Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

JayC

Mechanical Systems

Recommended Posts

How long, generally, do you like to back test a trading system, to become confident? It seems the markets are always evolving and changing. Will a true mechanical trading system, work in all markets? Or do they constantly need tweeking?

 

Just wondering some of others' thoughts on this.

 

JC

Share this post


Link to post
Share on other sites
Guest Tresor

Backtest it for at least a 3 year period and then optimize when the equity curve starts to deteriorate.

 

Regards

Share this post


Link to post
Share on other sites
How long, generally, do you like to back test a trading system, to become confident? It seems the markets are always evolving and changing. Will a true mechanical trading system, work in all markets? Or do they constantly need tweeking?

 

Just wondering some of others' thoughts on this.

 

JC

Hi, when I was first attracted to trading I started with mechanical systems. Programming, backtesting, optimizing etc. Then I started trading live one of the systems I developed. It took me about one week to find out that this was not the way. I couldn't be confident with my system, no matter what results it showed in backtest, because I simply didn't understand the market. I think confidence comes from understanding, knowing why you are doing what you are doing. And then from testing. Some people are probably OK with testing only to be able to gain confidence, but that wasn't my case.

To your second question:

I don't think one system will work in all markets or market phases. Surely you will adapt your systems for different vehicles. Also there are ways of detection the phase of the market (sideways / trending) to some extent. There are also ways of detection of volatility. Hence you can make your system adaptive to some extent (so it is at least not losing much during an unfavorable phase). And to smooth your equity curve you can run more uncorrelated systems at the same time.

Share this post


Link to post
Share on other sites

Hi Head2K

 

Is it an automated system you're talking about or you sitting there executing the trades according to some signals printed at a chart? Day or intraday?

 

If your system needs optimizing you should discard it right away! You should however develop a system to a standard stock, i.e. high volume most of the time. Forget about sideways or trending, when you think like that you're allready starting to see problems instead of solutions. If a stock is moving sideways, it just mean no money or at least less money, your system should react to this!!

 

I don't think one system will work in all markets or market phases.

It is a loser coming to talk, allready preparing himself to get ripped of!! (Sorry, but you deserved that ;) )

 

Whats a system then? A system should certainly work under all market conditions, you've to build the the conditions into your system i.e. don't trade between the first hour, don't trade the last hour or if volume is lower than 40% of normal HALT system, 3 loses in a row in a choppy market HALT or change observation period/ view / whatever.

I don't think the markets are evolving, but I think the people are.... they enter, they trade, they get some experience, they get more experience, they go away of one reason or another.

Share this post


Link to post
Share on other sites

Many people don't realize what a system actually is before they sit down and try to program it. If you can't code it then you'll find yourself strugling with confusion. And that's why so many chooses the dicretionary approach, because a discretionary approach is flexible all the time :)

Share this post


Link to post
Share on other sites
Many people don't realize what a system actually is before they sit down and try to program it. If you can't code it then you'll find yourself strugling with confusion. And that's why so many chooses the dicretionary approach, because a discretionary approach is flexible all the time :)

 

I think you are confusing trading on the seat of your pants with real discretionary trading. That is why many traders fail with a discretionary approach because they think like you do that it is flexible all the time. This is simply not true. You still need a very rigid trading plan and rules even with a discretionary approach to have the best chance of success.

Share this post


Link to post
Share on other sites
Hi Head2K

 

Is it an automated system you're talking about or you sitting there executing the trades according to some signals printed at a chart? Day or intraday?

 

If your system needs optimizing you should discard it right away! You should however develop a system to a standard stock, i.e. high volume most of the time. Forget about sideways or trending, when you think like that you're allready starting to see problems instead of solutions. If a stock is moving sideways, it just mean no money or at least less money, your system should react to this!!

 

 

It is a loser coming to talk, allready preparing himself to get ripped of!! (Sorry, but you deserved that ;) )

 

Whats a system then? A system should certainly work under all market conditions, you've to build the the conditions into your system i.e. don't trade between the first hour, don't trade the last hour or if volume is lower than 40% of normal HALT system, 3 loses in a row in a choppy market HALT or change observation period/ view / whatever.

I don't think the markets are evolving, but I think the people are.... they enter, they trade, they get some experience, they get more experience, they go away of one reason or another.

 

The thread is about mechanical systems whether automated or not is kind of academic it could be automatic, broker executed, or self executed.

 

I wonder if you are actually talking about fully mechanical systems? as most of what you are saying is contrary to my experience. It's also contrary to what most systems designers, who also publish, write. Do you trade a mechanical system(s)? How long have they been working?

