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.

Originally Posted:

What is need for Trading Software?

Trading is one of the most popular activities in which people are doing these days to earn money, start a new career or even just supplement their income. Some even consider trading and investing a passive source of income – which of course requires some knowledge of the market. For someone who has already been trading and trying their luck, it can still be better to keep pushing forward without help. But for someone new to the trading market or the struggling trader, that person surely needs additional help to trade the right way.

Finally, there is a software to assist. A tool like a Build Alpha can help them facilitate trading ideas and better understand the financial outcomes, such as risk and reward, drawdown, position-sizing, etc. It can also be used on any market type such as futures, stocks, currencies, bonds and even crypto currencies. Dealing in all these markets as a primary market or secondary market is made easier with the help of software. Comparing the same with the other options like taking the help of gurus or trading ‘experts’ leads to massive misinformation, account loss, and brokerage cost. These firms and ‘educators’ present their buyers with buying ideas that have not been tested or on the behalf of other clients that want to take the other side.


Software like Build Alpha that helps in trading is quite accessible as it can be easily downloaded and launched from a desktop or portable device. There is no skill required to operate it as the software can take any user input and return satisfactory results for trading and investing decision making.

So Why are these trading tools Vital

Let’s see the following essential points of these trading tools:

Trading software helps in facilitating buying and examination of financial outcomes.

It helps the traders that are trading alone, which is the self-directed trader. They require to employ and discover how to efficiently manage their trading software in enhancement to learning how to buy or invest.

Many other General characteristics of these trading tools incorporate order arrangement, technical review, structural analysis, electronic trading, and journal trading. So there is a lot on your plate that is served with this single tool.

Comprehension of This Trading Tool

These trading tools like BuildAlpha are giving the right set of insight to the traders to deal in the security market. Many of the traders and investors these days have shifted towards making at least some of the trading and interpretation utilizing the self-directed trading accounts. This is the main reason that there is an increase in the demand for such software that will provide the right trading capabilities — also giving a thorough analysis and knowledge resources within the software.

This software can give users the right pricing information for assets, fundamental data, graphs, functional analysis, vital statistics, some basic chat rooms, and many other features that are vital from the investment point of view. You will get the best application programming interfaces, that help service the trading software management. So now you can run independently on their network.

Originally Posted:

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!

Originally Posted:

Learn the Skill of Trading with Build Alpha

Trading in financial markets is a tedious job. An expert’s advice is always required to invest in capital markets for a new trader. Listen to all fund managers, their views of investing based on different market conditions. Always do lot of research and take guidance from experts before investing. A new trader must utilize a stop loss, avoid greed and do not trade with fear while investing.

Make a portfolio of strategies or shares from different sectors and maybe receive help from your broker. There are experts who provide market tips which enable beginners to make a wise decision, but on the other hand, you can take the help of this new trending software which is proving to be one of the best solutions in the market: Build Alpha.

Fresh investors always go for those stocks which have reasonable valuations or big growth potential. Different market analysts have their own investment strategies owing to the Bull and Bear phase of the market. There are many loop holes for the ones who are trading for the first time in the market. Investing successfully is basically an initial as well as ongoing journey to explore, learn and succeed in financial markets.

Tranding Software

No one can individually know all the things in the market, but with the aid of artificial intelligence like BuildAlpha software one can climb the ladder of success. You will learn a lot of new things about trading; the software is an overall solution to lead you toward the right path in trading and investing.

Investment and trading are two different aspects of shares, commodities and forex trading. There is intraday trading which requires comprehensive knowledge of market movements and its trends, microstructure, infrastructure and transaction costs. These trends are easily anticipated by the software which a normal human is unable to understand even if he or she is trading in the market for a long-time.

It is one of the outstanding tools which can boost up the confidence of new as well as existing investors in the trading market.  Anticipating the trend becomes easy if you do it through Build Alpha software solution. Also, Build Alpha has a new Intraday Edge feature which can help improve daily investment strategies by finding which hours of the day they are most effective to reduce your exposure and holding time.

The software is a guiding tool for all the young aspirants who want to learn and grow in trading.  It is one of the outstanding tools which can boost up the confidence of new as well as existing investors in the trading market. It guides in making strategies which can be utilized on a real-time basis for assisting our theories in the market (or finding new ones). This is one of the highly recommended softwares who is new to the world of stock market. Take a look at how Build Alpha can help you today.

