System development software

[Temjin]

Here is a link that I'm sure some of you are aware of already.

http://www.smarttraderblog.com/2007/02/position_sizing_software.php

So yes, Trade Sim and Market system analyzer comes into mind.

TradingBlox is pretty good as well but it is also quite expensive, so I haven't got the chance to use it yet. It does not allow intraday data back testing though.

Like MichaelD, I am a die hard automatic pure mechanical trader as well. While the psychology involved in executing trades does not concern me too much (because it is all automatic), the psychology involved in following the system and decide on whether it is performing to expectation or not is a major concern for me. (and also in the development of such system) More often there is a time the automatic trading system is not performing to what you expect and then you go and try to optimise it further or find another system endlessly and not get anywhere.

It is also important to understand some of the advantages and disadvantages of optimising a system through backtesting data. Curve-fitting is definitely one of the major reason why such optimised system fails. However, not optimising a system will cause your system not realising its full profit potential. Thus, it is important to get the right mix.

Forward testing your system through many different uncorrelated markets is one of "my" preferred way of optimising a system. Make sure to keep the concept simple as well so it applies to all markets.

Going a tid off topic here, but anyway, those are your trading softwares. Good luck in your venture.

 

[CanOz]

No, though this question is asked of mechanical traders all the time, they answer that they arent in the market to have fun, they're in it to win.

Another example is that professional traders focus on the trading and not on the profits. If they trade well - according to their tested and proven system - then the profits will come. The best traders make the most money, just like how the best doctors make the most money, and the best lawyers make the most money. Though their primary focus is not on the money, but on doing their job well.



Not sure what you mean by waiting for the performance of the system to weaken. If you system has been well designed and thoroughly tested by monte carlo analysis, then there should be no suprises, everything is known in terms of what to expect (ie. average profit/drawdown, minimum profit/drawdown, maximum profit/drawdown). But if your system starts pulling out numbers that were NOT expected, then, as tech/a once said, you are trading BLIND, and can no longer have confidence in your system, because this indicates that market conditions now are different then those endured during backtesting, so in this case you would probably exit all positions, well, i would.

Im not going to look at what the market is doing at all, i dont think its relevant unless im trading indices, but of course i will test this hypothesis during system development.

I guess what i'm wondering is...if you have a long term trend following system, what happens when the market is not in trend? I guess thats what T/A was referring to when he suggested incorporating the short side.

Cheers,

 

[nizar]

Temjin - can you elaborate a little on curve-fitting and other such disadvantages of optimising a system through backtesting data? Michael, tech, others, your thoughts on this also much appreciated.

Cann - does it matter if the market is not in a trend? as long as there are stocks that are strongly trending then you can still pick some winners, though there would be less of them.
The market is dictated by pretty much the top 10 or 20 or 50 stocks. Obviously in a sideways market a trend following system would not do as well as in a strongly trending market, though i would expect it to still outperform the market, and for some systems, the outperformance would still be significant.
In my opinion.
Note that i havent really tested anything, thats just my perception.

 

[CanOz]

Temjin - can you elaborate a little on curve-fitting and other such disadvantages of optimising a system through backtesting data? Michael, tech, others, your thoughts on this also much appreciated.

Cann - does it matter if the market is not in a trend? as long as there are stocks that are strongly trending then you can still pick some winners, though there would be less of them.
The market is dictated by pretty much the top 10 or 20 or 50 stocks. Obviously in a sideways market a trend following system would not do as well as in a strongly trending market, though i would expect it to still outperform the market, and for some systems, the outperformance would still be significant.
In my opinion.
Note that i havent really tested anything, thats just my perception.

Yes i suppose your right, provided the system identifies short and long trades? If the market conditions change, wouldn't the overall strategy need to change in order to outperform?

Anyways, i'm digressing too much...sorry...just thinking out loud.

In any case Nizar, i'm very interested in your system development...and your software. Love to know how you get on with it.

Cheers,

 

[tech/a]

Nizar.

3 things here.

(1) Temjin has touched on a very important point.One which you and all traders should be aware of and one that all traders be it Systems traders or discretionary/systematic traders,both technical and fundamental.
And that is being the best you can be in your trade. Quite correctly stated the money WILL come. Get away from the thinking of turning $5000 to $50000
in a few months/year or whatever. Sure it can be done and sure if the opportunity arises then take advantage of it ---but DONT GO LOOKING FOR IT.
Its been said many times before that its wise and correct Money management which will make you the money---so ALWAYS trade with this in mind---those who ply the ART of money management from stops to maximising R/R to correct use (And knowing when) to leverage yourself to the max,that will not only survive but succeed consistantly and beyond the normal returns of most in the market.

