Dump it Here

[ducati916]

Why Do Trading Strategies Stop Working & Why Do They Fail?


Knowing when a strategy stops working is of the utmost importance and it should be to all traders. Monitoring the win/loss ratio, average win/loss, drawdown, and Sharpe ratio sounds well and good but it's not the complete picture I'm looking for.

When a strategy is producing subpar performance, I review it to evaluate the changes in performance metrics. Doing so allows me to make minor adjustments to the trading plan. Before there are negative comments just bear in mind that without ongoing improvements we would still be driving around in a "Ford Model T" motor vehicle. Mechanical system trading is simply an ongoing process of refinement.



Skate.

This is probably the central issue with mechanical trading. Is the system simply in drawdown or broken?

Surely this goes back to an analysis of 'edge'? Assuming you (the trader) understands exactly his edge, the decision as to a drawdown or broken system should be relatively straightforward.

An example: I believe 1 pattern @peter2 trades is a HVBB setup (I may be mistaken in calling this chart pattern an edge, but any number of traders designate a chart pattern as an edge). Look at his examples (charts). Now the trader must examine are HVBB setups still a valid edge (this is simply assuming the results are below backtested results. I have no idea. This is simply a hypothetical edge)? The answer should be a yes or no.

Is not 'refinement' optimisation to prevailing market conditions?

Would not refinement rely on a very small data sample, given that this process could be somewhat ongoing?

Which brings me to my definition of what constitutes an 'edge': an edge must be an immutable, intrinsic reality of the market. If that can be described in the affirmative, then it can only ever be a drawdown, it can never be broken

jog on
duc

 

[Skate]

This is probably the central issue with mechanical trading. Is the system simply in drawdown or broken?

Surely this goes back to an analysis of 'edge'? Assuming you (the trader) understands exactly his edge, the decision as to a drawdown or broken system should be relatively straightforward.

An example: I believe 1 pattern @peter2 trades is a HVBB setup (I may be mistaken in calling this chart pattern an edge, but any number of traders designate a chart pattern as an edge). Look at his examples (charts). Now the trader must examine are HVBB setups still a valid edge (this is simply assuming the results are below backtested results. I have no idea. This is simply a hypothetical edge)? The answer should be a yes or no.

Is not 'refinement' optimisation to prevailing market conditions?

Would not refinement rely on a very small data sample, given that this process could be somewhat ongoing?

Which brings me to my definition of what constitutes an 'edge': an edge must be an immutable, intrinsic reality of the market. If that can be described in the affirmative, then it can only ever be a drawdown, it can never be broken

jog on
duc

Mechanical system trading (general comments)
@ducati916, the edge in a mechanical trend-following system refers to the system's statistical advantage in spotting and trading market trends. This advantage is founded on a set of rules and parameters that have been backtested and proven successful across a broad sample of historical data. The edge does not guarantee future profits, but it does lay the groundwork for the trader to have a better chance of success in the long run.

A drawdown in a trend-following system
Simply drawdowns indicate that the system is momentarily losing money as a result of a string of losing trades. This is an expected and typical component of trading, and the trader should continue to follow the system's principles while waiting for the drawdown to end.

However
If the system continuously loses money over time, it may suggest that the edge has worn off and the system is malfunctioning.

In terms of refining or optimisation a strategy
This process should be done on a continual basis in order to respond to changing market conditions and maintain the edge. However, it is critical to avoid over-optimisation and to ensure that any system adjustments are based on sound logic rather than simply curve-fitting to historical data.

In short
A trend-following system's edge is built on a statistically proven advantage in spotting and trading market trends. A downturn is a typical element of trading, but if the system continually loses money, it could mean that the edge has vanished and the system is flawed. To respond to changing market conditions, refinement, and optimisation should be continual, but caution should be given to avoid over-optimisation.

Let's talk about the SAP Strategy
This trading strategy I believe has a distinct edge based on a unique "percentage up" buy condition that needs the market to demonstrate a particular level of strength before buy signals are generated. Furthermore, the strategy includes a number of exit conditions that serve to protect earnings and minimise losses.

Overall
A specified edge is required in any trading system to provide the trader with a statistical advantage in the markets. The SAP Strategy has a well-defined edge, which, when executed correctly, can lead to long-term lucrative trading results.

Skate.

 

[Skate]

Let's talk about the SAP Strategy
This trading strategy I believe has a distinct edge based on a unique "percentage up" buy condition that needs the market to demonstrate a particular level of strength before buy signals are generated. Furthermore, the strategy includes a number of exit conditions that serve to protect earnings and minimise losses.

