Using Data to Gain an Edge

06/20/2011 4:00 pm EST

Focus: STRATEGIES

Michael Toma

Author, The Risk of Trading: Mastering the Most Important Element of Financial Speculati

Rather than relying solely on complex indicators, Mike Toma combs certain data to identify repeatable patterns in the market that often present very high-probability trade set-ups.

Well a lot of traders out there use technical indicators to determine when to get into a trade and when to get out of a trade, but there’s something else that you can do to get an idea of when to enter and exit the market as well. 

Our guest today is Mike Toma, here to talk about data analytics, so Mike, first of all, what is data analytics?

Well it’s basically the use of information, particularly in the trading world, maybe from your trade journal or otherwise, to really base trading decisions off of. And conversely, it’s not using—necessarily—technical analysis or charting patterns. 

I personally like to use a confluence of both to really have my trading plan or implement my plan effectively. 

Really what it is is just really looking at, when events occur frequently, I want to take advantage of that. If there’s an edge during those occurrences, it’s just really implementing it. 

The best example would be the MIT blackjack boys who in the “Bringing Down the House” movie, they just took advantage of some of the card counting and things. I’m not really a blackjack professional, but what they’re really doing is taking advantage of an edge and using data to really reach their trading goals. It’s not about charting or anything like that. 

It sounds like you may be talking a little bit about seasonality and knowing that the market goes up at a certain time of year and down at a certain time of year. Is that part of it?

Yeah, it’s part of it. You know, the other thing too is I look at quirky things that data presents to me. Maybe it’s a little over the top for me; I’m sort of a risk analyst as opposed to a technician—a pure technician, or a chartered market technician (CMT). 

NEXT: Telling Data Points to Watch for

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What I’m looking for is just quirky things that happen in trading patterns, particularly in data. For example, I’m a big lover of the Heikin-Ashi bars. What that basically is is rather than have a red bar and a down bar and an up move on a green bar, sometimes that can be convoluted and kind of mix me up and doesn’t really define the trend. 

The Heikin-Ashi kind of smoothes out certain trends. What I find is that when a change in a Heikin-Ashi trend using my time frames occurs, there’s a 77% chance that the next bar is going to continue with that trend. That’s powerful information for me.

It’s not about highs and lows, or head-and-shoulders patterns. That alone is giving me incentive to say “If I have a 77% chance of something occurring, I’ve got to look into that and take advantage of it.”

How do I then track this; is it a spreadsheet or a Web site, how do I do that?

I try to keep it simple. I do have databases, and it’s funny you mention that. I’m actually converting a lot of my journals into more risk analytic software in the near future.

I’ve actually started on spreadsheets and I encourage everyone to do it. It really doesn’t take much. It doesn’t really require a big tool to do it; it just requires the trader to recognize that these patterns take effect, and at the same time, are they going to create an edge for you where you can consistently detect and really implement these strategies?

You can detect some of these 77% edges all day, but if you really don’t execute effectively, you’re not going to be able to take advantage of it.

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