Trading strategy formulation?

[munchiedude]

hi all, im a newbie and wanted to ask a question that may seemed stupid but im sure im not the only one thinking it?

im jus curious as to whether there is a process that experienced traders follow when developing a new strategy?

my journey so far has been to finish babypips school 🙂)), write a trading plan from the template provided at T2W, installed 3 instances of MT4 for backtesting, demo account and hopefully live account later, downloaded historical data for backtesting and now looking at building an EA for my strategy for backtesting.

admittedly, the strategy that i have is based on fibs and macd, but im keen to get creative and explore all ideas both existing and new but this is where i've hit a bit of a bind....

would anyone be able to point me to a process or resources that will enable me to develop a strategy?

what im not looking for is the easy way out and copies of existing systems but just really trying to understand the thought processes and resources used in identifying/building a strategy to backtest?

would appreciate any useful help/advice in this area 🙂

 

[BumBumBum]

would anyone be able to point me to a process or resources that will enable me to develop a strategy?

You can take any working or working not very well EA and try to go from complex EA to it's simple parts. Reinvent it. I Started with this.

As soon as you understand the logic your brain will give you ideas how you can improve it or make better way.

Good luck!

 

[ronblack]

Trying to find a system by testing combinations of indicators will lead you nowhere. I tried that and I wasted 5 years with nothing but frustration. 99.99% of what one comes up with has no edge whatsoever and nowhere to be found.

I suggest some type of automated way for developing an edge. There are several programs around. Some are very expensive. A good one that I know off at a reasonable price for what it does is discussed in this thread (actually it generates some MT code):

http://www.trade2win.com/boards/trading-software/107654-price-action-lab.html

 

[the hare]

would anyone be able to point me to a process or resources that will enable me to develop a strategy?

Some of the van tharp ideas are quite useful. You can probably find a copy of his systems design course floating around or going cheap on ebay, its not great, but it'll point you in the right direction.

There used to be a nice article on elite trader which considered the design of a simple trend following strategy using trade station. Its probably still there.

There's a fairly lame article right here at the zoo regarding design of a breakout strategy.

 

[munchiedude]

thanks bumbumbum (nice name btw!) and ronblack for your inputs. some useful ideas although contradictory, has given me some ideas.

i have downloaded several EA's with a view of backtesting them and taking them apart to understand perhaps what could make them better by tweaking.

ronblack: thanks for your experience. i intended to use combination of indicators to test strategy ideas but from your 5 years of experience, it seems not a worthwhile journey to make?? i have looked at price action lab that you suggested and it seems a powerful piece of software to use, altho at this stage of my trading story, i neither can justify the $2975 price tag nor fully grasp the underlying concepts of the software when the stage i am at is still newbie and backtesting on demo accounts...!
when you touch on the automated way to trade, is this software suppose to scan the markets based on my trading criterias and form a trading system for me?

how would this be different to hypothesising a strategy however simple or complex and back/forward testing?

it does worry me that you have been trying combinations for 5 years and none have found an edge but if that were to be the case, then surely everyone that trades with their own formulated strategy is wasting their time? surely there are traders that have designed their own strategy, done the back/forward testing and are trading profitably without price action lab or a similar system?

i'm not making these points to criticise, very much the opposite, im trying to understand whether a self formulated strategy can be stable enough to stand the test of time and show consistent profits without spending $2.7k on solutions?

being a noob, i hope it makes sense, lol, i'm very much open to any ideas out there, but since your first comment crushed any hope i had for developing a trial and error approach to a system, im keen to understand what is best course of action to continue my trading journey!

thanks and looking forward to hearing from you or anyone that could add some gems 🙂

 

[Barramundi]

The idea behind the strategy I use came to me by first having an understanding of the basic technical tools & analysis techniques and combining this knowledge with observation of the markets. I simply saw things happen again and again, I made a note of them, backtested them and formulated a 'system'. The key components of the system were formulated on the futures markets. I knew my system would work very well before even approaching the forex market. I did a forward test purely to determine the best approach for trade management. The system continues to get better as I make further observations leading to a refinement of the strategy, but the fundamentals of the system mean it must work and won't require changing.

