Implementing Successful Systems Part 1: The Anatomy of a TradeCycle

[4EverMaAT 10]

Have you ever wondered how it is possible to be completely objective with all of your trading decisions? If you only trade occasionally or as a hobby, then it may not ever occur to you to write down or formulate your trading methods. If you are or planning to trade with real money either for yourself or professionally for someone else, maximum levels of accountability and integrity to explain how the profits will be made are desired. Let me be more blunt: You cannot expect to make any type of consistent profits betting on a few lucky trades from some blackbox.

 

There are certain fundamental processes or functionality in any system. By fundamental, I mean 'core', 'primary', or basic components or processes such that, if you remove or disable any one of these cores, the system will not function properly. There are also secondary or auxiliary components that are nice to have, but are not necessary for the systems intended purpose. These are usually cosmetic or preferential in nature. Take a car for example. One of its primary functions are to take you from point a to point b. If you remove the radiator system from the engine compartment, can the car still function to serve its primary purpose? With no method to cool the engine properly, it will quickly overheat and make the car inoperable. What if you removed the radio? The drive may be boring, but the primary function of the car may still be sustained.

 

It is important that you make this clear distinction between primary and secondary functions when designing or evaluating a trading system that is built to make profits. You want to ensure the primary components, working together in its designed flow, will produce the advertised or projected profits. Likewise, when one of the primary components fails, you can pinpoint the point of failure and apply the appropriate workaround. Too many traders choose to have their attention focused on secondary functionality, and many more charlatan system vendors exploit this. Some examples of secondary functionality may be chart/indicator color, trades 'win' %, worrying about scalping capability, and perhaps the worst lagging indicator of all: popularity :crap:. (this deserves further commentary in an upcoming thread)

 

A complete trading system has to have at a minimum:

1) an ability to determine satisfactory condition(s) exactly when to/not to enter the market. (collectively known as an entry signal or alert)

2) Actual entry or entries of trades into the market related to the signal generated in step 1.

3) an ability to determine satisfactory condition(s) exactly when to/not to exit the trades made in step 2. from the market. (collectively known as an exit 'signal' or alert)

4) Actual exit(s) of trades generated in step 2 from the market, based on exit signal from step 3.

 

Steps 1-4 above in sequence is what I call a tradecycle. A tradecycle could technically be applied to managing individual trades, each having its own independent tradecycle running simultaneously, trading the same or different instruments. I have found tradecycling is much more effective when applied to 1 or more trades of the same instrument in series (like a basket). You could still trade several different instruments in their own tradecycle, and preferably in their own account.

 

I use a combination of trend detection with non-lagging indicator, reverse entries (counter-trend) in a grid formation, and a closeAll exit strategy when net profits have been obtained. In this way, steps 3 and 4 are combined. Although not part of the tradecycle, a new step emerges: repeat as many times as possible:cool:. When you have a mechanical system, it is desirable to maximize repetitions (not to be confused with aggression) . The maximum profitability is derived by maximizing the number of tradecycles. So then we start talking about automation, dedicated servers, etc (another topic for another day).

 

This is easier to understand when you can see it visually. The screenshot shows a few tradecycles with a breakdown of each step. The grid was set to 0.2 lots sizes each, 2 pips apart from the initial trade. These were actual trades done on a live demo account. Live real money accounts have traded the same way (better in a few cases) with the same settings.

 

I have to see the reaction to this article before i figure out what part 2 will be about. I'm thinking more details about why tradecycling is the best approach for mechanical trading, the worst case scenarios (risk management), etc. I do hope that more people are aware that trading does not have to be difficult or mystical. Buying and selling mediums may change, but the core motivations of what drives people to agree on a contract (and a price) are always the same. At least no one can say they haven't been given a specific method to get started

 

Additional note: the indicator used is a custom, non-lagging trend detection indicator known as the Awesome Price Action Move Indicator [separate thread sometime soon....will be released free] But you could use something as simple as a moving average crossover or a coin toss trend filter if you wanted. As long as the filter is consistently applied.