# Danno's trading strategy development



## danno75 (24 December 2009)

I am in the same boat as a lot of newby's in that I am going through the process of educating myself and trying to put together a trading strategy that will work...hopefully.
I have gone from the initial stage about 18 months ago where I thought a course would be the answer to learning and in the process of asking about a certain training program got a heap of flak as it was assumed I was ramping the course I mentioned. I have moved on from that and after a period of contemplation that involved watching the crash of the market and the rally that has followed in the last six months I have developed a new mind set.
I have been studying this forum and have read books by Van Tharp and Nick Radge as well as a large number of general investment books which tend to condradict each other in terms of investment strategies. I have purchased Amibroker and Howard Bandy's "_Introduction to Amibroker_" book as a learing guide. I have found Amibroker to be a great resource and it has allowed me to find a focus point by using the threads related to it on ASF to speed up my learning curve.
I developed my first strategy a couple of months ago and recorded some results which did alright but in the process I saw that I had some elements to adjust, all of which is part of learning. I have started this thread because I know I will need advice and as time goes on I am going to post up my trades as some of the other member have, as well as questions I need answered. Hopefully with time I can learn enough to develop strategies that will work in different markets and tradng conditions.


----------



## danno75 (24 December 2009)

*Question about setting maximum $ risk*

I have been setting by maxium risk at 2% which is about the most reccommended but I have been working off using $10,000 initial capital as that is probably what I will start with if I ever feel I have developed a strategy with enough positive expectancy to trade for real. My question relates to recording enough trades to work out expectancy and returns. I have been using the 2% value based on current capital which is to say the first trade has $10,000 x 2% = $200, the second has 2% of what ever is left after the price of the first trade goes out. For example;
First trade
Code	Date	Quantity	Price	Brokerage	Taxes	Total
IPL	15/11/2009	542	$3.260	$6.00		$1,773.24
Second trade 
10,000 - 1,773,24 = 8226.76 starting capital x 2% =165 maximum risk.

To figure out the number of shares to buy for the next trade involves this formula: (max risk -(brokerage in +out))/(max stop loss).

As I enter more trades my tradable capital reduces until my risk/reward value goes below 2.5 which from what I have read is about as far as I should go, but this occurs after maybe 4 or 5 trades. I understand that this is because of the small initial capital but it doesn't help when trying to develop a system where I need results from at least 100 if not more trades.

Should I up my initial capital as it is just paper trading to maybe $100,000 to enable me to get enough results for a decent analysis? If I go that high should I reduce my max risk to 1 - 1.5 % or leave it at 2%? Or should I just use 2% risk of the initial capital i.e $200 out of $10,000 with all trades just to see if they would work out?
The process is a slow one at the moment because I don't have the programming skills for Amibroker so all calculations are manual. I have got some R&R coming up next week so I hope to commit a lot of that to Amibroker study and system development.


----------



## CanOz (24 December 2009)

*Re: Question about setting maximum $ risk*



danno75 said:


> I have been setting by maxium risk at 2% which is about the most reccommended but I have been working off using $10,000 initial capital as that is probably what I will start with if I ever feel I have developed a strategy with enough positive expectancy to trade for real. My question relates to recording enough trades to work out expectancy and returns. I have been using the 2% value based on current capital which is to say the first trade has $10,000 x 2% = $200, the second has 2% of what ever is left after the price of the first trade goes out. For example;
> First trade
> Code	Date	Quantity	Price	Brokerage	Taxes	Total
> IPL	15/11/2009	542	$3.260	$6.00		$1,773.24
> ...




Danno, in my view this is where leverage could be used effectively. I currently have a discretionary account that i set up and funded with $9k just to see how far i can take it in one year. The difference is i use IB and i can trade on margin. This allows me not to take larger positions, but to put more positions on thereby exposing myself to more trades over 3 to 1 Risk/reward.

