Developing a mechanical system from scratch

[tech/a]

OLd ground for you, my friend

But fair enough, point taken, we can move on now.

Tech, just one point, have you proven it to yourself by trading short-term mechanically? I suspect you are talking about discretionary trading, well thats a different ball game

No not entirely.
More a Systematic approach.
Not fully tested other than walk forward testing and results.
Different YES but the structure still comes from the principals learned from Systems developement.

You'll find as you learn the principals over the years presented by those who use them that it becomes crystal clear what is required in a profitable trading system/plans makeup.

The real key is having those NUMBERS from extensive testing.
I personally wont place decient Capital into trading methodologies/ideas unless I have them!

 

[happytrader]

Ok, just give me a bit of time here to get settled into my day job....how about i recap where we are....it might be a while...looking like a busy day here....Happy, you got some time to recap for us?

Cheers,

Hi Canuassieuck here is a recap in summary. I'm not good at this stuff so if I have distorted anyones message please feel free to correct me and expand your idea. All areas are up for discussion.

Objective

A cohesive team effort to develop a short term leveraged with CFDs, mechanical, trend following, trading system which incorporates longs, shorts and guaranteed stop losses.

Lesm provided attachments from IG markets with share lists and codes for CFDs

Timeframe

Short term

Entries

Motorway made reference to confirmation of the trend and entry on a dip or pullback.

Canaussieuck: Key reversal

Doctorj: super-high volume

ROn1n: crossing EMA

Nick explained quick, profitable moves come from an increase in volatility, therefore we need to define periods of low volatility - chart pattern submitted by Nick for discussion

Exits

Wayne explained that with regard to swing trading we have 2 choices 1. ride out reasonable retracements within the trend or 2. avoid them all together.

Stock selection

Happytrader suggested bluechips

Stoplosses

Cfd: stop losses should be guaranteed

Nizar uses 0.5 - 1%

Cheers
Happytrader

 

[It's Snake Pliskin]

But do we really?
(No disrespect, obviously you really know your stuff).

I remember reading in a book about how Ed Seykota started out, looking at Richard Donchians work about mechanical systems. Ed was saying he couldnt understand why mechanical systems outperform human discretion, but then he said, he doesnt think he needs to. The point is, it does.

I totally agree with Nick on understanding the WHY does it work mindset.

Without understanding one becomes dangerous. A bit like reading religious books and believing without critical thoughts to the contrary. Trading books have the same power over beginners.

 

[tech/a]

I'm a little bemused at the responses here.

You've got a very experienced Systems designer in Radge who has stepped forward and offered up his input---along with a suggested kick off.
Ive subtly hinted that your all getting tied up with the end result and not the journey of the learning experience which will stead you fast for ANY system you wish to design in the future.---all basically ignored.

Thats why I've taken the view of --Goodluck with your systems design.

I'm not speaking for Nick.

 

[Nick Radge]

But do we really?

Yes we do and you even answered the question yourself: Trend Following.

Why does it work? Markets will always trend. Than can't NOT trend. A trend allows gains to be larger than losses, assuming one takes action to cut a loss. A trend appears on every time frame - from 1-minute to yearly, take your pick. The principle remains the same throughout and is WHY profits are easily generated by following trends. Toby Crabel follows short term trends. Seykota follows longer term trends. Both are profitable..

I don't wish to takeover this thread so I will simply offer to point you in directions but also alert you to area's for consideration.

The first thing was that we'd find this a difficult task because everyone has a different personality, but also because everyone has a different experience in certain area's.

Secondly, forget this stuff about CFD margins, GSL's and risk at this stage. You'll get bogged down in semantics which will be dealt with later.

Start from a perspective that you have been offered a new job at a prop shop. You walk in to your new job, sit at your desk. Your instructions are simple:

1. You can trade the ASX-200
2. You can lose a maximum of $25,000 (we can amend this)
3. You will be paid a percentage of your monthly profits
4. Everything else is inconsequential; margins, GSL, blah blah

What are you going to do?

 

[nizar]

Thanks for your responses tech, Snake, Nick.

Im just a beginner like you said Snake, im not going to argue with that.
Thanks all for teaching me

 

[It's Snake Pliskin]

Yes we do and you even answered the question yourself: Trend Following.

Why does it work? Markets will always trend. Than can't NOT trend. A trend allows gains to be larger than losses, assuming one takes action to cut a loss. A trend appears on every time frame - from 1-minute to yearly, take your pick. The principle remains the same throughout and is WHY profits are easily generated by following trends. Toby Crabel follows short term trends. Seykota follows longer term trends. Both are profitable..

I don't wish to takeover this thread so I will simply offer to point you in directions but also alert you to area's for consideration.

The first thing was that we'd find this a difficult task because everyone has a different personality, but also because everyone has a different experience in certain area's.