 

[munchiedude]

The idea behind the strategy I use came to me by first having an understanding of the basic technical tools & analysis techniques and combining this knowledge with observation of the markets. I simply saw things happen again and again, I made a note of them, backtested them and formulated a 'system'. The key components of the system were formulated on the futures markets. I knew my system would work very well before even approaching the forex market. I did a forward test purely to determine the best approach for trade management. The system continues to get better as I make further observations leading to a refinement of the strategy, but the fundamentals of the system mean it must work and won't require changing.

hi barramundi and thanks very much for sharing your thought processes behind how you formulate a system, it has certainly got a few cogs going in my mind.

i have a few questions i was wondering if you could elaborate on?

would you recommend any good sources to get an understanding of technical tools and analysis techniques that would help improve knowledge in this area? when you say "you saw things happen again and again" what exactly would you look for when observing the markets?

how many indicators, if any, would you aspire to using for identifying trade signals?

i'm very grateful for yours and everyones post so far, i'm aiming to re-define my strategy the next 2 weeks and start serious backtesting, on that note, do you advocate back/forward testing manually or designing a EA to automate this part and make the testing efficient?

look forward to hearing from you or anyone else's input, the community here is great and i hope to provide positive contribution to this as soon as i exit being a newbie! 🙂

thanks, once again!

 

[Barramundi]

You've done the Babypips school, which is a good start. Martin Pring has a good book titled Technical Analysis Explained and John Murphy's Technical Analysis of the Financial Markets is regarded as a classic. Personally, I read every book I could get my hands on in the public library system until I was learning nothing new from them anymore.

I do use two indicators, but for the better trades I know what the indicators are going to say anyway. After all, they are derived from price action which I am observing. They are useful to me in defining borderline trades as to whether or not I have a valid setup. Having clearly defined rules helps to minimise hesitation when action is required.

I do my testing manually. I scored 2% in computer science while scoring A's in other subjects so computer programming is not my forte! My system would also be difficult if not impossible to backtest automatically as I have guidelines about the levels I look to trade at, but the final decision in this regard is subjective. I look at each of a dozen pairs and evaluate whether they are trending steadily, trending but showing signs of reversing, range bound or 'don't know/erratic'. The levels and direction I would look to enter are dependent upon my view of what each pair is doing. Eg. if it's going sideways I'll look to sell the tops and buy the bottoms, if it's trending steadily I'll look to take advantage of that trend, but if it looks like reversing I'll go against it. If I am unsure I leave it alone. What the market is doing will also govern how I manage the position. The final entry decisions and timing are more automated and well defined, but they still vary measurably in quality. I have defined some minimum standards that they must meet.

Regarding my observations, I started with a rather mediocre system but observed, in time, differences between trades that worked and those that didn't. I wasn't necessarily looking for differences, I simply noticed them. Since then, there has been times when I've let trades go because they didn't quite meet my criteria, but I noticed they would have worked out. When I notice the same thing happening, tho I may not have been looking for it, I'll make a note and do some backtesting. In one case I discovered I'd been passing up trades that would have got me into a BE trade with the chance of it running in my direction, a staggering 93% of the time.

Hope this helps...

 

[munchiedude]

You've done the Babypips school, which is a good start. Martin Pring has a good book titled Technical Analysis Explained and John Murphy's Technical Analysis of the Financial Markets is regarded as a classic. Personally, I read every book I could get my hands on in the public library system until I was learning nothing new from them anymore.

I do use two indicators, but for the better trades I know what the indicators are going to say anyway. After all, they are derived from price action which I am observing. They are useful to me in defining borderline trades as to whether or not I have a valid setup. Having clearly defined rules helps to minimise hesitation when action is required.