Cheers,



CanOz


----------



## danno75 (25 December 2009)

Thanks for the info CanOz,

I plan on opening an IB account as soon as I am sure that I  have got my ducks in a row and the strategy delivers positive expectancy. I have used the $6 minimum brokerage for my plan because of this, which I have found delivers much better returns and helps to have more positions open (as opposed to Etrade at $32 each way plus $16 for a conditional order i.e. trailing stop loss). The CFD option with IB is also an option I may look at in the future. For the moment though I want to concentrate on getting enough trades right to be profitable, which is why I think I will need to sit down and manually back test the system over 100 or so trades while at the same time paper trading the current market. I have a subscription with one of the more well known news letter type advisory companies (I wont be resubscribing though) and I have down loaded a history of all their CFD trades over the last year. From this I have separated the profitable trades and am going to analyse the data to try and help me get closer to writing a mechanical quanatitive based system on Amibroker. I will also have my first system in action on paper which I will manage by looking at the daily entry signals I get from the stockscreener I have in Amibroker and then use daily price movements and my money management system to work out the max risk, position size and the daily stop loss moves as per my current strategy.
I am in no rush to trade for real at the moment because I want to wait a while and keep my money rather than blow it and still have to put more in to the IB account to keep the account open.


----------



## CanOz (25 December 2009)

danno75 said:


> Thanks for the info CanOz,
> 
> I plan on opening an IB account as soon as I am sure that I  have got my ducks in a row and the strategy delivers positive expectancy. I have used the $6 minimum brokerage for my plan because of this, which I have found delivers much better returns and helps to have more positions open (as opposed to Etrade at $32 each way plus $16 for a conditional order i.e. trailing stop loss). The CFD option with IB is also an option I may look at in the future. For the moment though I want to concentrate on getting enough trades right to be profitable, which is why I think I will need to sit down and manually back test the system over 100 or so trades while at the same time paper trading the current market. I have a subscription with one of the more well known news letter type advisory companies (I wont be resubscribing though) and I have down loaded a history of all their CFD trades over the last year. From this I have separated the profitable trades and am going to analyse the data to try and help me get closer to writing a mechanical quanatitive based system on Amibroker. I will also have my first system in action on paper which I will manage by looking at the daily entry signals I get from the stockscreener I have in Amibroker and then use daily price movements and my money management system to work out the max risk, position size and the daily stop loss moves as per my current strategy.
> I am in no rush to trade for real at the moment because I want to wait a while and keep my money rather than blow it and still have to put more in to the IB account to keep the account open.




That sounds like a great plan Danno. I currently trade one mechanical system from an Australian Newsletter, and plan on trading another such system in the new year from a different trader. I will always try and trade a Discretionary account too, as i am now. 

In the future, when i have more time i would also like to design and test my own systems with a view to trading them one day.

Merry Christmas Mate.

CanOz


----------



## danno75 (25 December 2009)

Thanks mate, merry christmas to you too and all the best with trading in the new year

Danno


----------



## yonnie (25 December 2009)

didn`t know that you can get any meaningful leverage trading shares with IB........what leverage do you have?


----------



## IFocus (26 December 2009)

Good work Danno

I would open the IB account if you can sooner rather than later. After you open the account they let you open a simulator account same functionality as real account. 

You could then use this for your testing and at the same time work out all the order types of which there are many. Making mistakes placing orders is common when starting out. Its painful to lose money this way.

Looking forward to seeing you achieving a positive expectancy


----------



## CanOz (26 December 2009)

yonnie said:


> didn`t know that you can get any meaningful leverage trading shares with IB........what leverage do you have?




The margin account that IB provides lets you apply 'leverage' to your existing capital. Some people choose to allow their trading risk to increase and take larger positions with this leverage. Others like myself, trade the same risk and allow the margin account to fund more positions, not larger ones.

Leverage can be realized in several ways, not in only the instrument being traded. A margin loan is still leveraging your trading capital.