Trade the Money management

(2) Optimising.

Most definately a place for it but MY VEIW is when trading a SINGLE or very small universe.To expect a larger universe to conform to a maximisation of parameters is not feasable as this is likely to alter daily and definately weekly.
But I have heard of systems within systems---something I have not investigated-- but it works like this.
(1) Base system
(2) Trade triggered than that singular trade traded on its oprimised parameters through to exit or stop.

There are systems of course which are optimised to the max on single futures contracts and even singluar stops---each traded as an entity on itself which as a whole encompasses a system.
IE 10 trades in a portfolio each traded using their own individual optimised system.The optimised parameters are re checked and altered IF NECESSARY after each trade is closed,then those parameters are adopted for the next trade.---endless ideas as you can see.

(3) Short trading
Much has altered in the time I have been developing systems.
There are now CFD's which give access to the short side on more stocks and cheaper than ever before.
Market conditions are unlikely to remain the rampant bull we have seen for 4 yrs.Managing ones trading with a Long and Short methodology makes sence to me.Each different characters and each traded in a different way yet can be combined into a trading system. Again its about management.

While this looks complex if you write it down--the goals of your business---then your business plan---the testing (Which is your cashflow reports) then your application and monthly your reported balance sheet---we all strive to become better business managers.

 

[CanOz]

Here is a brief video I had put together showing my trend following model running through TradeStation:

http://www.projectstreamer.com/users/reefcap/chartist_system/chartist_system.html

Excellent, thanks Nick. Definately a must see for those looking to develop a system. I wish i could look at the others, like Stevo's and Tech's, but for some reason their sites won't come up for me.

Cheers,

 

[nizar]

In any case Nizar, i'm very interested in your system development...and your software. Love to know how you get on with it.

Cheers,

Thanks for your interest, ill keep you informed on my progress.

As for short trades, i posed the question a while ago about if there were brokers out there that allowed you to short sell without leverage .
Theres not many out there. Michael mentioned one where they charge $140/trade and only take phone orders.

I'll be looking at long only at least initially for the ASX.

I plan to also develop a system to trade US markets, and over there, its just as easy to go short as it is to go long (according to Wayne), so over there a system that trades both long and short would work better.

 

[nizar]

Excellent, thanks Nick. Definately a must see for those looking to develop a system. I wish i could look at the others, like Stevo's and Tech's, but for some reason their sites won't come up for me.

Cheers,

Can,

Look at Stevo's blog, that guy is a legend, his weekly systems REALLY COLLECT!

Also - have a look at Nicks forum (ReefCap) as there is extensive discussion of systems trading, design, and development. And tech/a's techTrader system as well.

 

[nizar]

Here is a brief video I had put together showing my trend following model running through TradeStation:

http://www.projectstreamer.com/users/reefcap/chartist_system/chartist_system.html

Thanks for the link Nick.
Excellent video.

How does tradeStation differ from tradeSim?
In your opinion is it better/worse?

Also in your video you state that its a fully mechanical system. Say, If you have 3 buy signals on a certain day and only 10k left (and your money management is 10k per trade) i suspect at this point you do look at the chart and apply some discretion?

 

[Nick Radge]

Nizar,
My problem is that I've worked with TradeStation for 10-years now and so I have never attempted any of the newer software. There are two bad points with TradeStation; it doesn't scan an entire universe and it doesn't do portfolio work.

I get past the scanning by using the little brother of TradeStation called SuperCharts, but I really don't do much scanning anyway.

The portfolio work is where TS really falls down and where Amibroker or Tradesim come into their element. If I weren't so stuck in my ways I'd go with Amibroker. When I need portfolio work done I send it off to Kaveman to do it for me.

As a matter of interest, below is the exact same system as shown in the video above, except here it's trading 1-minute data instead of daily data. Note the trend following statistics prevail here as well; low win rate, high win/loss ratio, high profit factor. Same principles, yet higher trade frequency which makes for higher profitability.

This is the last 3-months results for BHP:

 

[Nick Radge]

As for number of positions, I really don't have that much of an issue. My system is very selective. I've never had two buys on the same day and it can be weeks between new orders. However, in this kind of environment you will still get to the end of your capital eventually. It's really a matter of deciding how many total positions you want. I tend to be nearer 10 than 20. The more positions you get the more likely you'll replicate the broad market.

I think its an important element to have a very selective system. No point running a full mechanical system if it spits out 5 trades each day so you then add an element of discretion to actually choose the trade you will take. I know of one vendor provider whose system generates up to 10 signals each day. Now its a long term trend following system, so it falls down in real time replication.