Originally Posted:

Using Conditional Probabilities To Gain A Trading Edge

Much of trading can be broken down as conditional probabilities. And there’s a distinct benefit in understanding what is likely to happen if some condition (or set of conditions) is true or not.

Build AlphaFor example, is tomorrow more or less likely to close higher if we are above the 200 day moving average or below the 200 day moving average?

Conditional Probabilities

However, there has been much talk about seasonality as we approach summer trading. For that reason, I would like to share some simple graphs showing how the big stocks and ETFs fair on each day of the week. In other words, do certain stocks or ETFs perform better on certain days of the week or is day of the week meaningless/random?

BuildAlphaWe have all heard about “Turnaround Tuesday” for the S&P500, right? How about buying Gold on Friday ahead of the weekend? Let’s see if these market axioms are true (they are).

Below are charts showing the gains achieved on each day of the week for each stock and ETF listed below.

CHARTS:  Conditional Probabilities by Day of Week

This is simple information that can help ease some stress or provide some additional edge in your trading or investment allocations. Looking to buy FaceBook? Maybe wait until Wednesday? The main point I always try to make is that it is important to know these “conditions” that lead to higher probabilities of success. These conditions can be found through testing and historical research and can provide slight edges against those that do not understand these nuances.

Over at Build Alpha, we have tools that can help those with no programming capabilities do large scale testing – it is time to level the playing field.

Originally Posted:

3 Uses for Monte Carlo Simulations in Trading

What is the likelihood the past repeats itself? I don’t have to tell you that those odds are pretty low. Monte Carlo simulations allow us to build general ideas of what to expect in the future.

No one can predict the future, but if we can simulate potential outcomes then we can make better-informed decisions on how to take the risk today.

A Monte Carlo simulation is one tool that can help us create a range of possible outcomes to make better decisions regarding uncertainty and risk. But did you know there were multiple ways a trader and money manager can use Monte Carlo tests?

Side note: Every test has its own assumptions, failures, and difficulties. If any test were a perfect test then you’d only need that one test – which I am not claiming to be the case. This post is not about Monte Carlo being perfect – but rather it being part of your larger suite of testing tools. Finally, outside describing some benefits of Monte Carlo simulations, I’ve also assumed you’ve followed proper testing steps to generate reliable trade results to be used in a Monte Carlo simulation! I have other posts to get you to that point; email me with any questions.

1.  Original (and Resample) Monte Carlo:

a.  This is the most visually popular Monte Carlo simulation. We simply take the backtest’s trade results and reshuffle their order. We do so 1000 times. Now we have 1000 ‘new’ equity curves that allow us to have a better look at the potential risks we may assume when trading this strategy. The underlying assumption is our trade results should be similar but not in the same order as the past.

b.  Now we can calculate some basic statistics like the average drawdown of these new 1,000 equity curves. Most times you will notice this average drawdown is higher than the backtest’s drawdown. It is very wise to use the average drawdown (or even the worst drawdown) from the Monte Carlo simulation when considering sizing and allocations to a trading system compared to using just the original backtest’s drawdown.

How can we use this?

1.  Better expectations. Imagine trading a system that had backtest drawdown of 8% and you sized based on this. However, live trading sees a drawdown of 12%. You turn the strategy off. However, the Monte Carlo would have told you a drawdown of this level was to be expected. The strategy rallies from here but you’re on the sidelines because of improper sizing.

2.  Understanding when to expect profitability. The strategy is flat to down after 50 trades. Is this normal? Same scenario – trader turns the perfectly good system off while the trader who analyzed Monte Carlo understood this likelihood and that all simulations were not greater than $0 until after trade 75.

2.  Randomized Monte Carlo

The Randomized Monte Carlo test is one of the many tests offered in BuildAlpha to check for overfitting in the strategy creation process. Randomized Monte Carlo re-trades each entry signal from the backtest but uses a random (yet appropriate) exit for each signal and then repeats this process 1000 times. Again, leaving us with 1000 new equity curves to analyze.

The idea is… if our trading signal is strong enough it should generate profit regardless of the exit(s) used. Of course, using random exits will not produce as smooth returns as our original exit(s), but the signal should still maintain general profitability.

If the system does not maintain profitability with random exits then it is likely our original entry signal was overfitted to the historical data and the system can be discarded before any real money is risked!

How Can We Use This?

The first image is a ‘passing’ randomized Monte Carlo. You can see the random exits maintain general profitability, but the original exits do smooth out and improve returns (there is an edge in these exits).