Cheers,


CanOz


----------



## yonnie (27 December 2009)

oh yeah, I forgot that IB apply leverage outside the bottom 500 or so.
unfortunately not for penny stocks


----------



## howardbandy (28 December 2009)

Hi Danno, and all --

Not to pour cold water on a hot idea, but I see that my name is mentioned as one of the contributors to your trading project ----

It is prudent to proceed in a few steps.
1.  Develop a trading system over some in-sample data.
2.  Verify that is is profitable when applied to some out-of-sample data that was not used at all during the development process.
3.  Verify that it is both tradable and profitable when traded with real money, taking very small positions.
4.  Only after many profitable closed real money trades (you decide how many that means -- perhaps 20 or 30 -- but enough so that you are comfortable trading the system and have some idea of what to expect when it is traded), begin taking larger positions or begin using leverage.

Thanks for listening,
Howard


----------



## danno75 (25 January 2010)

I have been doing some paper trades over the last two months and have recorded them in excel. The results have not been spectacular but approximately $500 from $10,000 is a start. I calculate that to be 30% over a year, can some one correct me if I'm wrong. The calculation is 2 months profit 5% x 6(1 year) = 30%, i.e 500 x 6 = $3000. Anyway as I said this is just my first attempt at managing my trades and tweeking my plan.


----------



## danno75 (25 January 2010)

Ok I have managed to insert a jpg. file which is a start so here is another one with the buy signals and a bit more information regarding how I manage my trading plan.


----------



## danno75 (25 January 2010)

Righto now that some of the info is up I will give a brief explanation of my trading plan. Any constructive critisism or advise will be taken onboard. 

Data: I am using Premium data with Amibroker for EOD data

Entry: I am using Techtrader for Amibroker for entry signals as I am still trying to figure out how to program Amibroker. I have run backtests with Techtrader and they aren't giving very good results but I understand the basics of how it screens looking for trends and the maximum $10 buy price suits me as I will only start with USD 10k. Anyway I use Techtraders buy signals as an indicator and set my buy price 0.02 above to give extra verification. I figure that the bigger the share price the less volitile it should be so 0.02 as a percentage of the price will have more effect on lower priced stocks.

Money Mangement: I am using 2% risk with 3 ATR(30) as the initial stop to work out position size. As soon as the price goes through break even I monitor and move my trailing stop loss up to 0.02 above break even. This has cut a couple of trades short but there are a larger number that went south and my capital base was insured by having this exit just above break even. As Van Tharp and Nick Radge have said the main aim is to protect capital and wait for the few big gainers that will make the system profitable. If the trade isn't going to run I would rather be out of it.

Exit: I am using a 2 ATR (30) trailing stop as the exit. At the moment the market seems to be running fairly flat ( as opposed to 2009) so I am trying to hold any profits that I can find. If things start to trend up consistantly I may move the stop loss out to 3 ATR(30). I like the idea of using ATR as it changes with volitality.

Trading Platform: I am entering these trades using Interactive Brokers prices. I am in the process of setting up an account with them and will trade using the IB platform as soon as I am confident I can get positive expectancy. The entry/exit price of 0.08 or $6 is just too much of an advantage compared to Etrade at $32 each way and $16 for a conditional order (trailing stop loss). I don't live in Australia either and eventually may have a look at other types of active investing that IB offer.

Expectancy: I have added an expectancy figure to my Trade Log, I am using the formula E = (% of wins x average win size)-(% of losses x average loss size). For the last two month period as shown above I got E = 38.65, I am not sure if I have dont the calc correctly or if that figure is right. Maybe someone can help me there.


----------



## Superboot (29 January 2010)

Hi Danno,

Great work on the posts! I too am in a very similar boat and follow your thread with great interest. 

I also have -
* Amibroker
* Starting to formulate a system
* 2/3 through Van Tharps book (and have read Howards, plus tonnes of others)
.. and the list goes on.

I had put my system development on hold for the last 3 months or so and have just restarted. Keep the thread going and I too will post my thoughts etc once I get back up to speed.

Regarding your comment about max $ risk, I think from memory Alexander Elder has some good strategies on this.

Cheers
S


----------



## Mr J (30 January 2010)

*Re: Question about setting maximum $ risk*



> until my risk/reward value goes below 2.5 which from what I have read is about as far as I should go




Whatever you read was mathematically irrational. There is no right or wrong R:R. Any R:R is fine as long as the accompanying winrate allows for a profitable trade.