I do my testing manually. I scored 2% in computer science while scoring A's in other subjects so computer programming is not my forte! My system would also be difficult if not impossible to backtest automatically as I have guidelines about the levels I look to trade at, but the final decision in this regard is subjective. I look at each of a dozen pairs and evaluate whether they are trending steadily, trending but showing signs of reversing, range bound or 'don't know/erratic'. The levels and direction I would look to enter are dependent upon my view of what each pair is doing. Eg. if it's going sideways I'll look to sell the tops and buy the bottoms, if it's trending steadily I'll look to take advantage of that trend, but if it looks like reversing I'll go against it. If I am unsure I leave it alone. What the market is doing will also govern how I manage the position. The final entry decisions and timing are more automated and well defined, but they still vary measurably in quality. I have defined some minimum standards that they must meet.

Regarding my observations, I started with a rather mediocre system but observed, in time, differences between trades that worked and those that didn't. I wasn't necessarily looking for differences, I simply noticed them. Since then, there has been times when I've let trades go because they didn't quite meet my criteria, but I noticed they would have worked out. When I notice the same thing happening, tho I may not have been looking for it, I'll make a note and do some backtesting. In one case I discovered I'd been passing up trades that would have got me into a BE trade with the chance of it running in my direction, a staggering 93% of the time.

Hope this helps...

thanks barramundi for your imput and advice. i've taken your approach and am now formulating a strategy based on a set of ground rules built up in my trading plan as to point of entry/exit and other parameters for identifying trends.

one interesting thing that has cropped up in my research is the mention of the Mcginley Dynamic indicator. have you or anyone here heard of it? it seems that noone has mentioned it on T2W when i did a search on it. Since i am looking to use an EMA/MACD/STOC set up and mcginley is deemed a more reliable derivation of SMA/EMA, this may work.

insofar as the thinking behind formulation, i have many ideas jumping around my head atm, but over the next 2 weeks i hope to begin manually backtesting the strategy and will update as it progresses.

if anyone has a different approach to strategy formulation, i would dearly love to hear it!

 

[Barramundi]

Hmm , I've never heard of the Mcginley Dynamic indicator, and I don't look at any MA in any of it's permutations. The MACD and Stoch are a great combo tho!

 

[munchiedude]

yeah, its 'famously' the most reliable indicator you've never heard of....! you can find some info here http://www.investopedia.com/articles/forex/09/mcginley-dynamic-indicator.asp if interested.

problem i have is converting indicators from MT4 to sharescope....its a pain these cross platform indicators!

 

[Barramundi]

yeah, its 'famously' the most reliable indicator you've never heard of....! you can find some info here http://www.investopedia.com/articles/forex/09/mcginley-dynamic-indicator.asp if interested.

problem i have is converting indicators from MT4 to sharescope....its a pain these cross platform indicators!

Had a read. IMO there are better ways to identify trends than with MAs. In any case, it isn't on my (Trading Station II) charts.
If you're looking to program in new indicators, there would be plenty who could do it for a fee, but as previously stated, I ain't the one to ask!
Best of luck boss...

 

[munchiedude]

thanks boss lol

i'm now using mt4 with dinapoli macd/stocs/mcginley set up for trending mkts and alligator/mcginley for ranging markets. i want to get trading station soon as their software looks awesome!

 

[Barramundi]

thanks boss lol

i'm now using mt4 with dinapoli macd/stocs/mcginley set up for trending mkts and alligator/mcginley for ranging markets. i want to get trading station soon as their software looks awesome!

It was the difficulty to read/display issues with the MACD on MT4 that swayed me to going with Trading Station II. I've been happy with that decision.

 

[tdrtw]

>> would appreciate any useful help/advice in this area

It appears you are very focussed on how to enter a trade, when it is of utmost important on how you exit the trade.

I posted the below up on another thread. It gives an overview of my own personal system. It may help you to devise your own system. My goal is to spend the least amount of time trading, and the most amount having fun and enjoying myself.

==============>

I thought I would give an overview of my system. It took me a while to settle into my system but it is founded off what works for me. I’ve had some help along the way from people who helped solidify my thinking and beliefs. But most importantly 3 books have been the foundation to my success (and none of them give you a trading system to use 🙂

Market Wizards – Jack Schwager
Trade Your Way To Financial Freedom – Van Tharp
Trading In The Zone – Mark Douglas

I believe it is important for someone to devise their own system and what works for them as opposed to trading someone elses off the shelf system (did that, and it didn’t work for me).

