*sigh*Quote from MGJ:
All markets trend ... ... ... but they only trend some of the time.
A different approach is to say "I'm going to develop a NOUN-based system, but only take trades when the market is obviously in a NOUN. When the market is not in a NOUN, I'm going to stay out. Perhaps for many many bars. Therefore I am going to develop a NOUN-based system and I am going to develop a market-state filter that tells me whether or not the market is in a NOUN.
It's up to you whether you choose NOUN=TREND or NOUN=TRADING-RANGE or some other approach to trading.
One classic approach advocated by many authors, applies when you have chosen noun=trend. In this case they suggest you only take signals to go Long when the next higher-level time frame trend is Up. If you're trading 60-minute bars, only take long entry signals when the trend on the daily chart is Up. If you're trading daily bars, only take longs when the trend on the weekly chart is up. Etc. Some even suggest you require the TWO higher timeframe charts to be trending in the same direction, before you accept an entry signal on your lower timeframe chart.
Just because some bozo wrote it in a book (or an ET posting) doesn't make it correct, of course. But it might just possibly serve as a catalyst for your own thinking and research.
Quote from acrary:
Well, if you want to work here is the basics.
For every system I develop I use DUM.
D - Define
All systems are based on finding and pulling a fundamental truth about the market. Define what fundamental truth you'll be going after. Ex. All markets have a tendency to trend beyond random. Now you've got the definition that most technical-based hedge funds are derived from.
U - Understand
Determine the conditions under which the defined truth tends to occur. In the case of a trend tendency it could be when does the trend tendency begin beyond random? This will lead you to how do I measure a trend? Since trends can occur randomly, how do I determine if a trend is beyond a confidence level of randomness? Does the trending tendency beyond random exhibit the same degree of persistence beyond one year? two years? 5 years? If not, is there some point at which the persistence beyond random occurs every year? If so, does it also persist at the same frequency for 5, 10, 50 different markets? If so, you've discovered a fundamental truth and you now understand what you need to know about the behavior.
M - Mine
Once you understand the conditions under which the behavior occurs, you write the code necessary to map the understanding of the behavior. Is the code going to be all inclusive of many markets? or try to just go after the best of the best? Once mapped it's a mechanical process to determine how well it maps against the behavior. After you're satisfied you've developed a satisfactory method for mining the behavior, you can do an edge test to see if it happens beyond random. If not, use Monte Carlo sims to determine confidence levels for trading the method. Determine at what confidence level you'll stop trading. Examine the drawdown versus the profit. Is it worth risking any money on this? If so, allocate money using a money management scheme.
After you're done with this, you'll have your first system. Next, develop a complimentary system (non-correlated). Go through the same process for say a range bound system. Once you've gone through the mining stage, use the correlation test to weight the two systems. Apply the weights to the money management scheme and move on to your third system.
There you have it. The entire system development process. If any of you want to work, you now have the structure to make it happen. If not, I hope you've had a few minutes of amusement.
Everything else I would discuss would merely be adding detail to some aspect of the development. So I guess I'm done with the journal. No need to dive into details when a 30 sec. overview is all that is necessary (lol).
Alan
Quote from frostengine:
I chose ES because its the most liquid contract. The competion in the ES is very fierce, which is also something I like.
I would have chosen the ER2, but with the move to ICE, that contract may change substantially.
I find YM to be too think,and I just don't like the way the NQ trades.
Quote from MGJ:
Measuring the benefits of an Entry signal, in isolation.
Chuck LeBeau suggests making a "system" with your entry signal and a time-based exit. Exit the position at market on the open, N bars after entry. Then simply measure the Winning Percentage. Coin flipping will give Winning Percentage = 50%, so you are looking for an entry with >50% Winners. That is, you are looking for an entry which is profitable N bars later, more than half the time. Vary the value of "N"; try 5 bars later, 10 bars later, 15 bars later, etc. According to the timeframe of trades you hope to implement. LeBeau suggests you want to find entries which lead to profits N days later, more than 55% of the time. Less than that is practically indistinguishable from coinflipping.
RINA Systems has an "Entry Efficiency" measure which equals (for long trades)
((Highest High during trade) - Entry Price) / ((Highest High during trade) - (Lowest Low during trade))
This assumes some sort of an exit is married to the Entry. Could be an N-bar hold if you like.
Curtis Faith's book Way Of The Turtle presents an Edge Ratio that lets you measure the edge (benefit above trading-at-random) of an entry. It's volatility-normalized-MFE divided by volatility-normalized-MAE, measured in an N-bar holding period, see the book for nitty gritty details. Random trades will have MFE approximately equal to MAE, thus random trading will have Faith's Edge Ratio ~=~ 1.0. Better than random entries will have MFE > MAE, thus a Faith's Edge Ratio > 1.0. Worst than random entries will have Faith's Edge Ratio < 1.0.
I think ANYTHING that involves creating backtest simulations, running them, studying the results, and interpreting them for yourself, is good for a beginning system trader. Particularly the "interpreting them for yourself" activity. One benefit of trying lots of different ideas is that you can clearly identify the best-performing one or two among them. You may not yet have the confidence to judge whether a certain result is terrible, mediocre, good, excellent, or world-beating. But you WILL know which result among your candidates, had better-than-all-the-rest performance in your testing.Quote from Gary Fox:
Do you think this (studying the winning percentage of an entry plus a fixed N-bar holding period, as advocated by Chuck LeBeau) is a fairly good way to go for a beginner?