What time frame do you trade? 0.08% brokerage is pretty significant.


----------



## danno75 (30 January 2010)

Mr J 
I would have to go back through various posts on ASF and some of the books I have read to find the exact source of the minimum 2.5 R:R that I stated. My question related to testing systems as I am paper trading at the moment to slowly work my way to a profitable system. I found that as my capital based reduced through buy transactions the risk reward ratio would lower on the following set ups due to the smaller amount of capital I could use acording to the 2% risk model I am using. After I had bought six lots of shares for instance the small amount of capital that my trading plan would allow me to use would start returning <2.5 RR. This was worked out by using a 5R return target to see what kind of risk:return I would get from the trade. 

As for the 0.08% brokerage that is the Interative Brokers rate which I have started using in my calculations as I am in the process of opening an account. The difference between using that and Etrades $32 each way plus $16 for a trailing stop was very significant as I am only starting with USD $10,000.

The time frame I am working with is from a few days upwards using a trailing stop as an exit. In the examples above the trailing stop is very tight at 2ATR(30) but from looking back at the trades on Amibroker I have prevented capital loss over the last couple of months and come out ahead. I realise the stops could be wider on the longer time frame but I don't think we are in an up trend at the moment. The market is flat and there are small upturns followed by down turns which has happened over the last couple of days. In early November there was an upturn that my system caught a some wins on and then it flatened until the last couple of weeks in December where I got the results shown on the tables above.

I am only trading long in stocks as I am still learning about other methods. If I had some sort of shorting strategy I would look at going short at the moment. I am actually happy at improving on the one area at the moment and later once I have started to get some good or at least profitable results from my trades I will look at expanding a bit.

As soon as I get my next signal and enter the trade I will post it up but due to the down turn in the last couple of days I haven't been able to enter. The entry signals that I get from Techtrader are trend based and as such need a few good days running to recognise possible buys.

I am working on a minesite in Asia and don't have the time for trying to sort through and identify chart patterns. I would rather have a quantitive based entry signal that can be run by Amibroker in a matter of seconds and then I just spend half an hour each night going through price movement and adjusting my stops accordingly.

Hopefully I am on the right path


----------



## danno75 (30 January 2010)

Mr J,

I found the following post by Tech A that refers to a minimum risk reward value:

"So after devising your plan unless you can PROVE to yourself that your Risk reward ratio is greater than 1.5 (Should be around 4 ) Thats 4X return against amount risked AND your Winning trades to losing trades relative to your Risk reward ratio returns a positive expectancy(PROFIT),your no better off than having NO PLAN at all!"
Tech A 31/10/04 https://www.aussiestockforums.com/forums/showthread.php?t=401&highlight=risk+reward+ratio

Sorry I don't know how to use the quote function in the forum


----------



## Mr J (30 January 2010)

I asked about timeframe because on a short time the brokerage would be very significant compared to futures, forex etc. I guess it can't be too bad if timeframe is from a few days as others seem to do it, but I'd still calculate how much you're paying compared to other markets. As a trader/investor, your first priority should be to limit expenses of the trade to give yourself the best chance of success.

As for R:R, with respect to TechA, having a minimum R:R is the wrong to approach it and misleading to others. Expectation - our average return on a trade - is calculated using risk, reward *and* winrate. Any r:r can be profitable given a suitable winrate. They also have an inverse relationship, i.e. increasing r:r will lower winrate, while decreasing it will raise winrate. I'm not suggesting you take an r:r lower than 2.5:1, but be aware that it is not _necessarily_ a bad idea to do so.


----------



## danno75 (30 January 2010)

Thanks for the info Mr J. 
I think the IB brokerage on other types of trades eg. options, futures etc is a lot lower but thats something I haven't looked right in to yet. 

In the post from Tech A I think he said something similar to what you are talking about in that a trader shouldn't get too caught up in the RR for individual trades but should look at the trading system as a whole which includes using the win rate for evaluation. 

