Questions about trading systems

[cunparis]

I'm kind of new to this and I have a few questions that I'm hoping to get some input from others. Please no flaming or arguing insulting and all that.

Really short background: My investment experience is using IBD approach. I am reading books on trading (day and swing) trying to learn all I can.

Question: How many people have a profitable system?

One thing I've learned from the various books I've read is that one needs a profitable system. I'm talking about looking for specific setups with pre-defined buy and sell rules. In High Probability Trading the author talks about developing such a system and backtesting it. So that's what I'm doing.

So take a book such as Mastering the Trade for example. In this book the author published some trade setups. So I'm thinking:

1 - if this works, wouldn't evenone be doing it (which would in fact make it not work). Unless of course only a small percentage of people use it and then it would work.

2 - or maybe this worked in the past but is no longer working so he wrote a book about it.

I'm just learning how to program strategies (not just his but in general) and I'm having fun with NinjaTrader & backtesting. But I'm still curious about the two possibilities above.

Is it possible to create a system that has a postive expectancy? Do any of you have such a system (don't worry I won't ask you for it).

When I read the books I get the idea that it's simple: Just find a system with positive expectancy and go trade. But if it were that simple then why do the vast majority (I don't want to say 95% but that's what everyone says) not make money?

Is it because they don't take the time to develop their system and follow it religiously? Do they just blindly jump in and out of trades, effectively gambling? Or do these people quit during the drawdown periods?

There was another thread asking if trading was really that difficult or if people were just stupid. I hope I'm posing the question a bit more intelligently (no offense). I'm a bit skeptical coding up a system that I read about in a book but since I don't have my own system I think it's a good place to start.

Anyway, I'm curious if you are using a system, have you backtested it, and are you profitable? And if I do the same, is that enough? Let's assume for the discussion that I have the software, capital, and discipline.

 

[Mike805]

Quote from cunparis:

Let's assume for the discussion that I have the software, capital, and discipline.

That's a strong assumption to make... escpecially the discipline part.

Unless you are a successful (read disciplined) trader on your own right, a system in of itself will not make you profitable. It takes just as much discipline and mental toughness to follow a good system as it does to trade purely discretionarily. Any flaws in your psychology will show up in trading the system - i.e. not taking trades due to fear or trying to "outsmart" the system, etc... etc... One needs to have already developed the mental toughness necessary to trade correctly regardless of the method/system used - this is why a good system in the hands of a poor trader will always LOSE. Mechanical systems, as much as they claim, never really remove the trader from the equation.

Also, keep in mind that the better systems automatically do the most pyschologically uncomfortable thing, i.e. they place you into difficult and highly rewarding trades. IMO one has to be able to pyschologically handle those types of difficult scenarios without automation and then slowly transition into full automation - i.e. you have to become a good trader first.

Mike

 

[Mike805]

Quote from cunparis:

Anyway, I'm curious if you are using a system, have you backtested it, and are you profitable? And if I do the same, is that enough?

Yes, and yes.

No, that is not enough. What is your math/stats background? Do you know what "introducing bias" means? What do you know about curve-fitting? What is your time frame? Minutes? Days?

 

[wiesman02]

If you guys take a look at my journal in the journals thread, you'll see that I claim to have a profitable system, but, as a new trader of a few weeks, I'm at the breakeven / barely profitable stage.


has nothing to do w/ my system. Completely pyschological and discipline oriented.

 

[cunparis]

Quote from Mike805:

Yes, and yes.

No, that is not enough. What is your math/stats background? Do you know what "introducing bias" means? What do you know about curve-fitting? What is your time frame? Minutes? Days?

Hey Mike thanks for your feedback. I agree that assuming discipline is a strong assumption. I only make that assumption for my question because I want to know what affect the system has on the results. I already know that last year I did NOT have the discipline required. But for this year, after reading several books on the subject including Trading in the Zone, I hope to build it.

As for your questions: I have a computer science degree and was just 2 classes short of a minor in math. I had statistics but don't remember what introducing bias means but I have an idea. Curve fitting yes.

