probability-based trading using regression channels this presentation is available on our website:

Probability-based Trading Using Regression Channels

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Speaker Profile: Greg Shtock, Investor's Business Daily Toronto Group Organizer.

Greg is an active personal investor who is managing his own portfolio and trading futures, options, stocks and exchange-traded funds (ETFs). He developed and follows a well-defined set of rules. These rules are based on the trend following principles, risk management and the necessity of having a detailed plan prior to initiating any investment position.

Greg didn’t begin his career in the financial industry. Over 20 years ago, while working full time as an engineer, he began to manage his own investments. He carefully studied the markets, tested different investment methods and discovered what methods work, what methods don’t work and, most importantly, why. Today, he shares his experience, insights, and passion with others by teaching courses and seminars such as the Practical Personal Investing course at Ryerson LIFE Institute.

Canadian Society of Technical Analysts, November 25, 2014, Monthly Meeting, Presented by Greg Shtock 1

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Probability-based Trading Using Regression Channels TC2000 chart, Stock X, Technical Analysis

My Journey into the Financial World.


I started my journey by reading almost every book available on the subject of investing. I attended meetings such as this one and studied different strategies related to the investing methodologies.

It included a wide range of strategies from Warren Buffett's 'Buy-And-Hold' Strategy to Day Trading, Fundamental and Technical Analyses, etc.

Each strategy looked great in theory.

Being an engineer and a practical man, I did not stop at the academic level. I tried each and every strategy in the real world of investing.



However, practical application of these theories revealed very different results. NONE of the methods worked all the time.

Former Federal Reserve Board Chairman, Alan Greenspan, often used the phrase “Irrational Exuberance” to describe the financial markets.

Dennis Gartman once said: “The market can remain illogical far longer than you or I can remain solvent.



To be a successful investor you need to have an edge.

Mark Douglas: "An edge is nothing more than an indication of a higher probability of one thing happening over another.“http://www.markdouglas.com/

Van Tharp, Probabilities and Expectancyhttp://www.vantharp.com/tharp-concepts/expectancy.asp

Expectancy along with position sizing are probably the two most important factors in trading/investing success.

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

http://www.markdouglas.com/

http://www.vantharp.com/tharp-concepts/expectancy.asp



The pinnacle of my academic journey was when I went to the extreme of developing computer codes such as the Kelly’s formula.

His paper dealt with the fact that in the probability theory a formula could be devised to determine the optimal size for a series of bets to minimize risk and maximize expected returns.

In probability theory and intertemporal portfolio choice: the Kelly criterion, Kelly strategy, Kelly formula, or Kelly bet is a formula used to determine the optimal size of a series of bets. In most gambling and some investing scenarios, the Kelly strategy will do better in the long run than any essentially different strategy. For simple bets with two outcomes, one involving losing the entire amount bet, and the other involving winning the bet amount multiplied by the payoff odds, the Kelly bet is:

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• p is the probability of winning;• q is the probability of losing, which is 1 − p.

From <http://en.wikipedia.org/wiki/Kelly_criterion>

Then I realized the validity of Albert Einstein’s following statement:

"Any intelligent fool can make things bigger and more complex. It takes a touch of genius and a lot of courage to move in the opposite direction."

Today I am a big believer in the “Keep It Simple, Stupid” (KISS) principle.

I always have a detailed plan before initiating any new position.

It includes:

Technical Analysis and Regression Channels which are the essential part of probability-based trading.

Stop loss and target prices.

Risk / Reward Ratio - it measures probabilities of expected returns of an investment relative to the amount of risk undertaken to capture these returns.



Practical Personal Investing, Session 4, presented by Greg Shtock 12


Fundamental analysis involves analyzing financial statements, management, competitive advantages, state of the economy, interest rates, earnings forecast, credit risk, cash flow, divided, P/E ratio (price-to-earnings ratio), PEG ratio, debt-to-equity ratio, etc.

Based on fundamental analysis, investors can determine whether it is a value stock, a growth stock, or a stock that you should stay away from.

Technical Analysis maintains that all information is already reflected in the stock price. Trends “are your friend.” The technical analyst does not care what the “value” of a stock is.

Stock prices trend directionally, i.e., up, down, or sideways. The basic definition of a price trend was originally put forward by the Dow Theory.

There is NO investor’s Holy Grail or a crystal ball. We can NOT predict future prices or market moves.


Probability-based Trading Using Support / Resistance Example: Support Line Case trading Forex Trading USD.CAD

Regression Line

Standard Deviation (SD)

Standard Deviation (SD)Support 1.12504

Target 1.15000

Current Price 1.13434

Potential Loss: 1.13434 – 1.12504 = 0.0093Potential Gain: 1.15000 - 1.13434=0.01566 Reward to Risk Ratio: 0.01566 / 0.00894 = 1.68

Reward / Risk Ratio 1.68 to 1


Probability-based Trading Using Regression Channels The concepts of support and resistance levels are undoubtedly the most acceptable and widely used among investors, traders and technical analysts. However, they have their own challenges.