To anyone following along
The SAP Strategy is a trend-following trading strategy that aims to remove the mystique of system trading for beginners and provide a practical example of mechanical system trading. The strategy uses a unique buy condition to enter positions and a variety of exit conditions to protect profits and minimize losses.

While the strategy has not gone through the proper "paper trading" phase, the project started out as a small $100k portfolio. However, additional funds belonging to others carry a higher level of personal pressure.

Overall, the SAP Strategy is a well-defined trend-following strategy that has the potential to generate profitable returns over the long term. also, I'll continue to test and refine the strategy as market conditions change and always prioritise a risk management approach.

Skate.

 

[Gringotts Bank]

An edge exists if it reflects something fundamental about human behaviour and decision making.

Momentum: At some point a stock will trend strongly, even if just by chance. If you're an early holder, you will become quite comfortable and less likely to sell (due to the feeling of comfort afforded by the profit buffer). If you're not a holder, you may feel FOMO, and be more likley to buy. Both of these behaviours mean that the more a stock moves up, the more likely it will continue in that direction.

Reversion: Reversion is just the end point of the momentum wave. Early holders will at some point notice FOMO traders hopping on the stock (both volume and volatility will increase). The balance of bulls to bears becomes highly skewed in favour of bulls, and now there's a heap of holders and no one stepping up to buy. Holders noticing the lack of buying pressure will sell, which starts a cascade effect in the opposite direction.

Vice versa for downwards momentum and reversion. Both can give an edge.

Whether momentum continues has everything to do with the balance of buying and selling pressure during the run. An upwards run needs a lot of selling to continue, and a downwards run needs a lot of buying to continue. The less counter-pressure during the run, the more likely it will reverse hard.

 

[Skate]

Why write a daily series of posts?
I've noticed that there are fewer postings that grab my attention these days, so I've decided to write a generic daily post geared at beginners to keep the "Dump it here" thread current.

After a few posts, being generic in nature, they didn't hold my interest in writing them each morning. Naturally, I thought that others felt the same way. Along the way, I thought it would be interesting to introduce a practical trading method, and trading it live would add some drama using real money.

Knowing this, I came up with the notion of creating a trading technique that beginners could comprehend and follow, in order to eliminate the mysticism of system trading for people considering this trading style.

Skate.

 

[Skate]

I created the "System Analysis Project", called the "SAP Strategy" for this project. Without much consideration, I skipped the "paper trading phase" in my rush to demonstrate a practical example of how to trade a simple trend-following technique.

However, because the project began as a small $100k portfolio, IMHO, it was worthy of throwing caution to the wind to demonstrate this trading technique as part of my daily posts.

Unfortunately, family members have joined the portfolio, increasing the portfolio value to $200k. While losing my money is not a concern, the pressure to succeed by trading funds belonging to others adds drama to the project.

In stating this, I am still committed to trading this strategy in a methodical and consistent manner, free of emotional biases.

Skate.

 

[Skate]

Overall, the SAP approach is a well-defined trend-following approach with the potential to provide long-term returns. However, it is crucial to remember that trading with real money has a higher amount of risk, especially when trading with other people's funds. Prioritising risk management is the very heart of this project.

The SAP Strategy is a trend-following trading strategy that uses a "unique buy condition" to generate buy signals and a variety of "exit conditions" to protect profits and minimise losses. The strategy is designed to capture large market moves while keeping risk under control.

The "buy condition" of the SAP Strategy requires that 50% of the index being traded is advancing as well as other filters, indicating overall market strength. Only when the buy condition is met, the strategy will generate buy signals.

Once a position is entered, the SAP Strategy uses a variety of exit conditions to protect profits and minimize losses. If the position does not perform within a few weekly bars, the position is sold quickly. This helps to prevent losses from mounting "and" it allows these funds to be allocated to better opportunities.

The strategy also uses trailing stops to protect profits and capture large market moves. As the position moves in the trader's favour, the stop is moved higher to lock in profits. If the market moves against the position, the stop is triggered, and the position is sold to minimise losses.

Overall, the SAP Strategy is a trend-following strategy that uses a unique buy condition to enter positions and a variety of exit conditions to protect profits and minimize losses. By following the strategy's rules and focusing on risk management, the strategy has the potential to generate profitable returns over the long term.

Skate.

 

[peter2]

In response to @ducati916's mention of a bar pattern I mention frequently (HVBB). IMO the HVBB is not an edge. This can be proven quite simply by back-testing the HVBB pattern. Trading every HVBB will NOT be profitable. One may improve the performance by filtering out many of the losing HVBBs but I doubt one could filter out enough losers to be profitable overall. The HVBB is a scannable pattern, like the MA crossover that finds charts that for me are worth looking.