A more complex system will not have these issues. I developed this one back in 1999 for futures trading, but made some small changes in 2001 to trade equities.

 

[CanOz]

Can,

Look at Stevo's blog, that guy is a legend, his weekly systems REALLY COLLECT!

Also - have a look at Nicks forum (ReefCap) as there is extensive discussion of systems trading, design, and development. And tech/a's techTrader system as well.

Will try to have another look at Stevo's site tonite. I Have started going through the ReefCap stuff, but theres allot there. Its all good.

I definiately need to use Nick's resource more than i currently do.

Cheers,

 

[nizar]

Nick thanks for your response.

Just a question regarding your exits as seen in the system on the video link provided.

What exit did you use?

It was impressive how you were out of the stock during almost the entire sideways period. The entry seems like a white candle into new highs or something like that.

Tech/a - thanks for your post with those 3 points, it will all be taken into consideration.

 

[Temjin]

Temjin - can you elaborate a little on curve-fitting and other such disadvantages of optimising a system through backtesting data? Michael, tech, others, your thoughts on this also much appreciated.

My understanding is that if you over-optimised a system via historic data only, you will only get a system that will tell you how to trade to produce the most profit only during those past period. There is no guarantee that the system will exhibit the same type of performance if being traded in the future and thus, one of the best practices out there to system optimisation is to use forward testing over many different uncorrelated markets.

What I meant by forward testing is to optimise your system, for example, the period from 1995 to 2000, then test the system from 2001 to present. (again, FOR EXAMPLE ONLY!) If the system provide you with a consistent positive expectency and trading opportunities that you desire, and that you can meet your own objective by trading an appropriate position size that produces a "theoretical" drawdown that you can tolerate, then you will have a very solid system.

I really don't have a true answer to all this, at least from my readings so far.

However, my belief is that the more complex a trading system is (i.e. more degree of freedom), the less its ability to withstand changes to the market. My another belief is that if a trading system works in the past, it does not necessary mean it will continue to do so in the future.

The best thing you can do to minimise the chance of that happening is by designing the system so it is conceptually simple so it can be applied to all kind of markets, and that it has the ability to produce consistant profit through forward testing. This is, in my opinion, would produce a system that has a higher probability of withstanding all the "uncertain" changes in the future and can still be profitable without further major intervention.

Nizar.

3 things here.

(1) Temjin has touched on a very important point.One which you and all traders should be aware of and one that all traders be it Systems traders or discretionary/systematic traders,both technical and fundamental.
And that is being the best you can be in your trade. Quite correctly stated the money WILL come. Get away from the thinking of turning $5000 to $50000
in a few months/year or whatever. Sure it can be done and sure if the opportunity arises then take advantage of it ---but DONT GO LOOKING FOR IT.
Its been said many times before that its wise and correct Money management which will make you the money---so ALWAYS trade with this in mind---those who ply the ART of money management from stops to maximising R/R to correct use (And knowing when) to leverage yourself to the max,that will not only survive but succeed consistantly and beyond the normal returns of most in the market.

Trade the Money management

Spot on here, I agree. Unfortunately, there are still too many people chasing that "get rich quick" idea because they have the mindset that if somebody can do it, why can't I?

Dr Tharp did mention that even though he believed trading can be taught to everyone and that everyone has the "potential" to make money consistently in the market, not everybody can do it because they all have different mindset on how to do things. It is usually difficult, if not impossible, to change their core beliefs because they are the same beliefs that they have developed through their experiences in life.

Can,

Look at Stevo's blog, that guy is a legend, his weekly systems REALLY COLLECT!

Also - have a look at Nicks forum (ReefCap) as there is extensive discussion of systems trading, design, and development. And tech/a's techTrader system as well.

Can someone post me a link to this Stevo's blog? Can't seem to find it. Thanks.

 

[nizar]

My understanding is that if you over-optimised a system via historic data only, you will only get a system that will tell you how to trade to produce the most profit only during those past period. There is no guarantee that the system will exhibit the same type of performance if being traded in the future and thus, one of the best practices out there to system optimisation is to use forward testing over many different uncorrelated markets.

What I meant by forward testing is to optimise your system, for example, the period from 1995 to 2000, then test the system from 2001 to present. (again, FOR EXAMPLE ONLY!) If the system provide you with a consistent positive expectency and trading opportunities that you desire, and that you can meet your own objective by trading an appropriate position size that produces a "theoretical" drawdown that you can tolerate, then you will have a very solid system.

Solid post.
Thanks.

 

[Nick Radge]

if you have a long term trend following system, what happens when the market is not in trend?

