newbie systems development questions

[FanOfFridays]

Quote from ges:

Do you mean win/loss ratio? As in 66% of the trades were profitable? If so, what is the average gain and average loss?

ges

(Ahem)... damn. Well, this had to happen eventually, so I may as well 'fess up now.

The fact of the matter is this. I am using Metastock. The version I have (8.0) is so full of bugs that I cannot use the System Tester. I have spoken to support about it and inquired on the Yahoo MS thread and there are about 50 hoops that I have to jump through in order to MAYBE get it to work properly. Others have told me that there are fatal flaws in the design which make it unsuitable for system testing. Sorry MS - this isn't a mindless bash - this is my experience.

Anyway, what I have been doing is ... (ahem)...manually plotting the signals above a 20 year chart of various instruments and then going through and calculating which trades would have been winners and which losers. I know that this will seem ludicrous to many and I will be told that a system isn't a system until it has been rigorously backtested. I know that this is true. I just want to say that I have been extremely conservative in my analysis - any trade that looks even slightly marginal is rejected as a loser. I have been assuming that entry occurs midway between the high and the low of the next days bar (i.e the day after the signal). I do not assume that I could get in at the opening price. I calculate stop losses based on both points and % of equity. Commissions are of course calculated as well.

Obviously this is not going to cut it as a rigorous method of system testing . That's why I am trying to figure out which system is best for me from a backtesting POV. My biggest question right now is - how much of a learning curve will there be with WLD, since as far as I can tell it is one of the better programs out there. Still checking into linnsoft and Technifilter Plus as suggested here.

Anyway, ges - yes, I meant 66% profitable. Average loser vs. average winner?

This is where I can't help but get excited. I have seen that if the system sticks to its stops, there are plenty of trades that become winners and then run a good ways before getting stopped out. Other winners are of shorter duration. But NONE of the losers would EVER run into the kind of losses shown by the good running winners UNLESS you are dealing with a large gapping move. Those gaps do happen, granted, but they don't happen as often as a winner goes for a good long run. I can see very clearly that letting winners run out is crucial for the kind of trading I seem to be heading for. How to program this into a purely mechanical system, I have yet to figure out.

(if it were that simple, everyone would be doing it...Ed.)

 

[Grob109]

Quote from traderNik:



Grob109 - wow.... thanks a lot for this detailed suggestion. I'll definitely check this out. One thing though - I am unclear about what you mean by a 'right to left channel traverse (points 1 and 2)'. Is there any way you could either post a chart with an example or give me a recent example from a particular stock? At any rate, I have an account set up at Multex and I have been doing some screens such as the ones you suggested - I just need to fully understand your entry system.

I am glad you commented. It is a tough thing to trade without recognizing what goes on with price channels. Most swnig traders are caught in a world where they believe S and R are static levels that yield a horizontal channel.

I selected a set of stocks for you where the price channel tips upward from lower left to to upper right. This minimizes risk while making money. Further toy will only be trading a part of a trend that is previously established. This makes investing even less risky.

So all the stocks you will have will look the same. On a sheet of paper draw a line from lower left to upper right. Draw a second line parallel and above it by two inches. Look closely and you will see the channel has two sides: left and right. Most people who trade deal with top and bottom channel lines. Thi error causes them to not be able to make accurate assessments. Too bad. Those people can learn to call the bottom line the right line and the top line the left line for long trades.

People who have vertical orientations have a hardr time making money than those with horizontal orientations.

All trends wax and wane. They forge ahead and then relax for a while. There are reasons for this for sure. Going from the right to left side of the channel makes money fastest. Label where the first line you drew starts. Label it 1. Go to the other line and above and to the right of point 1 put a point 2. For explanation purposes, I ask that you put in another point. Go back to the initial line and to the right of point 2 and add point 3.
Connect the points in order. The beginning of the trend was the right to left traverse in the channel. Next came the first period of distribution going from point 2 to 3. This may or may not continue to make money (some times it is a retrace.) For the stocks I selected for you it will not be a retrace, however. The selections are too strong for a retrace.

You go in as the trend resumes accumulation after the first distribution. This is known as he “herd” entering on the newspaper reports, etc. Only smart money catches he initial BO as you know. You trade with the herd at this point because of your mental state. It is too risky for you to take a trade on the first BO so far because of how you got to the mind set that you have. Nothing is wrong with this. There are people in much worse shape than the herd as you know. The task for these people is to get to trade with the herd. You are there at this point. By giving up a portion of the start of a trend you are more assured of profits as the second half begins as a continuation.

I wrote all this out in detail so you can do the software programming for the whole effort according to your viewpoint. My initial response to you assumed that you knew what a channel was and how they form.

To look at a bunch of stocks that have these channels use stocktables.com. It is important to trade from a small universe all of whose members do the same thing over and over again. The macro view of looking at as large a sample as possible is kind of silly.

You set up if you do it will double your money twice a year. That is a good beginner mechanical level.

 

[ges]

Quote from traderNik:

[BAnyway, ges - yes, I meant 66% profitable. Average loser vs. average winner?

This is where I can't help but get excited. I have seen that if the system sticks to its stops, there are plenty of trades that become winners and then run a good ways before getting stopped out. Other winners are of shorter duration. But NONE of the losers would EVER run into the kind of losses shown by the good running winners UNLESS you are dealing with a large gapping move. Those gaps do happen, granted, but they don't happen as often as a winner goes for a good long run. I can see very clearly that letting winners run out is crucial for the kind of trading I seem to be heading for. How to program this into a purely mechanical system, I have yet to figure out.

(if it were that simple, everyone would be doing it...Ed.) [/B]

OK, it sound like your average winner is larger than your average loser. If this is the case, and you have 66% winning trades, then you have a good system. But it something you might want to quantify. Just add up the % loss for all losers and % gain for all winners and figure the average for each.

A decent system tester, like TFP, will do this for you.

ges

 

[FanOfFridays]

hey Grob

Thanks for the clarifications. The concept of price channels wasn't so unfamiliar to me, but I didn't quite get the 'right to left' bit. I like the simplicity of your system and I will be trying to automate it, as you mentioned you have done.

You are right when you say that I have been vertically oriented. I have indeed been very taken by the behaviour of stocks as they approach important S & R levels. I thought that my best trades would be generated this way. Thanks for pointing out that the channels can provide a steady stream of good trades.