Sharpe Shooter Continued

The Reasoning Behind the Logic

Sharpe Shooter uses one aspect of market making on behalf of directional traders. One of our goals at Pallino is to combine disciplines of knowledge to offer ideas/solutions/deliverables with longer shelf lives. We believe one way to do that is to ‘walk the line’ between different ways of thinking. Keep reading for a basic explanation.

There are distinct attributes of equity curves for different types of market participants. Market makers tend to have a high number of winning days with occasional fast deep drawdowns. For mid-frequency directional traders, or breakout traders, a low win rate is often the crux of the challenge. Still for others there are different issues. This algo is a way to smooth out returns for one type of trader.

The Details

1. Algo is available for use with Trading Technologies Pro license. It is selected as an order type in an MD Trader ladder and is started by manually trading.

2. All covers and reloads are limit orders submitted based on the entrance trade’s average fill price. Limit order reloads can never get filled at a worse price: during very fast markets these orders can only have positive slippage.

3. I do not change any orders’ prices once at the exchange, so latency issues are improbable.

4. There is one parameter that can be linked to a research output: the spin size. Try different values during different times of day. There often is much more money in larger (IE fewer) spins than in a larger number of smaller spins. This value is market specific: contact us for tips on how to accurately research this.

5. Algo logic will work beautifully across large price ranges for something wild and unruly like the DAX future in Germany, or the NASDAQ 100 future at the CME. I have also seen opportunity for many 1-tick reload setups in liquid slow moving calendar spreads. Think grains and energies but also any future during a roll where you have a directional opinion.

The Scenarios

Let’s compare price path scenarios using this algo versus a straightforward position trade. The summary here is that the algo improves the PnL of most possible outcomes and hurts the PnL of just one outcome.

1. The market moves straight in your favor. Using this algo will halve your profit because its average exit price will be closer to entrance. This is no good! We don’t want smooth moving trends.

2. The market moves straight against you. The algo will lose the same exact amount as a manual trade.

3. The market moves in your favor for a time and you collect some spins. Then the market moves against you and your stop is hit. You will lose less. The more time it spends collecting spins, the less you will lose. For fast moving markets like the S&P 500 E-Mini future, when the stop is relatively close in, it could take just a few minutes to collect enough spins to scratch a possible stop-out.

4. The market moves in your favor for an extended period, toggles around, and then hits your stop. You may scratch the entire stop out cost. If your target price is farther away, then there is a much larger swath of price path for collecting spins. In that case, it is very possible that you make more than the cost of a stop.

5. The market moves in your favor but takes a very long time to hit your target. You will get paid much better than a normal position.

6. The market is range bound, for an extended period, near your entrance price. This algo will pay you handsomely versus scratching otherwise.

Creative Uses Above and Beyond Initial Use Case

1. Let’s say you are not on the edge of a price range but in the center of a price range. Set the stop distance larger than the target distance. Set the stop distance such that your stop orders are near the edge of your range. Turn on both a buy algo and a sell algo and aim to have the same entrance price on each algo. Your net position becomes zero and you blanket a mean reverting price range with orders. Algos will spin all day long until you turn them off or you hit one of the stops.

2. Turn on 2 in the same direction at the same time, but set your spin parameter differently in each. This is a way to collect different size trace-backs at the same time. Since larger trace-backs are composed of smaller ones, you can collect each on the same moves.

3. This algo will work beautifully during econ numbers or fast moving markets because the order logic is very clean. Algo can only have positive slippage since all orders are limit orders (except for the stop order).

4. Contact us to discuss attaching this logic to an entrance trade signal of your choosing, to fully automate the trade.

5. Contact us to discuss a dynamic version that incorporates nuanced market maker logic.

Pallino: On Target