 

I am interested cause it sounds like you have discovered the holy grail if you have a system that can use the same entries for trend and consolidation that works in all market conditions under all levels of volatility and never needs tweaking or putting on the shelf for a while :D

Share this post


Link to post
Share on other sites

As I understood it he is talking about something I would call a compiled system, which is basically a system that includes different signals for different market conditions. Could be understood as a bunch of standalone systems running together. I guess it depends on what one means by "system" - if it is one setup bound with certain criteria, or a whole trading strategy.

Share this post


Link to post
Share on other sites
As I understood it he is talking about something I would call a compiled system, which is basically a system that includes different signals for different market conditions. Could be understood as a bunch of standalone systems running together. I guess it depends on what one means by "system" - if it is one setup bound with certain criteria, or a whole trading strategy.

 

Yes that occurred to me H2K. Interested to hear more :)

Share this post


Link to post
Share on other sites

A real eye opening experience is to program a system and optimize on things you know are completely bogus and random.

A system that only buys at 10:16 on a tuesday..if you use even the slightest bit of money management to have bigger winners than losers its not that hard to find a "profitable system" like this with an "edge".

The problem is the system has no edge, its just data snooping bias and purely random.

Even win rate has a ton of randomness in it.

Here is a system: long SPY at 10:00am everyday for the last 2 months, stop at 1/2 ATR and target at a full ATR..

89% win rate but it loses .13% before commisions..

To me the point is, with historical backtesting you simply can not know if you are exploiting a fundamental behaviour of the market or if you have simply found some good looking random patterns in your data...Even then with walk forward testing, there is nothing to say your are simply not getting lucky, especially since if you walk forward for 2 months and get great results you will probly have alot of false confidence in the system.

I do agree that I don't get why anyone uses optimized parameters in a system..

Currently, I simply see no way around using a monte carlo simulation. At least then you have a control to test against as far as purely random behaviour is concerned.

Not to mention that to me the retail algo literature focuses far too much on the entry with trade management and the exit an after thought.

Share this post


Link to post
Share on other sites

I do agree that I don't get why anyone uses optimized parameters in a system..

 

Everything you said can equally apply to a discretionary system. So what? If you are live trading your system and making money, just be aware that at some time in the future it may stop working. How will you know? Look at your equity curve and treat it like a price curve. Stop trading it when it is trending down and wait for it to turn back up gain, or set a new high or higher high.

 

One of the big advantages to computer generated trading is the automatic record keep and statistics maintained (in my case by TradeStation). And I know that having just one (type of) system forme is not helpful.

 

In my case, I have a breakout system, a pullback system and a consolidation system. They all work - some times better than others but on average work more consistently than just 1 by itself.

 

Be sure to reduce size. Trade small. Build an edge and consistency on a daily basis.

Share this post


Link to post
Share on other sites
Everything you said can equally apply to a discretionary system. So what?

 

Well I'm not sure what you mean. I mean if you look at discretionary trading from an algo standpoint, the discretionary trader is basically forward testing and optimizing the most powerfull neural network software ever devised..

That is vastly different than if your optimizer tells you to use a 21.22 and 51.054 moving average because its slightly more profitable than a 20 and 50 moving average.

From trying to get into auto trading, I feel that at the retail level we are still stuck in the 90s while there have been huge advances in auto trading in the last 10-15 years. I totally agree with your multi strategy statement, our software should open up to a page that shows the portfolio of strategies and how they interact against real market data and purely random data. Instead we get alot of point and click strategy wizards and useless indicator optimizations.

This sounds like an interesting new book on the subject but I had been waiting for someone to post a review which someone did yesterday. Probly worth checking out as far as stuff "filtering down" to our level.

http://www.amazon.com/Quantitative-Trading-Build-Algorithmic-Business/dp/0470284889/ref=sr_1_1?ie=UTF8&s=books&qid=1220109693&sr=1-1

Share this post


Link to post
Share on other sites
Well I'm not sure what you mean. I mean if you look at discretionary trading from an algo standpoint, the discretionary trader is basically forward testing and optimizing the most powerfull neural network software ever devised..

Yes I can agree what that, but only to a certain degree. The human brain is also very complicated and even small insignificant things can affect the outcome in a negative way! Consistency is needed :)

 

That is vastly different than if your optimizer tells you to use a 21.22 and 51.054 moving average because its slightly more profitable than a 20 and 50 moving average.

No one should ever built a system that need that kind of optimizing, I think the main reason for this confusement is that the majority of new players at the market are overwhelming these times.

 

From trying to get into auto trading, I feel that at the retail level we are still stuck in the 90s while there have been huge advances in auto trading in the last 10-15 years. I totally agree with your multi strategy statement, our software should open up to a page that shows the portfolio of strategies and how they interact against real market data and purely random data. Instead we get alot of point and click strategy wizards and useless indicator optimizations.