My edge is a mathematical or statistical edge that I create by managing a batch of trades correctly. My biggest edge is trading reversal patterns after market dips of >10%. My normal edge is created in bullish markets and I have no edge in bearish markets, so elect to stay out until the outlook improves.

I started as a break-out trader but the break-outs aren't an edge, rather a strategy that I can use to create my statistical edge.

Edit: My edge is being able to manage a batch of trades in such a way that creates an overall profit.

 

[Skate]

"Trading for Beginners - Skate's Practical Guide to Profitable Trading"
A daily series of posts aimed at those just starting out on their trading journey.

52. Knowing when to sell is difficult
Every trader must possess the essential ability to know when to exit a position. Knowing when to sell can be a difficult decision for any trader, but it is a necessary ability to have in order to control risk and protect your portfolio from large losses.

While it may be tempting to hold a losing position in the expectation of a comeback, having a specific profit-taking or exit strategy can help you decrease your exposure to market volatility and lower your downside risk.

Selling a position can be a potent risk management tool that shields your portfolio from severe losses. However, selling too early can result in the loss of long-term gains and earnings. It is critical to strike a balance between minimising risk and capitalising on market possibilities.

It's critical to prevent faulty thinking, such as hanging on to a position for too long in the hopes of a turnaround. Unfortunately, this way of thinking can be risky and can result in lost opportunities, causing large losses. While it may be tempting to wait for a better opportunity, there are times when you must cut your losses and move on to new opportunities with greater profit potential.

Having a precise exit strategy is one method of risk management by removing the decision of when to sell out of the trader’s hands. For example, if a stock falls below a specific price or its growth potential falls below a given threshold, you may opt to sell it. You may make sensible, data-driven decisions regarding when to sell by setting defined objectives, rather than being led by emotion or flawed thinking.

Finally, knowing when to sell is an important component of successful trading. You can control risk and seize opportunities for growth and profit over the long term by being disciplined and having a clear precise trading strategy in place.

Skate.

 

[Skate]

Skate.

 

[DaveTrade]

Every trader must possess the essential ability to know when to exit a position. Knowing when to sell can be a difficult decision for any trader, but it is a necessary ability to have in order to control risk and protect your portfolio from large losses.

Exits should be predefined before entering the trade and if you are 100% mechanical then you just execute your plan. If you decide not to execute a predefined exit then you must be clear on the reason for this which may be based on new information that you didn't have when entering the trade. The reason cannot be HOPE.

 

[Skate]

Exits should be predefined before entering the trade and if you are 100% mechanical then you just execute your plan. If you decide not to execute a predefined exit then you must be clear on the reason for this which may be based on new information that you didn't have when entering the trade. The reason cannot be HOPE.

@DaveTrade, I absolutely agree with your point of view that having a clear exit strategy in trading is critical for minimising losses, and it should be determined before entering a trade. A well-defined exit strategy assists traders in remaining disciplined and making informed decisions rather than depending on emotions or responding rashly to market swings.

However, there may be times when a trader decides to vary from their predetermined exit strategy due to new information that was not available when the trade was taken. It is critical in such instances not to make decisions exclusively based on emotions, as this could lead to faulty thinking with potentially disastrous effects.

Having a planned exit strategy and a disciplined trading technique, in my opinion, is critical for trading success. Traders must be adaptive to new knowledge and market conditions while avoiding emotional decisions, as emotions have no place in trading. A disciplined trading technique enables traders to control risk and make informed trading decisions based on their analysis of market conditions, rather than making emotional decisions.

To summarise, having a well-defined multi-exit strategy, a disciplined trading technique, and the flexibility to adjust to new information are all critical aspects for trading success. To achieve long-term profitability in trading, traders must stay steadfastly focused.

Skate.

 

[qldfrog]

This is probably the central issue with mechanical trading. Is the system simply in drawdown or broken?

Surely this goes back to an analysis of 'edge'? Assuming you (the trader) understands exactly his edge, the decision as to a drawdown or broken system should be relatively straightforward.

An example: I believe 1 pattern @peter2 trades is a HVBB setup (I may be mistaken in calling this chart pattern an edge, but any number of traders designate a chart pattern as an edge). Look at his examples (charts). Now the trader must examine are HVBB setups still a valid edge (this is simply assuming the results are below backtested results. I have no idea. This is simply a hypothetical edge)? The answer should be a yes or no.

Is not 'refinement' optimisation to prevailing market conditions?