My time frame will probably be swing trading but I hope to get into day trading once I get the system worked out.

I'll start paper trading the system in the beginning. I know it's not the same as real money but I don't want to rush into it.

 

[jack hershey]

Quote from cunparis:

Hey Mike thanks for your feedback. I agree that assuming discipline is a strong assumption. I only make that assumption for my question because I want to know what affect the system has on the results. I already know that last year I did NOT have the discipline required. But for this year, after reading several books on the subject including Trading in the Zone, I hope to build it.

As for your questions: I have a computer science degree and was just 2 classes short of a minor in math. I had statistics but don't remember what introducing bias means but I have an idea. Curve fitting yes.

My time frame will probably be swing trading but I hope to get into day trading once I get the system worked out.

I'll start paper trading the system in the beginning. I know it's not the same as real money but I don't want to rush into it.

By reading IBD you get to have a good view of what is the most effective mindset.

By using EPS and RS you will be able to acquire and maintain a great universe for trading. This put you at a level where all the stocks look alike. This the most serious advantage a person can have for bearing down on making money position trading.

All such high quality stocks cycle and they do it on a rising trend curve. Having high quality sotocks in rising trends allows you to focus on the traverses they make of the channel in which they trade.

You will noice that you can be selective of when to take on trades. The usual cycle of traversing from trendline to the opposite trend line varies from 8 to 3 days ordinarily. Traverse widths can be used for ranking which stock to pick when you have the cash from completing a turn. Also use the cycle time as a consideration.

So holding a stock from three to eight days means that you will do 100 to 30 cycles a year where the width of the channel is what you make in a cycle.

All of this can be done using available codes and scripts for various platforms. You may want to search a little.

It turns out that the volume leads price so you can use volume to know when the beginning of a cycle is coming and before the price begins to move. It is pleasant way to do position trading.

In recent years some platforms have begun to use the principle of volume leading price. On QCharts the sortable column that you can add is called "unusual volume". By sorting your universe on "unusual volume', the stocks that are going to take off in the first hour or so in the am can be sorted. They rise to the top of the list as "unusual volume" performs the sort for you.

Ideally it is nice to use stocks with wide channels and short traversing times; 10% a day for three days is a nice target for making money.

I use three volume measures to ease on down the road: DryUp which precedes the price breakout; First Rising Volume which occurs as the first day of you Hold begins after you buy; and Peaking Volume which is where the price has compoleted its run up. DU, FRV and Peaking is the shorthand.

To make it very simple and mostly automatic, I had a chart typed to reflect all that a person needs to know to do this manually. Not many people choose to use it because it represents a beak with the traditions of conventional wisdom in the financial industry. Since you have read IBD stuff, you also recognize that there are many aspects of CANSLIM which are not conventional wisdom. IBD is very cognicent of the common mistakes people make. You have also read those to preclude making thoe mistakes. In ET a lot of people persist in making these common mistakes.

I attached the sheet for trading a selected universe and using volume as a leading indicator of price. Shoot ofr 100 cycles a year where you make about 5% a day in these 3 day cycles. the compound interest formula is a good one to use to see what it is like when you let your profits work for you.

 

[cunparis]

Quote from jack hershey:

By reading IBD you get to have a good view of what is the most effective mindset.
...

Thanks Jack for your feedback, good stuff there. I'm glad someone appreciates IBD as much as I do. I think swing trading is a natural progress from IBD to trading. Your channel trading idea corresponds pretty much with what I read in Elder's "Come into my trading room" (http://www.amazon.com/gp/product/04...inkCode=xm2&camp=1789&creativeASIN=0471225347). I think it's a good strategy and the IBD 100 certain provides a good selection.

I attached the sheet for trading a selected universe and using volume as a leading indicator of price.

I have to admit, although I understood everything about the channels and the volume, cycles, etc. you lost me with the sheet you attached. I don't know what the columns mean. My guess is that one is to look for a certain percentage of volume and price and use that to predict the price move but I need some more clues.