The Market isn't random :cool: so why should one ever concentrate on building something at a unrealistic background, besides it would be fun :o

But I agree with you :)

Share this post


Link to post
Share on other sites
To me the point is, with historical backtesting you simply can not know if you are exploiting a fundamental behaviour of the market or if you have simply found some good looking random patterns in your data...Even then with walk forward testing, there is nothing to say your are simply not getting lucky, especially since if you walk forward for 2 months and get great results you will probly have alot of false confidence in the system.

I do agree that I don't get why anyone uses optimized parameters in a system..

Currently, I simply see no way around using a monte carlo simulation. At least then you have a control to test against as far as purely random behaviour is concerned.

Not to mention that to me the retail algo literature focuses far too much on the entry with trade management and the exit an after thought.

When done properly, back tests can be very useful for developing trading systems. As you said, though, consideration must be given to doing more than simply running strategies against a batch of data. You mentioned three such additional factors maybe worth pondering: Monte Carlo simulations; parameter optimization; and, money/risk management.

 

In regard to the original questions, my individual strategies are initially evaluated against at least 250 bars of data (I am an EOD trader).

Share this post


Link to post
Share on other sites

One of the biggest advantages I have received from spending the year of development effort devising a winning stragey or 2, is the understanding of what it takes to be a winner in the market. You can get this by discovering what money management rules work , and which ones do not.

 

Then - should you decide to take some discretionary trades - you are in a much better position to win over time by following the rules which have proven merit from your backtesting.

 

Case in point: I used to think it was profitable to scale out of trades with as little as 10 ticks on the YM (4 on the ES) and try to hold onto a 2nd position. I now realize that trying to scalp the market is ultimately a losing proposition.

 

Cut down you trade frequency - get into a trend and trail your stop a long way behind the market. You need to take a profit at least 2 x your stop size to be a long term winner.

Share this post


Link to post
Share on other sites
Cut down you trade frequency - get into a trend and trail your stop a long way behind the market. You need to take a profit at least 2 x your stop size to be a long term winner.

 

I don't agree with this statement. Just looking at risk:reward, is looking at only half of the equation. The higher your accuracy, the less your risk:reward needs to be to be profitable and visa versa. You need to look at expectancy and not just risk:reward.

Share this post


Link to post
Share on other sites

What I mean is that while optimizing money management parameters for my automated (mechanical) systems, I learned that, especially if you are scaling out of a position, it is the last part of the position which provides the major portion of the account eequity growth.

 

Staying in the move is essential to build up the value of the Average Winning Trade.

 

This was not what I expected when I first seriously tried to develop automated strategies. And it was only after I gave up trying to take 10 points of profit for the 1st contract in the YM (as an example) and held for longer gains (34 ticks on the 1st half) - and then left my stop at breakeven while the 2nd position runs for as long as possible that the strategies really began to have a tradeable edge.

Share this post


Link to post
Share on other sites

Hi every one

 

Can you imagine that somebody has developed a mechanical system that works

and he is prepare to sell it for a few $$$$?Come on guys,we know these kind of systems are for people who don't have a bloody idea about trading and they are prepare to part of their money.The best system is learn to SEE the chart

with no systems and no indicators.Then you will make some $$.Why am I say all these?Because I never heard anybody to be successful using systems of that nature.

Share this post


Link to post
Share on other sites
Guest mifgjkar

Is it an automated system you're talking about or you sitting there executing the trades according to some signals printed at a chart? Day or intraday?

Share this post


Link to post
Share on other sites
The best system is learn to SEE the chart

with no systems and no indicators.Then you will make some $$.Why am I say all these?Because I never heard anybody to be successful using systems of that nature.

It's been awhile since I read Marty Schwartz's book (Pit Bull), and so may not correctly remember certain details. If my somewhat faded memories are reasonably accurate, Marty earned 25% compounded monthly returns using -- among other tools -- moving averages, stochastics and Terry Laundry's Magic T indicator for his trades.

 

Discussions of this nature sometimes get hung up on definitional disputes about "system" and "indicator". As a guess, it's the term "mechanical" that is causing some people to have mental heartburn. To offer one perspective in that regard, my trading did not become consistently profitable until I began developing and trading mechanical systems, possibly because it afforded me a more structured environment.

Share this post


Link to post
Share on other sites

Currently I am using a mechanical system. What is does is generate a buy or sell signal, and I chose when or if to enter into a trade. Since I have not taken that last step (left it to place the trades for me) then I think it falls under the heading of mechanical. Would a rule based indicator trade signal that the trader would enter into at their discretion be the same thing?