Secondly, forget this stuff about CFD margins, GSL's and risk at this stage. You'll get bogged down in semantics which will be dealt with later.

Start from a perspective that you have been offered a new job at a prop shop. You walk in to your new job, sit at your desk. Your instructions are simple:

1. You can trade the ASX-200
2. You can lose a maximum of $25,000 (we can amend this)
3. You will be paid a percentage of your monthly profits
4. Everything else is inconsequential; margins, GSL, blah blah

What are you going to do?

tech,
I think you could learn from Nick's style instead of spitting the dummy.
Anything further is much appreciated.
Snake

 

[CanOz]

Yes we do and you even answered the question yourself: Trend Following.

Why does it work? Markets will always trend. Than can't NOT trend. A trend allows gains to be larger than losses, assuming one takes action to cut a loss. A trend appears on every time frame - from 1-minute to yearly, take your pick. The principle remains the same throughout and is WHY profits are easily generated by following trends. Toby Crabel follows short term trends. Seykota follows longer term trends. Both are profitable..

I don't wish to takeover this thread so I will simply offer to point you in directions but also alert you to area's for consideration.

The first thing was that we'd find this a difficult task because everyone has a different personality, but also because everyone has a different experience in certain area's.

Secondly, forget this stuff about CFD margins, GSL's and risk at this stage. You'll get bogged down in semantics which will be dealt with later.

Start from a perspective that you have been offered a new job at a prop shop. You walk in to your new job, sit at your desk. Your instructions are simple:

1. You can trade the ASX-200
2. You can lose a maximum of $25,000 (we can amend this)
3. You will be paid a percentage of your monthly profits
4. Everything else is inconsequential; margins, GSL, blah blah

What are you going to do?

Well i know what i'm going to do.....

Make some rules for my system before i code it!

Rule No.1 - I can only risk 2% of my capital on any trade

No.2 - I must move my stop to breakeven ASAP.

C'mon, lets throw out some more rules!

(Nick please interject if i'm on the wrong track here.)

Cheers,

 

[wayneL]

Let's start with some building blocks then. For a public system, it has to work EOD, so medium term trends?

Building block 1: I personally like to start with the trailing exit as this will tend to define everything else.

As a starting point, shall we go for 3.5 ATR? or perhaps 20-30ema of the lows? What do we think?

 

[tech/a]

Snake.
Ive been learning off of Radge for years.
When this guy gets involved for no fee---everyone learns including me.

That was/is the whole point of my dummy spit.
Encourage his input--- most here ignored it!

He's got a lot more patience than I have.
Anyway up and at em.

 

[happytrader]

Let's start with some building blocks then. For a public system, it has to work EOD, so medium term trends?

Building block 1: I personally like to start with the trailing exit as this will tend to define everything else.

As a starting point, shall we go for 3.5 ATR? or perhaps 20-30ema of the lows? What do we think?

Hi Wayne

Does EOD data mean entering within the last hour of trading when a trend is identified or does it mean looking at EOD to decide what to do the next day?

Cheers
Happytrader

 

[nizar]

Hi Wayne

Does EOD data mean entering within the last hour of trading when a trend is identified or does it mean looking at EOD to decide what to do the next day?

Cheers
Happytrader

The latter.
EOD traders do their analysis after the markets close.

 

[happytrader]

The latter.
EOD traders do their analysis after the markets close.

Hi Nizar

If we are seeking to enter the market in a period defined as low volatility and since we know the first hour of the market is one of high volatilaty, when do we enter? The point I am getting at is, if you are using EOD data your values would be the equivalent of hindsight trading.

Cheers
Happytrader

 

[Kauri]

I may be way off track here but a whiles ago I set off to develop a mechanical system... from my diary I note the first stages i listed to be dealt with....

Trade what.... shares
Universe.........ASX300
TimeFrame......EOD
Direction.........Long/short
Time in...........Short-Medium term

Capital available....XXXXX
Max amount per trade...xxxx
Pyramid.........yes

Trend filter.....
Buy signals.....
Sell signals.....

et al......

From there I moved on to CFD/margin/risk management etc once I had the above as a profitable propisition..

Cheers
Kauri

 

[tech/a]

End of day means you'll be using EOD data and selling on NEXT open from any trigger to buy or sell.
This is a system so it wont care about Morning volatility blah.

In the end you'll have a set of parameters that if traded as designed and tested will return the expectancy found through testing.
What you get with a system is a repetitive entry and exit which over time will give the sested return within the upper and lower boundaries of the returns found through testing.

 

[nizar]

End of day means you'll be using EOD data and selling on NEXT open from any trigger to buy or sell.
This is a system so it wont care about Morning volatility blah.