It is based on a single data point. Typically, you look at the chart and choose one point where you think the support and resistance is.

As such, it is also subjective. Different analysts may pick up different points.

Because it is so widely used everyone knows and talks about it. Therefore, you have NO edge over everyone else. In fact, you are at a disadvantage because the “big guys” use it to their advantage.

Probability-based Trading Using Regression Channels solves these problems because:

It is a statistical analysis of a large number of data points.

It is objective because it calculates the results without the user’s opinion.

It is not popular and rarely used. Most amateur and even professional traders have never heard of this methodology.

And finally it is NOT a “holy grail”. However, it does give you enormous advantage over other traders and puts the odds in your favour.


Probability-based Trading Using Regression Channels Definitions: Linear Regression Line

Linear regression is a common statistical data analysis tool. Linear Regression Lines use the least squares method or other methods to plot a straight line through prices so as to minimize the distances between the prices and the resulting line.

This line could be considered as the "equilibrium“ of all data points. It acts like a “magnet”. Prices move above or below the line would be “pulled” back to the equilibrium mean point.

It is in essence the reversion to the mean mechanism.


Probability-based Trading Using Regression Channels Definitions: Standard Deviation (SD) and Bell Curve

In statistics and probability theory, the Standard Deviation (SD), represented by the Greek letter sigma, σ, measures the amount of variation or dispersion from the average.

In probability theory, the normal (or Gaussian) distribution or the bell curve, is a commonly occurring continuous probability distribution—a function that tells the probability that any real observation will fall between any two real limits or real numbers. http://en.wikipedia.org/wiki/Normal_distribution

Examples of power and importance of Statistical Process Control (SPC) in mass production environment. We can apply this proven method to trading.


Probability-based Trading Using Regression Channels Example: Forex Trading USD.CAD

Regression Line




Regression Line

1 Standard Deviation (SD)Line

1 Standard Deviation (SD) Line

Current Price 1.09501

SD Value 1.08786(Stop Loss)

Target 1.27865

Potential Loss: 1.09501 – 1.08786 = 0.00715Potential Gain: 1.27865 - 1.09501 = 0.18364 Reward to Risk Ratio: 0.18364 / 0.00715 = 25.7

Reward / Risk Ratio 25.7 to 1

Probability-based Trading Using Regression Channels Example: Regression Channels Case Trading Forex Trading USD.CAD


Probability-based Trading Using Regression Channels What this reward / risk ratio means?

In the case of the support line example, this ratio was 1.68. This means on average, after a number of trades were made following this system, you will have gained $1.68 per trade when you are right vs $1 loss when you are wrong.

In the illustration of the regression channels case, this ratio was 25.7, which means you would have made on average $25.7 on each successful trade vs. $1 loss on trade that did not work out.

In real life, based on my experience, it is difficult to find trades with 25:1 ratio. On the other hand, I would NOT typically initiate a trade with 1.68:1 ratio or less.

From a practical point of view, I would find trades with ratio between 3:1 to 5:1 or higher.

What does it mean if trades have 3:1 ratio? It means that even if you are wrong 50% of the time or half of your trades are losers, you will make money !!!


Upcoming Events:Next MeetingSubject: Investment Ideas for a Challenging MarketWhen: Sunday, December 7, 2014, 2 p.m. to 4 p.m.Where: Meeting Room #1 in North York Central Library, 5120 Yonge Street, Toronto, M2N 5N9. It is next to Mel Lastman Square, at North York station on Yonge subway line.Please note. There is a $10 fee.

Webinar: CSTA Ottawa and Monteal Chapter: CAN SLIM Stocks Analysis December 8, 2014, 5 p.m.

Webinars: Practical Personal Investing Webinars Series.Tools I Use.This is a real time demonstration of TC2000 program and how I use it to:=> Search markets for potential investments opportunities based on a pre-defined set of rules=> Manage portfolios and watch lists=> Set price and trend line alerts as part of your risk management plan=> Charts, technical analysis, regression channels, etc.=> Q&A session will follow this short presentation.When: T.B.A.Where: https://join.me/InvestorsSupportNetworkWatch a two minute video “How to log in to the Webinar”____________________________________________________________________________________

Thank you.To View this Presentation, Contact Us or Attend Seminars / Webinars, Please visit our Website:

http://investorssupportnetwork.com/

https://join.me/InvestorsSupportNetwork

https://www.youtube.com/watch?v=-DxQ6dPtTbo




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