Developing a Trading System Step by Step

[Murray Ruggiero]

I am not sure what happened. I zipped the file this time.

 

[Xephen]

I think this kind of approach may always make less money than a more long-term (really medium-term in this case) approach. By definition, the trend has already been underway before you enter since you are waiting for a pullback. Also by definition some of the pullbacks, even the ones with a VolEx in the direction of the longer trend, aren't really pullbacks, they are the failure of the trend. The doesn't mean the approach can't be made to work. It just means that you will miss part of the trend and you will trade in the midst of some trend failures. Due to this, you may want to use a tighter exit mechanism for failures? About the short side performance, I know the common wisdom is that trades should be identical on the long and short side, but it doesn't take much testing to see that markets behave differently in down trends than in up trends.

As a side note, I'd encourage anyone interested in this stuff to take a look at Murray's product, TradersStudio. We've been using it for about a year now, and it really is the best thing out there. We use TradeStation, Trading Recipes and Rina Systems, and this is better than any of them. You can put together multiple systems and look at them as an entire portfolio, including portfolio level drawdown. You can calculate Start Trade DrawDown. Also, the product is still being improved so now is your chance to offer input into its development. At recent prices, it is also a terrific bargain. If you're interested in buying a system, a couple of vendors will even make you a great bundle deal to get their system and TradersStudio at good prices. When you start testing parameters across entire portfolios, you may be surprised by how your opinions about market behaviour change.

X
Xephen Merchant Partners

 

[Murray Ruggiero]

I fixed the spreadsheet, the problem was for some reason it got corrupted when I did not zip it. Does anyone have any input on why this strategy did not work well?.

I will give members a little more time to respond , then I will publish my analysis. I will give you a hint. What happens if the market takes off and does not retrace ?.

 

[Xephen]

As I was writing before, and specifically in response to Murray's "hint", in the case where a market does not retrace or pull back, the first time the price will fall below the short average will be ... when the trend is over. You will miss the whole thing.

X
Xephen Merchant Partners

 

[BENG]

Quote from Xephen:

As I was writing before, and specifically in response to Murray's "hint", in the case where a market does not retrace or pull back, the first time the price will fall below the short average will be ... when the trend is over. You will miss the whole thing.

X
Xephen Merchant Partners

To elaborate more on Xephen's comment, most trend following systems become profitable because of a handful of big and good trades. They are big trades because of the strong trend, and strong trend certainly doesn't go below the shortest optimized moving average that was tested here.

I think most people who develop systems, do it for one single market, or one type of markets, stocks, currencies, bonds, or commodities. I can build 1000 good S&P systems, but not a single one can work on a basket of markets.

A lot of system discussions on ET become useless when applied to a basket of markets JMHO.

I'm not sure how many people can give inputs to a multi-markets system discussion... if possible, could you please move forward in a faster pace? It might help to generate more discussions.

 

[DblArrow]

Quote from Murray Ruggiero:

What happens if the market takes off and does not retrace ?.

Then we have no entry. (Then emotion kicks in and we chase and we finally get in close to the other extreme.)

I trade something very similar on a 5 min time frame and have on a number of occasions missed trades due to the lack of a retrace. These are then often big moves. When the retrace does come - it often will not take out the previous high, then we get a signal for the opposite direction causing a losing trade.

Very good thread here - thanks for your effort.

Make 'em pretty, Chris

 

[Murray Ruggiero]

Quote from DblArrow:

Then we have no entry. (Then emotion kicks in and we chase and we finally get in close to the other extreme.)

I trade something very similar on a 5 min time frame and have on a number of occasions missed trades due to the lack of a retrace. These are then often big moves. When the retrace does come - it often will not take out the previous high, then we get a signal for the opposite direction causing a losing trade.

Very good thread here - thanks for your effort.

Make 'em pretty, Chris

That what I was looking for, the point is that this system does not make as much money, but the Drawdown is lower. Our problem is that we miss the big moves that don't retrace. If you are going to develop break out system which we filter out breakouts , you need to design a fail safe mechanism. One system which everyone knows about which has this approach is the Turtle system. One of the filters the Turtles used was that you only take a trade if the current or last trade is a loser. The theory is that if the market is trending in one direction, first trade in the opposite direction is just a retracement and not a good breakout.
The Turtle system uses a 20 day breakout normally, these are the breakouts we filter. But we have a unconditional entry at a 55 day breakout. This protect us from missing very large winning trades.

 

[Xephen]

Yes! You can demonstrate this very easily. Take a breakout system like the Turtle 20/55 and change the logic so instead of buying on a stop, the system puts in a limit order the next several days to buy at the breakout point. You will get filled the vast majority of the time and minimize slippage. But guess what? Your performance will be substantially worse than the stop entry version. Why? Becase the very best trades -- the ones that really "make" the system -- never retrace. Also explains the high winning percentage of strategies that fade the turtles.

Xephen

 

[Murray Ruggiero]

I plan on putting my next lesson up tomorrow. I have been a bit under the weather the past few days. Thank you for being patient.

 

[swingman]

Quote from Murray Ruggiero:

The problem with most trend following systems is that they win about 35%-45% percent of their trades. This is part of the problem with these methods. The only holy grail I know is to trade multiple uncorrelated systems, combine them using money management. This is exacting what TradersStudio was designed for. I would recommend , trading a Bond system and a stock index system combined with a trend following one.

What about currency markets? Are results any better with those? And, do you trade those at all as you do not include them in your recommendation?