The second image is a ‘failing’ randomized Monte Carlo. A great backtest, but you can see the random exits cause the signal to fall apart. This shows a weak (and possibly overfit) entry signal. Luckily, we identified this possibility before risking real money – what is that worth to you!?


3.  Monte Carlo Drawdowns

I briefly mentioned we could use the first Monte Carlo test to get better expectations surrounding potential drawdowns and risks our strategy or portfolio might experience. However, using a Monte Carlo simulation to analyze drawdowns can help us actually size our strategies more appropriately.

The Monte Carlo Drawdown test allows us to assign confidence to what levels of risk we may assume. The test works as follows…

  1. The user specifies the starting capital amount
  2. Run Monte Carlo simulation (original or resample MC)
  3. Record all 1000 maximum drawdowns as a percent of starting capital
  4. Plot 1000 maximum percent drawdowns as frequency distribution (green bars below)
  5. Follow the cumulative distribution (blue) line up to 95% on the Y axis
  6. Find associated x-axis value (drawdown %) with 95% on Y-axis along the blue line.


This allows us to conclude that 95% (y-axis) of all Monte Carlo simulations are below 20% drawdown (x-axis). In other words, we have a 5% chance of experiencing a drawdown greater than 20%. If a trader cannot live with those numbers than re-run the test while increasing the starting capital in step 1. Repeat this until you find a drawdown amount (with 95% confidence) you are comfortable with.

How Can We Use This?

There are many times a trader may find a great looking strategy but cannot actually put enough capital behind it to comfortably trade it – this is rarely talked about.

Properly sizing strategies allows us to (sleep at night) stay with a system’s inevitable down periods and ride out enough trades to allow the law of large numbers to play in our favor. Sizing appropriately can be the difference between hitting max pain too soon, turning it off too soon, or comfortably allowing the law of large numbers to play out.

Anyways, I hope this shows three unique ways to take a deeper dive into your strategy testing and ultimately leads to more calculated risk-taking. Far too many want to risk too much and simply rely on backtests (hint: it is not enough Noise Test). Proper testing and deep dives into strategies can be the difference between ‘part-time’ trader and a robust portfolio.

As always… thanks for reading,  And PS Pretty big Build Alpha update coming soon! Thanks for all the patience as I continue to build it out.

Trading is not something that should be driven by Emotions!

Build Alpha Trading Software

Traders definitely understand the value of market estimation and the right strategy, but no matter how many years you have been in the industry you just can’t say anything for sure. There has to be a logical approach backed with facts and strategies that yields the maximum success rate based on probabilities. People have actually spent years after years just to understand what works better and what doesn’t in the trading industry. It used to be a long process when you would have to work on various strategies manually, test your ideas on the basis of market, time period and exit conditions but not anymore! Build Alpha is the key – a fully automated trading software that can help you to define and execute various trading tactics anytime in no time at all.

These are some common issues that almost every trader faces. Now, of course, you must have realized by now that the trading is not something that should be driven by emotions. You can get lucky a few times, however, for the people who are taking trading as a career or a long-term investment option, there is no way one can merely rely on luck. The overall market is growing exponentially with new opportunities available almost every day, so it definitely demands a long-term and reliable solution. That’s exactly what BuildAlpha does – a brainchild of one innovative mind from the trading industry itself. While seeking answers for questions above, one person with long trading experience came up with a brilliant solution to all such roadblocks. Are you intrigued to know more about this unique solution?


Since we have understood the need and overall benefits of Build Alpha, now the real question arises that how exactly it is going to help me? This automated solution is equipped with an easy to use interface defined as input and output interfaces. You can easily configure your search requirements in the input interface, build a strategy based on the market choice, entry signals, fitness function, and exit conditions. The software database has around 5000+ signals to test against your configured search requirements – which means you can simply click to add or remove various conditions to test and see results for your trading strategies right away.

It will automatically run the numerous strategies based on your requirements and will allow you to pick the best one to actually execute in your trading campaign. It also allows you to pick and compare strategies among different set signals to analyses the changes and impact. The graphical representations of the data make it easier for you to understand the future trends and behaviors of a particular stock and help you to make the key trading decisions with minimal efforts. I will certainly not go deep into the logics, however, if by any chance you are excited to read about all the aspects of it, you can read in detail at the features section on the website.

This is an absolute revolution – the real question, are you ready for the automation in the trading industry? The sooner the better!

Originally Posted: