater or equal to 70.00 and let’s simply define oversold as a 14 period RSI of less than or equal to 30.00.

Below is a chart showing the RSI of the S&P 500’s ETF (NYSEARCA:SPY) with the overbought and oversold levels plotted.

Trading Rules

From January 2002 to May 2017 here are some stats:

  • Days overbought 214 out of 3,878 or only 5.5%
  • Days oversold 60 out of 3,878 or only 1.5%
  • Days in the middle roughly 3,604 out of 3,878 or 92.9%

Of course when these overbought or oversold conditions are true the markets do appear easier to trade as volatility often expands and it seems easier to skim some meat off the bone, if you will. However, many strategy developers and traders focus on these overbought and oversold conditions when in reality it is extremely difficult to be patient 92 to 98+% of the time.

A simple solution is to augment your trading with trading systems that do well in these “common” times or regular conditions. Let’s look at how SPY did during this 92% of the time period the market was not overbought or oversold. The test period covers January 2002 to September 2012 (as we will save Q4 2012 to present day as out of sample data for later testing).


Build Alpha: As you can see that trading in these 92% of the time when the market is neither overbought or oversold is extremely trendless and encompass some serious drawdowns; making life extremely difficult for traders.

Let’s add an 8 period moving average filter and see if we can smooth out performance (performance only based on 100 shares for testing/demonstration purposes).

As you can see the moving average filter makes a significant difference albeit not perfect. That is, trading when prices are below the 8 period moving average produced significantly greater performance than when price was above the 8 period moving average. This is counter-intuitive for sure.

BuildAlpha: The process of continuing to refine and add filter and rules to our trading “system” is part of the strategy development process. It can be long and arduous. To keep this post short and sweet let’s “accept” these two rules (1. RSI between 30 and 70 and 2. Price below 8 SMA) and go ahead and see how this system would have performed on the out of sample data from September 2012 to May 2017.

The strategy holds up quite well and we now have some simple rules to follow/guide our trading in the “doldrums” that occur 92% of the time.

The long and arduous process of refining and adding conditions can be greatly simplified with modern computing power and software. Build Alpha attempts to make this process simple and fast! Build Alpha is trading software designed to create trading strategies from thousands of inputs, filters, and signals for the research-oriented trader and investor – no programming required!

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5 Lessons From One of the Greatest Traders of All Time

As a quantitative trader, I could not have been more excited for the new book “The Man Who Solved the Markets” by Gregory Zuckerman which details Jim Simons incredible story.

Jim Simons averaged a 66% return over the past 30 years and a 39% return after his 5% management and 44% performance fee (pg 316 of book).

I plowed through the book and had, what I believe, are some major takeaways to share:

1. Edge is important; not the story of why it exists. 

In other words, data mining is ok.

This is something I’ve long defended since the launch of Build Alpha. You do not need a hypothesis or explanation of why a certain investing/trading edge exists if it is statistically relevant or significant.

In my opinion, it is possible we simply cannot comprehend why a pattern or edge exists because it exists in a dimension too complex for our current understanding. Therefore, we should not discard edges that we do not understand.

This is why I (and BuildAlpha) search the market for edges and let the data tell us where the edge is. Remove the human bias, false ‘truths‘ and the need to explain/justify everything with a hypothesis or reason why it is happening. Many of these patterns are ‘overlooked’ because they don’t have an explanation, but have clearly been profitable for Renaissance!

Here are a few quotes to drive home takeaway #1:

“Simons and his researchers didn’t believe in spending much time proposing and testing their own intuitive trade ideas. They let the data point them to the anomalies signaling opportunity. They also didn’t think it made sense to worry about why these phenomena existed. All that mattered was that they happened frequently enough to include in their updated trading system, and that they could be tested to ensure they weren’t statistical flukes”. (pg 109)

“Simons and his colleagues hadn’t spent too much time wondering why their growing collection of algorithms predicted prices so presciently. They were scientists and mathematicians, not analysts or economists. If certain signals produced results that were statistically significant, that was enough to include them in the trading model” (pg 150).

“I don’t know why the planets orbit the sun. That doesn’t mean I can’t predict them” – Simons (pg 151).

“More than half of the trading signals Simons’s team was discovering were non-intuitive, or those they couldn’t fully understand. Most quant firms ignore signals if they can’t develop a reasonable hypothesis to explain them, but Simons and his colleagues never liked spending too much time searching for the causes of market phenomena. If their signals met various measures of statistical strength, they were comfortable wagering on them.” (pg 204).

“Volume divided by price change three days earlier, yes, we’d include that” – Simons (pg 204)

2. Everyone struggles with discipline and following their system. Even the Greatest of All Time (G.O.A.T)

Discipline is key and the ability to consistently follow your system(s) can be the difference between winning and losing. We all believe discipline becomes easier if you have more reliable edges or have grown your account quite a bit, but Jim Simons would probably argue that is simply not true!

BuildAlphaIn Dec 2018, Simons (worth approx. $23B at the time) called his advisor and wanted to override his systems (pg 308). The systems that have created the most incredible track record in history.

In the “Quant Quake” of 2007, Simons overrode his systems before the eventual rebound. One employee was quoted as saying it cost the firm money (pg 260). Moral of the story.. follow your system and trust your research! Everyone struggles with this, but we must.

Note: Majority of his career Simons was actually the one advocating to NOT override the systems and may be a large part of his success. These were just two small examples.

“Trust the model. We have to let it ride; we can’t panic” – Simons (pg 216)

3. Surround yourself with a great team

This one should be obvious, but no one becomes the G.O.A.T alone. Brady has Belichick, Jordan had Pippen, Kobe had Shaq, Ruth had Gehrig, etc.

A large portion of the book chronicles how Jim sought out help from brilliant individuals, hiring them away from prestigious positions (science, tech and academia) by offering to double their salary. I won’t go over every individual, but a lot of chapters in this book are dedicated to the spectacular individuals that helped create the incredible returns which give Jim Simons the G.O.A.T title.

He recruited great talent to his team. Surround yourself with those that are experts in things you are not or inspire you to push past your limits.

Incorporate different approaches to your own similar to how Simons did. Trading is a lonely business at times.. you don’t need a hedge fund to build your own team.

4. Build strategies using different data.

Sure price and volume are great but the book mentioned other areas of alternative data Renaissance found useful.

Here are some simple ideas the book mentioned:

– sentiment

– correlations and relative moves

– number of times a stock’s ticker appears in major publications (regardless of sentiment)

Additionally, here is a previous See It Market blog I did using Commitment of Traders report to generate a trading signal:

5. Edge doesn’t have to be big.

Renaissance searched for “overlooked” edges and joked about a 50.75% win rate while utilizing the law of large numbers to win in the long-run.

Often times we get caught up searching for the holy grail or the perfect entry/exit for our trading or strategy development. But even with all these PhDs, RenTech was excelling trading a nearly 50% winning system to generate such astronomical returns. Much more can be gained by combining and adding unique smaller edges together than wasting time hunting for the perfect holy grail strategy!

 “We’re right 50.75 percent of the time… but we’re 100 percent right 50.75 percent of the time. You can make billions that way” (pg 272)


Build Alpha: Money isn’t the be all end all. He’s had tremendous tragedy in his personal life. Remember to enjoy LIFE while on the financial quest we are all on! The market isn’t going anywhere.I enjoyed the book and hope you do/did as well.

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