My belief is that pretty much most systems will have a positive expectancy over time that are founded on sound money management and respect for risk. I believe most people think success is based off the right magical system (aka something that is external to them). When in reality this is not the case, success is something that resides within us, and in most cases we end up self sabotaging ourselves and blame it on external things such as the system without addressing the real problem, ourselves and our beliefs. Look at any successful person – NONE of them do the same thing, they do their own thing. Which means success is based of the person, NOT what they do.

With that being said, what did I want out of a system? I wanted a simple entry that was visual. I am able to pull up a chart in the required time frame, and be able to instantly know whether I would have traded it and how without using any indicators or price manipulation. The Keep It Simple Stupid (KISS) principle.

Once in a trade I wanted an exit system that was automatic. I did not want to have to monitor trades once entered. This is where my biggest “ah moment” came when I read about website from someone that introduced me to “One Cancels All” grouping of trades. That really put me on the right path to an automated exit strategy. I was also introduced to the Futures Market, and I instantly gravitated to this and away from Stocks.

I wanted a day trading system. I liked closing out the trades by the end of day and updating my books so to speak. I liked the cleanliness of starting fresh each day, it gave me a mental seperation of the previous day to the current day. Prior to that I was trading a trend system I bought from someone. As much as I learnt from it (I didn’t make any money from it due following someone elses rules which didn’t suit me, I believed in the system but it wasn’t my own, I needed to own it for it to work). It could takes weeks for a trade to pan out, I wanted quicker results. In day trading it’s minutes or hours. That works better for me.

I also wanted a time frame for my entry. I didn’t want to have to spend all day trading or looking for trades.

With that being said, this is what I came down to.

When the market opens up, I give myself 30 minutes to find a trade. I use 5 strict patterns that are visually easy to see. If no pattern is found, I shut down and try again the next day. In general 1 of the 5 patterns is found about 50% of the time. So 50% of the time I find no trade and do not trade that contract that day (not trading is something to get used to, as it’s hard in the beginning to sit on the side lines, you always want to be in the action).

I follow the trend, I enter the market on STOP orders either Long or Short and only at a new High/Low for that day within the required 30 minute time frame.

Once in a position, my Stop Point (which drives my position size) is based off a visual from the chart. I always know my stop point BEFORE entering a position.

I use a fixed reward of 2 times my STOP amount. So if my stop amount is 40 cents from my entry on an Oil Contract, my profit point will be 80 cents from the entry.

Once entered into a position, I must now protect my position. 3 orders are necessary.

1) STOP order to keep my loss at my predefined amount
2) LIMIT order, which will be my profit taking point
3) MKT on close order. If my stop or limit order don’t trigger, I have an order set that triggers 1 minute before the market closes, and will sell immediately at MKT price.

These 3 orders are grouped together as an OCA group (One Cancels All). If either order fires, then the others are automatically cancelled or adjusted for a partial fill (happens once in a while on the LMT order if price just touches it and bounces off).

Once my 3 exit orders are in place, I can walk away, there is nothing left for me to do.

I risk 1% of capital per trade, and will trade upto 3 different contracts a day.

The system is now fully programmed and automatic with no human intervention necessary. It runs from a server in my house.

I do monitor it to make sure nothing bad happens. I have an application on my iPhone that allows me to remote connect to my server and keep an eye on it for safety. Take today for example, I was having breakfast at a café with a friend as the markets opened up. I glanced over at my phone twice just to make sure everything looked fine. Took me less than 5 seconds to do without having to mention what I was doing.

Over hundreds of trades, my win rate is 42.9% with a 2:1 risk:reward. Enough to stay ahead of the game with slippage and commisions. It is often that my profits for a whole month happen in 2 to 3 days. The rest of the month is just break even, win a bit here, lose a bit here, no trading this day etc…

That’s about it. Pretty simple really, and works for me. I hope this helps.