Would not refinement rely on a very small data sample, given that this process could be somewhat ongoing?

Which brings me to my definition of what constitutes an 'edge': an edge must be an immutable, intrinsic reality of the market. If that can be described in the affirmative, then it can only ever be a drawdown, it can never be broken

jog on
duc

May i beg to differ here Mr Le Duc on the:
an edge must be an immutable, intrinsic reality of the market.
Your edge might be temporary ,so immutable? I do not think so:
You have first knowledge thru technology for example of market movement and so can be first to react, that is a definite edge and the way some darkpool operators are making a mozza, all that can dissappear with a new technology or someone building a data center a bit nearer from an exchange...
and same goes with mechanical trading, you discover a new "recipe" working well, you have an edge, you make money, the strategy spreads, more people are on it and trigger same or similar orders, you miss your buy, sell lower..edge is gone

 

[Skate]

May i beg to differ here Mr Le Duc on the:
an edge must be an immutable, intrinsic reality of the market.
Your edge might be temporary ,so immutable? I do not think so:
You have first knowledge thru technology for example of market movement and so can be first to react, that is a definite edge and the way some darkpool operators are making a mozza, all that can dissappear with a new technology or someone building a data center a bit nearer from an exchange...
and same goes with mechanical trading, you discover a new "recipe" working well, you have an edge, you make money, the strategy spreads, more people are on it and trigger same or similar orders, you miss your buy, sell lower..edge is gone

@qldfrog, I agree with your views. The assumption that @ducati916 made that an edge must be immutable (unchangeable), in my view is not always correct and I'm sure @ducati916 will have more to add. The market is always changing, and what worked yesterday may not work today or tomorrow. As you indicated, advances in technology or changes in market conditions can swiftly render a perfectly sound profitable strategy outdated and even sometimes obsolete.

Furthermore, the concept of optimising (refining) a trading strategy and aligning it more to the current market conditions is critical for sustaining a competitive advantage. Traders must respond to market fluctuations and modify their methods accordingly. This process must be ongoing, and a trader's Strategy may need to be tweaked on a regular basis in order to remain profitable.

So, while having a consistent edge is critical for trading success, it is not always an immovable, inherent market truth. Instead, it could be a fleeting advantage that requires constant modification and adaptation to remain effective.

Skate.

 

[Skate]

My edge is being able to manage a batch of trades in such a way that creates an overall profit.

@peter2's remark is accurate - having an edge is essential for creating a profit in trading. An edge is a unique advantage that a trader has in the market, which allows them to identify profitable opportunities and make successful trades.

However, having an edge alone is not enough - traders must also have the discipline, risk management skills, and ability to adapt to changing market conditions to turn their edge into profits.

What is a Trading Edge?
A trading edge is a distinct advantage that a trader possesses in the market that increases the likelihood of successful trading. It might be founded on a trader's knowledge, skills, expertise, or access to information that enables them to spot profitable market opportunities. Having a trading edge is critical for trading success, and traders must constantly develop and optimise their trading strategy to keep their edge (an advantage) in the market.

An edge is a trading word that simply describes a trader's advantage in the market. It is a set of conditions that increase the likelihood of a trader's success. Traders can get an advantage (edge) by using a variety of techniques, such as technical analysis.

Furthermore, a trader's advantage may be transient or fleeting. For example, a trader may uncover a new profitable trading approach, but when additional traders adopt it, the edge may vanish as the market becomes saturated with traders using the same method. As a result, traders must continually be on the lookout for new techniques in order to preserve their edge (advantage).

Finally, having a consistent edge is critical for trading success. However, an edge could be a fleeting advantage that requires constant modification and adaptation to remain effective. As a result, traders must constantly develop and "optimise" their trading strategy in order to stay ahead of the market and preserve their edge.

Skate.

 

[DaveTrade]

EDGE

The way I see it is, an edge should be as unchangeable as possible. An edge that is unchangeable at the current technological period could be referred to as a real edge but there are various edges of varying life spans and I suppose they could be classified as having a sliding scale of strength depending on how permanent they may be.

 

[Skate]

EDGE

The way I see it is, an edge should be as unchangeable as possible. An edge that is unchangeable at the current technological period could be referred to as a real edge but there are various edges of varying life spans and I suppose they could be classified as having a sliding scale of strength depending on how permanent they may be.

@DaveTrade, discussing alternative views is how we gain knowledge. While @qldfrog and I hold one view, you and @ducati916 lean toward the opposite perspective. However, to play the "devil's advocate" I'll admit the concept of a trading edge can be both immutable and subjective to a degree. Objective factors such as market knowledge, technical analysis, or fundamental analysis contribute to a trader's edge, but the interpretation and application of these factors can vary from trader to trader, making it a subjective concept.