 

If it were totally automated, then it would fire the signal and place the trade for me.

 

The auto scalper system (that's what we call it) is currently about 85%. Its a scalper, so the targets are close - 1, 1.25, 1.75 points on the S&P. I don't trade 3 contracts with it, so for me its a true scalper - 1 point all in all out. The stop is 2.5 points, but in the back testing stats, 85% average negated the occasional full stop out. What's unique is that if it starts to move against you, you can get out before a full stop out (which I often do) and so keep it the stops to about 2 points.

 

It's not my system, but so far it has performed extremely well in real market trading.

 

There are a few real market tested systems out there that have performed well consistently, and I have read about them in Futures Truth magazine. The BWT Zones is the main one that comes to mind. It is still in use today.

 

I am discovering (in my research) that the best automated systems are NOT for sale. They are leased, and run either through strategy runner or some other automatic trade entry software at the broker's host site, and the cost is x amount per contract traded.

Edited by edabreu
Add more thoughts

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • Date: 29th March 2024. GBPUSD Analysis: The Pound Trades Higher But For How Long? The global Stocks Markets are closed due to Easter Friday (Good Friday). The NASDAQ continued to follow the sideways trend while other indices again rose. The SNP500 reaches an all-time high, but the NASDAQ remains under pressure from Tesla, Meta and Apple. The Euro continues to trade lower against all major currencies including the US Dollar, Euro and Japanese Yen. The British Pound is the best performing currency during this morning’s Asian session. However, investors are largely fixing their attention on this afternoon’s Core PCE Price Index. GBPUSD – The Pound Trades Higher but For How Long? The GBPUSD is slightly higher than the day’s open and is primary due to the Pound’s strong performance. At the moment, the British Pound is increasing in value against all major currencies. However, the US Dollar Index is also trading 0.10% higher and for this reason there is a slight conflict here. If investors wish to avoid this conflict, the EURUSD is a better option. This is because, the Euro depreciating against the whole currency market avoiding the “tug-of-war” scenario. The GBPUSD is trading slightly lower than the 2-month’s average price and is trading at 49.10 on the RSI. For this reason, the price of the exchange is at a “neutral” level and is signalling neither a buy nor a sell. The day’s price action and future signals are possibly likely to be triggered by this afternoon’s Core PCE Price Index. Analysts expect the Core PCE Price Index to read 0.3% which is slightly lower than the previous month but will result in the annual figure remaining at 2.85%. The PCE rate is different to the inflation rate and the Fed aims for a rate between 1.5% to 2.00%. Therefore, even if the annual rate remains at 2.85%, as analysts expect, it would be too high for the Fed. If the rate increases, even if only slightly, the US Dollar can again renew bullish momentum and the stock market can come under pressure. This includes the SNP500. Investors are focused on the publication of data on the UK’s gross domestic product (GDP) for the last quarter of 2023: the quarterly figures decreased by 0.3%, and 0.2% over the past 12-months. This confirms the state of a shallow recession and the need for stimulation. The data, combined with a cooling labor market and a steady decline in inflation, increase the likelihood that the Bank of England will soon begin interest rate cuts. In the latest meeting the Bank of England representatives did not see any members vote for a hike. USA500 – The SNP500 Rises to New Highs, But Cannot Hold Onto Gains! The price of the SNP500 rises to an all-time high, before correcting 0.33% and ending the day slightly lower than the open price. Nonetheless, the index performs better than the NASDAQ which came under pressure from Tesla, Meta and Apple which hold a higher weight compared to the SNP500. For the SNP500, these 3 stocks hold a weight of 9.25%, whereas the 3 stocks make up 14.63% of the NASDAQ. The SNP500 is also supported by ExxonMobil’s gains due to higher energy prices. The market will remain closed on Friday due to Easter. However, the market will reopen on Monday for the US and investors can expect high volatility. Investors will also need to take into consideration how the PCE Price Index and the changed value of the US Dollar is likely to affect the stock market next week. Always trade with strict risk management. Your capital is the single most important aspect of your trading business. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HFM Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Michalis Efthymiou Market Analyst HFMarkets Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • MT4 is good and will be good until their parent company keep updating the software, later mt4 users will have to switch to mt5.
    • $SOUN SoundHound AI stock at 5.91 support area , see https://stockconsultant.com/?SOUN
    • $ELEV Elevation Oncology stock bull flag breakout watch , see https://stockconsultant.com/?ELEV
    • $AVDX AvidXchange stock narrow range breakout watch above 13.32 , see https://stockconsultant.com/?AVDX
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.