This is the type of comment where I believe people fail in trading. To undertake a journey, any journey - including trading, you need to understand what will lay ahead of you. If you understand what will lay ahead and you then accept those issues, then you will be one large step toward being profitable. Problem is that rarely do people understand what will lay ahead, so when things get a little tough they drop the method/system and go looking elsewhere. This I call the "beginners cycle". Always looking for something better rather than travelling the journey in full.

This is where backtesting is crucial or understanding why a method will work. Rather than look at the end result, look at how that result came about and what that journey entailed. A long term trend following system will have prolonged flat periods when bearish conditions prevail. That is part & parcel of the journey. If you are unwilling to accept those flat periods, then there is no point trading a trend following system.

Think of trend following like driving from Sydney to Brisbane. You know its going to take 12-hours. You know its going to involve several rest stops. You know its going to involve possible detours or delays due to roadworks or traffic. You know you may even get lost or need to take an overnight stop if you get tired. Yet, you accept these factors before leaving and as a result you make the journey successfully. Trading should no different Understand what a system entails first, then decide whether it suits you, then trade it. Unfortunetaly most people just look at the end result without knowing how they intend to get there.

Take a look at the following equity curve and tell me if you'd like it? I have no doubt most will. It represents a system with a 50% win rate and a win/loss ratio of 3:1, very similar to a trend following system.

Here is the same system - exactly the same, yet it shows just a small part of the journey. After 17 trades its breakeven. Most people would throw in the towel and go looking for something else once this has occurred

If one was unwilling to accept equity curve 2, then they will never achieve equity curve 1.

 

[ezyTrader]

Hi Nick, in your opinion then, would you encourage beginners to participate in a couple of different systems? ie. A long term trend following, and a shorter term?

 

[Nick Radge]

ezyTrader,
Yes, I'd highly encourage a new trader to pursue trend following to some degree. I moved to longer term trend following in futures back in 1999. It really works a lot more in ones favour, such as:

Less comm's
Less costs
Less work
Less anxiety
Better tax efficiency
Benefits from dividends

From a short term trading perspective, all these work against you, rather than for you.


Nick

 

[CanOz]

This is the type of comment where I believe people fail in trading. To undertake a journey, any journey - including trading, you need to understand what will lay ahead of you. If you understand what will lay ahead and you then accept those issues, then you will be one large step toward being profitable. Problem is that rarely do people understand what will lay ahead, so when things get a little tough they drop the method/system and go looking elsewhere. This I call the "beginners cycle". Always looking for something better rather than travelling the journey in full.

This is where backtesting is crucial or understanding why a method will work. Rather than look at the end result, look at how that result came about and what that journey entailed. A long term trend following system will have prolonged flat periods when bearish conditions prevail. That is part & parcel of the journey. If you are unwilling to accept those flat periods, then there is no point trading a trend following system.

Think of trend following like driving from Sydney to Brisbane. You know its going to take 12-hours. You know its going to involve several rest stops. You know its going to involve possible detours or delays due to roadworks or traffic. You know you may even get lost or need to take an overnight stop if you get tired. Yet, you accept these factors before leaving and as a result you make the journey successfully. Trading should no different Understand what a system entails first, then decide whether it suits you, then trade it. Unfortunetaly most people just look at the end result without knowing how they intend to get there.

Take a look at the following equity curve and tell me if you'd like it? I have no doubt most will. It represents a system with a 50% win rate and a win/loss ratio of 3:1, very similar to a trend following system.

Here is the same system - exactly the same, yet it shows just a small part of the journey. After 17 trades its breakeven. Most people would throw in the towel and go looking for something else once this has occurred

If one was unwilling to accept equity curve 2, then they will never achieve equity curve 1.

Thanks Nick. I guess what i was wondering is, what if the bearish period were to last a decade, a sideways move, how could a trend following system outperform a swing trading system?

Cheers,

 

[nizar]

Thanks Nick. I guess what i was wondering is, what if the bearish period were to last a decade, a sideways move, how could a trend following system outperform a swing trading system?

Cheers,

The last bearish period was the 70s bear.
Design both systems and test them during this period.

Trading is all about probabilities - how likely is a bearish period to happen and last 10 years?

What i would do is simple;
Design a system based on data which is still significant to market conditions which the system in forward trading is likely to experience (post-1992 for ASX because the introduction of compulsory super gives an upwards bias to the market ever since it was introduced in July 1992, and thus data before this is no longer relevant due to the change in market dynamics) and then trade it.
You would know the max/min/average drawdown, max/min/average returns, largest string of losses, etc. When your trading results fall outside the parameters expected from the backtest results, then your system is no longer worth trading.

Then its back to tha drawing board.

Nick and others feel free to add please and correct.