Besides, the market is constantly changing, and what worked yesterday may not work today or tomorrow, requiring traders to continuously refine and adapt their strategies to maintain their edge. Therefore, a balance between an immutable edge and a subjective approach is crucial for success in trading.

Skate.

 

[DaveTrade]

While @qldfrog and I hold one view, you and @ducati916 lean toward the opposite perspective.

I'm really in the middle, I think there can be real edges, strong edges and weak edges, by this I mean a varying strength of an edge.

 

[ducati916]

May i beg to differ here Mr Le Duc on the:
an edge must be an immutable, intrinsic reality of the market.
Your edge might be temporary ,so immutable? I do not think so:
You have first knowledge thru technology for example of market movement and so can be first to react, that is a definite edge and the way some darkpool operators are making a mozza, all that can dissappear with a new technology or someone building a data center a bit nearer from an exchange...
and same goes with mechanical trading, you discover a new "recipe" working well, you have an edge, you make money, the strategy spreads, more people are on it and trigger same or similar orders, you miss your buy, sell lower..edge is gone

Your 'edge' must 'unable to be changed'. The edge must either reside within yourself, ie. @peter2 example or be intrinsic to the market itself. Peter's is the best example of this. I would also submit that this is one of the hardest edge's to maintain over time. The market is like the sea crashing against rocks. Over time discipline is eroded.



If we look at the market, which would now incorporate the 'unchanging over time' aspect also we know that markets can only do 1 of 3 things: (a) go higher, (b) go lower or (c) go nowhere.

So just taking (c) as an example: going nowhere is on a scale from 0 to whatever. Price changes not at all or within a range. That range will vary over time. It might be 5% for a few months, then change to 3%.

The same variance will exist in uptrends and down trends. The pattern of the trend will vary. This is the root of 'the market changes'.

A 'statistical' edge is no edge at all. It is a chimera. A statistical edge lulls you gently to sleep. Poof! It is gone as the market plunges 9%+ overnight. In a truly wild one, 22% in a day. If you are leveraged, poof, your account is gone. Even an edge that relies on the trader is not exempt or protection from reliance upon a statistical edge, whether they realise it or not.

So your edge if intrinsic to the market, must not rely overmuch on a statistical edge.

My issue with mechanical systems is this:



Where is the 'objective line' in the sand? How much losing is too much losing?

Many traders trade a system or a strategy conflating it with an edge. A system or a strategy is not an edge unless it conforms to the immutable rule.

Which is why if you cannot describe your edge in 1 sentence, it is unlikely that you have an edge.

@Gringotts Bank:



Correct.

Obviously creating an actionable edge from that is a slightly more difficult task to identify.

jog on
duc

 

[Skate]

"Trading for Beginners - Skate's Practical Guide to Profitable Trading"
A daily series of posts aimed at those just starting out on their trading journey.

53. Trading paralysis
Trading paralysis is a typical occurrence among traders, especially those who have had substantial losses. This state of inaction is frequently driven by the dread of making the wrong decision, which could result in additional losses. Traders who can overcome their fear and act, on the other hand, can boost their odds of success and gain more financial stability over time.

Maintaining a long-term perspective is one technique to overcome trading paralysis. Traders who concentrate on their long-term objectives are better able to make rational decisions, even in the face of short-term losses. Traders can avoid being swept up in the emotions of the present by keeping their eyes on the future and making decisions that are consistent with their overall trading plan.

Being adaptable and disciplined is another way to overcome trading paralysis. Traders who can adjust to shifting market conditions and stick to their trading plan have a better chance of long-term success. This demands self-control and the ability to stick to the trading plan even when it is tempting to override or deviate from it.

It's also vital to remember that unforeseen developments can cause a position to fall in value. In such circumstances, cutting losses and moving on to other opportunities may be required. This necessitates a willingness to accept losses as part of the trading process and to use them to improve performance.

Finally, acting is the key to overcoming trade paralysis. While selling a position at a substantial loss can be unpleasant, doing so can free up "mental and emotional" energy that can be used to locate better trading opportunities. This can provide a much-needed motivation boost and assist traders in regaining confidence and focusing on long-term goals.

In conclusion, traders who are able to overcome trading paralysis by retaining a long-term view, are more likely to attain financial stability and prosperity over time. While losses are an unavoidable aspect of the trading process, they can be used to improve future performance. Traders can overcome losses and gain better trading success in the long run by remaining focused, disciplined, and acting appropriately when required to do so.

Skate.