Thanks again.

 

[rwk]

Quote from cunparis:
. . . When I read the books I get the idea that it's simple: Just find a system with positive expectancy and go trade. But if it were that simple then why do the vast majority (I don't want to say 95% but that's what everyone says) not make money?

You're confusing simple with easy. Developing and trading with a system that has positive expectancy is quite simple, but not at all easy. First, it's not easy to find a system that has positive expectancy. Second, it's not easy to blindly apply a system, especially when it starts losing money. All systems lose money part of the time. It is hard to tell whether the system is having a normal, expected loss or has started to fail.

Good luck!

 

[jack hershey]

Quote from cunparis:

Thanks Jack for your feedback, good stuff there. I'm glad someone appreciates IBD as much as I do. I think swing trading is a natural progress from IBD to trading. Your channel trading idea corresponds pretty much with what I read in Elder's "Come into my trading room" (http://www.amazon.com/gp/product/04...inkCode=xm2&camp=1789&creativeASIN=0471225347). I think it's a good strategy and the IBD 100 certain provides a good selection.



I have to admit, although I understood everything about the channels and the volume, cycles, etc. you lost me with the sheet you attached. I don't know what the columns mean. My guess is that one is to look for a certain percentage of volume and price and use that to predict the price move but I need some more clues.

Thanks again.

The IBD 100 can be improved upon by sorting using EPS and RS. Use the top values to get a list.

DU is the column that has values during the day (every 30 mins) as a stock comes down to the trendline.

when the stock is going to repeat a traverse in the channel from right to left (go long), the DU end of day value is reached fairly rapidly in the am.

Since a low volume is required to keep the price low, failing to keep volume low in the am simply means that during the rest of the day the volume will reach 2, 3 or 4 times the DU. This increase in volume "pushes" the price after DU is reached early in the morning.

The am window for buying that is created is between the time the DU is reached in the am and when the price begins to lift off within the next hour.

Usually you make over 5% the first day after lift off of price.

From what I read in ET it is difficult for most people to use any of what I suggest. Most people like to follow the CW and spend years not making any money. This is apparently normal.

To actually use the chart a person would have to be set up and he would have to see it happening on a display. I did a writeup where I went through chosing the stocks to trade on a Sunday and then I scan the list about 30 times during the Monday following to show how it worked. I also added these snapshots to a previously type transcript of a two hour presentation where I showed the same thing a few months before.

Occasionally i see someone post about their reading and views. If a person is acquainted with sorting using EPS and RS then there is a chance he may be able to use the volume leading price principle. The chart just takes this knowledge that is used to make making money easy.

By sorting stocks on a list by the important volume information, a person just gets to sit at a screen and be told which stocks will breakout and when to buy them before the price begins the breakout.

The chart is used by people in many places. It is just "normalized" mathematically so it works in a lot of markets where a universe of stocks that show a high Beta (>3) characteristic.

If a person is making 10% every three or four days on his capital it is considered unbelievable or astonishing. The markets make that possible and most people ignore the possibility simply because it is so foreign to their lifestyles and knowledge.

It is a fact that most people cannot sit down and work on a learning plan nor a business plan for trading. some say that if a person knows what he is doing he can put it on one sheet of paper. the sheet you printed is a one page sheet that just simply shows how everyday of the year anyone can be making a lot of money and do it day fter day.

A corresponding sheet for commodities would be the "sweeps" sheet. It is a long one (24 inches) instead of just 11 inches.

My viewpoint and the vantagepoint from which I speak is different than most peoples. I am on the other side of being successful..way over there in fact. When I read a post I look at a person...where he is and .... where he could be. Mostly it is a sad experience for me and I use it to learn about how to communicate to people where it still may be possible for them to get started on being rich.

Vast, huge sums of money change hands every day. It goes from one person to another and each thinks he is doing the right thing. most people have persnally invented what they do. Some people have received what they do by it being transferred to them. I've been sharing what I do for 50 years.