In the end you'll have a set of parameters that if traded as designed and tested will return the expectancy found through testing.
What you get with a system is a repetitive entry and exit which over time will give the sested return within the upper and lower boundaries of the returns found through testing.

What you just said is so textbook Tech.
You should be a sales rep for TradeSim.
You wouldve sold me a package!
LOL joke

 

[CanOz]

I may be way off track here but a whiles ago I set off to develop a mechanical system... from my diary I note the first stages i listed to be dealt with....

Trade what.... shares
Universe.........ASX300
TimeFrame......EOD
Direction.........Long/short
Time in...........Short-Medium term

Capital available....XXXXX
Max amount per trade...xxxx
Pyramid.........yes

Trend filter.....
Buy signals.....
Sell signals.....

et al......

From there I moved on to CFD/margin/risk management etc once I had the above as a profitable propisition..

Cheers
Kauri

Thanks for that Kauri, Wayne, Tech, Nizar Happy.And thanks again to Nick for the continued directions. I'm flying blind here so i really appreciate your help on this. Nick, is it a similar matter to going through the systematic trading plan as you present on your course, then coding and testing it all?

Lets get that down so we can move on:

Trade what.... CFD's
Universe.........600 IG MArkets long/short CFD list
TimeFrame......EOD
Direction.........Long/short
Time in...........Short-Medium term

Capital available....25,000
Max amount per trade...2% FFP???
Pyramid.........yes with Fluid fixed fractional pos.

Entry- a reduced volitility pattern - yet to be clearly defined
Initial stop at technical support
Breakeven Stop ASAP (breakeven 2xinitial stop distance)
Trailing stop - ATR
Exposure Stop - ????

Cheers,

 

[happytrader]

Thanks for that Kauri, Wayne, Tech, Nizar Happy.And thanks again to Nick for the continued directions. I'm flying blind here so i really appreciate your help on this. Nick, is it a similar matter to going through the systematic trading plan as you present on your course, then coding and testing it all?

Lets get that down so we can move on:

Trade what.... CFD's
Universe.........600 IG MArkets long/short CFD list
TimeFrame......EOD
Direction.........Long/short
Time in...........Short-Medium term

Capital available....25,000
Max amount per trade...2% FFP???
Pyramid.........yes with Fluid fixed fractional pos.

Entry- a reduced volitility pattern - yet to be clearly defined
Initial stop at technical support
Breakeven Stop ASAP (breakeven 2xinitial stop distance)
Trailing stop - ATR
Exposure Stop - ????

Cheers,

Canaussieuck, Would you consider increasing trade position amounts to 10% or up to $2,500 per trade? I believe this would reduce the tendency to overtrade and ensure that traders are particularly careful when it comes to fulfilling entry, profit, loss and risk criteria regarding trade selection.

Cheers
Happytrader

 

[CanOz]

Canaussieuck, Would you consider increasing trade position amounts to 10% or up to $2,500 per trade? I believe this would reduce the tendency to overtrade and ensure that traders are particularly careful when it comes to fulfilling entry, profit, loss and risk criteria regarding trade selection.

Cheers
Happytrader

Well the reason i said FFR of 2% was to address all of those, however i'm not sure if a system can allocate capital in this manner, i'm just too inexperienced in this to tell....thats why i had the ??? marks.

Are you familiar with Fixed Fractional Positioning Happy?

Its an awesome concept. I'll find a link.

Cheers,

 

[CanOz]

It seems everyone is creeping back toward a trend following system. That's fine, but its been done with Tech Trader. Maybe Tech can post his code somewhere as a seperate reference and we continue on the short-term CFD thing here?

I'll put forward an idea and one that can be "eyeballed" and then "calculated". This will enable those without software to follow along.

A major belief of mine is that one needs to understand WHY a system will make money. With short term trading we need to get as much "bang for buck" as we can in a small amount of time. We don't want to hand around waiting for a sustained trend to get going. We want a result and we want it quickly. A quick result comes from an increase in volatility and an increase in volatility comes from a contraction in volatility. One follows the other - just look at any bollinger band and you see the action.

Therefore, if one is wants a quick move that comes from an increase in volatility then one should look for a the contraction of volatility that will be a precursor to the required move.

Now, this was done elsewhere in May 2001. I will not paste the link to those 6-pages out of respect to Joe, but anyone interested can PM me for that link.

So, we need to define a period of low volatility, but we also need to be able to "eyeball" it. How about this:

Here we have a simple pattern that has 3-days contracting. It's easy to see on a chart, it happens with enough frequency to be useful for trading and it fits with our theory of volatility.

Should we build on this?

Just to get back to this, i might try a narrative for it, anyone jump in here.

The ATR of the current bar is less than 1 bar before
The ATR of 1 bar ago is less than that of 2 bar before

Now, should we put a condition in for the trend? Like an MA? See chart.