Just looking at what has happened in the US over night I don't know if there will be much of a chance to trade my long stock system for a while so I will start doing some reading on other types of trading. I would like to look at forex and futures but I am not sure if they require a lot of time everyday and constant monitoring. I suppose really it is the time frame that decides the intensity of the trade. That is short time frames require more constant observation whereas longer timesframes looking at trends can be managed by checking the progress at wider intervals.

Thanks for the input, it is always good to have outside opinions.


----------



## Superboot (31 January 2010)

Hi Danno,

A couple of questions if you have the time  -

1. What type of system have/are you developing? From your comments I am thinking a trend system?
2. If you do have a trend system, do you have a filter or similar that assesses the market as a whole and keeps you in or out depending on the conditions? (I had a system a while back when volatility was very high and kept getting stopped out - I am thinking of developing 2 systems, one for trending markets and the other for a swinging market and use them accordingly)
3. You mentioned you had a money management system - is this a spreadsheet or a software package?

Thanks in advance! 
Super


----------



## danno75 (1 February 2010)

Hi Superboot,

1. The system I am developing is a trending system at the moment. I have got the basics down but it will be a matter of getting some more trades away so I can analyse what has happened further. As I said the entry signals are based on Techtrader which is a complete system that Tech A developed years ago. I found the Amibroker coding for it on a thread somewhere in ASF and used it as a learning resouce to see how the AFL coding works in Amibroker. I have run backtests and I haven't been able to get a positive result from it recently as a complete system but the code describes how the entry signals work and I could get my head around the basic principal. I used these  for my own entry points using the scan function in Amibroker and manually do the money management and charting of stops, breakeven etc.

2. As I said above the system has trend based entries and it only scans stocks under $10 which I find better as I am only working of $10,000 starting capital . This can be adjusted in the Amibroker coding. I am at work at the moment so I can't tell you the exact indicators it uses to define the trend but I will later if you are interested.

In regards to market conditions I am trying to figure that one out myself. I have read a some good books in the last few months that have described some of the indicators that define if the market is trending or ranging, but I need to go back to them and start experimenting to see which if any give the result that I need. I have put a bit of discretionary decision making in to my system lately because I don't have an indicator but just from looking at the long term chart of the ASX all ords and ASX200 you can see that things have peaked and are a bit flat. I also saw this in my trades as the majority went well and then flattened or dropped. Now that could just be natural movement but the market index charts sort of confirm. To stop myself losing money when the price has reversed I have tightened my stops right up and have moved my stop loss a couple of points above the break even point once the price goes through it. This has meant that a couple of trades went down through the stop loss and then came back up and I missed some positive movement but overall on the system as a whole has benefited and I have kept my capital positive. I will change this way of thinking once I can confirm the market is going to rise consistantly (this could be some way off from recent global index results). 

I also want to develop a system for ranging markets but I don't know if the amount of capital I am working with will allow for enough profits off such small moves. I am thinking that futures like Eminis or forex could be better as they rely on smaller movements and margin to give the return.

3. The money management system is excel spread sheet based. I got it of the net. It was part of a package from a spruiker that I found while looking for information. I am not going to list the product or the dudes name but it was about $70 so I didn't really think it was too much to blow if there was something positive from it. As it was the explanations were very basic which was what I needed at the time and it made a whole lot of what I had been reading fall in to place. It was based on the Turtle Traders theories and since I had previously read the Turtles book I understood it. The major component I got out of it was the two money mangement spread sheets, one of them is the Trade Log that I posted. The second does the actual money mangement calc and gives you your initial stop loss value and risk reward based on what ever profit target you decide to use. 

If you want the spread sheets PM me as I'm not sure if linking them to this post would be a copyright issue.

I hope this answers your questions, if you want to know anything else let me know. I don't really care if anyone else attempts to use the system that I have developed because I know it probably isn't very good but it is just one of the resources I am using to learn the dark arts of trading before selling my soul to the market.


----------



## Superboot (2 February 2010)

Thanks Dano - I appreciate your comments 

Sounds like you are dealing with some of the same challenges!

I will no doubt have some more questions for you soon - I will also add some of my current thoughts on system strategy as well.

Cheers
S


----------