Thanks for responding. I was sorry to hear that you cannot understand the sheet. A person who understands it and can make use of it stands a chance of doubling his money every 25 to 50 days.

By using it for 50 days the same way day after day it may be possible to "get it". 1000 days is about 3 years. People on ET since 2005 probably could have been looking at the sheet for a 1,000 days and not gotten the idea that you know before price moves that it going to move and when it is going to move.

This is an idea whose time has come for anyone who takes the time to print the sheet. The number .25 is like the Da Vinci code to people who want to be rich. It appears at the bottom of the DU column and not too far down the FRV column.

Imagine a person who is a computer scientist and that he cannot grasp for three years that he has a ticket to great wealth on a sheet of paper where the same number appears twice. Lets say he has 5 or 6 years of college where he spent 5,000 or more a year to get educated. He still can't figure out that if a day's volume happens early in the am , that the price of the stock is going to break out that day!!! I am talking about a person with 5 or 6 years of college and 3 years on ET, a total of 8 or 9 years.
I am very very amazed when I look at these people. None of them has even stolen the idea to make money tellling others about the secret code of .25.

can you imagine what CNBC would be like if they announced every time volume on a high beta stock hit .25 in the first 1 1/2 hours of trading???? It would be a different world for a heck of a lot of high schools graduates.

 

[Mike805]

Quote from cunparis:

Hey Mike thanks for your feedback. I agree that assuming discipline is a strong assumption. I only make that assumption for my question because I want to know what affect the system has on the results. I already know that last year I did NOT have the discipline required. But for this year, after reading several books on the subject including Trading in the Zone, I hope to build it.

As for your questions: I have a computer science degree and was just 2 classes short of a minor in math. I had statistics but don't remember what introducing bias means but I have an idea. Curve fitting yes.

My time frame will probably be swing trading but I hope to get into day trading once I get the system worked out.

I'll start paper trading the system in the beginning. I know it's not the same as real money but I don't want to rush into it.

If you read behind the lines of my post you'll know that I struggle with my system discipline every now and then. I thought that full automation would cure my ills, but it hasn't. Don't get me wrong, I trade well and make good money, but, I still cut some winners short (I've been trading for close to 9 years now and wouldn't you know it - I still make rookie mistakes).

At this point I think it is an ego thing; I want to prove something about being right about market direction even though my system is telling me to stay in the trade a bit longer... it comes down to that extra little move that in the long term makes a huge difference to my bottom line... we're talking ticks here... you'll be suprised at what those ticks amount to over the course of a year.

Anyhow, my goal for every month is to follow signals to a T regardless of the money involved - I suggest you make that your goal... it is tough but it gets easier with practice.

By introducing bias I mean being careful with your assessment of system results with respect to the market conditions at hand. Say you have a long breakout system - it will likely work very well in a bull market but might fail in a bear. Now, say you test and configure your system to be "best fit" for a bull market and you test on a basket of stocks that had recent runs in price... because your test setup was long biased, your system will only work in similar market conditions. In general, you will have to provide in sample data that is representative of a broad range of market conditions and not create a system that favors any stock specific behaviors (by this I mean don't test on GOOG and think you've found a winning system...).

Because you have a CS background you should know something about normal distributions. Your system trades should fall into a normal distribution with a mean to the right side of 0 - i.e. a system with an average profit per trade. AVOID potential systems that have a non-normal distribution as they do not demonstrate a statistically significant market inefficiency (this logic is more for intraday shorter time frame systems and may not apply to swing trading systems). Oh and make sure you have an adequate sample size (200 trades or more).

There is a lot more to the process, especially regarding out-of-sample testing. I highly recommend to try to get in the TradeStation Forums and do some research there (I recommend you start an account there just for the forums, they are an excellent source). Also, TradeStation is very easy to do quick backtesting with.

IMO, creating a good robust system is not that easy... it takes a lot of shrewd and critical thinking. Question all your assumptions and do not optimize until after you have something that is somewhat profitable!!!

Mike