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Old 11-28-2007, 03:30 AM
kimchi kimchi is offline
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Join Date: May 2006
Location: FU minbet
Posts: 1,246
Default Making a 2+2 trading system

NOTE: ahnuld: If you think I should just get a blog, then lock this and I’ll move on. Also, the main piece of advice I’ll give is for people not to follow my advice, but just consider it with reference to your own situation and try and test anything of interest yourself…... Then you can only blame yourself when you bust your wad.

I’d like to develop and implement a new trading strategy on this forum. There are regulars here who are much more qualified than me to do this, but I thought the process might be useful for others to watch and help me.. Besides, it’s something that must be done by me eventually anyway. The system will be mechanical in nature and probably non-discretionary, so I won’t be considering fundamental analysis (I suspect 90% of you will stop reading here). You can call it TA, but I won’t be using any classical chart-reading or Japanese candlestick techniques here as I’m still practicing those disciplines. Most of this will be relevant to anyone trading anything; whether by FA, TA, tea-leaves, solar flares, lunar cycles, or the Stu Ungar Method. I will be using some very familiar indicators and hope to look for an edge primarily from my exits and bet-sizing, and using the indicators to help maintain discipline and quantify prices beyond the noise. For the record, I believe using indicators is inferior to price alone since indicators are a derivative from price. Some are a derivative of a derivative (eg- MACD, TMA) and the further you depart from the price, the further you depart from the reality of the market.

I currently trade 2 systems. One is long-term (months/years) and the other is medium term (weeks/months). Both have had mixed but reasonable results and are by no means magic bullets, but they have met my (modest) objectives. I have a little more time on my hands, so I thought I’d try to make a shorter term strategy (days/weeks). Provided I trade each system on different markets I should be able to improve my overall risk/reward as the above 2 systems are quite different in nature, and hopefully this 3rd one will be to. Posting live trades for these 2 systems would be like watching paint dry for most people, but maybe daily positions (or at least market orders) might spark an interest amongst you gambooolers. I have neither the time, ability nor inclination to daytrade. I would probably have a better edge at an Absolute Poker blackjack table than being sat in front of screens full of 100s of blinking red and green arrows (aka-the world’s biggest slot machine).

I suggest the trading plan be written something like this: (and each section can be discussed/flamed in a separate sub-thread)

1. Introduction – finding a concept or an exploitable edge.
2. Objectives – I believe developing a trading system is like making your own clothes. I may feel good and look fantastic in purple and green jeans, but they may not be suitable for you.
3. Timeframe – tick by tick, hour by hour daytrading, EOD, weekly charts?
4. market(s) and trading vehicle - Commodities, forex,, stocks? Also, am I going to trade equities, futures, spread-trading, fruit & vege, CFDs,?
5. Trade set-up – What conditions need to be present before I place an order? This might involve various trade filters.
6. Entry – How, where, and why am I going to enter the market?
7. Exit – How, where, and why am I going to exit the market?
8. Stops – buy limit, stop-loss, GTC, GTS, OCO etc. How am I going to use stops to enter/exit the trade and protect capital/take profits?
9. Money management – Know how much to bet, pyramiding, ‘bankroll’ management. Experiment (play) with the Kelly Criterion. This section will probably overlap #7
10. Understanding my system’s performance – This will include back-testing, forward testing and paper trading and is very time consuming and difficult (for me). I need to know how my system will behave under various conditions, what the expected profits/losses are (EV), risk/reward, std.dev, sharpe, opportunity factor, blah blah. It is very important to be able to psychologically whether drawdowns knowing you still have an edge. (aka, my current 500BB downswing – FU MINBET)
11. Further concepts such as contingency planning, record keeping/reviewing.

All the above things need to be defined and considered before any trade is taken.

I will try and address some of the concepts discussed, but hopefully just keep to the bare details. I’m sure others here could do a better job than me explaining the intricacies and reasoning behind the various aspects of system development.

I have lots of ideas for systems and get more every time I stand and think in the shower. I’ll start by suggesting a basic concept around which a strategy can be developed. I don’t claim to have any specialist knowledge and I’m not planning to re-invent the wheel, but I will be developing something from the ground-up that I will be trading live (if it seems to work). Bear in mind this could all end in abysmal failure (happened many times), or I could find something that works well (happened a few times). Also, many of the above points may have to be re-visited as new information/data/discoveries/realities come to light.

It is my opinion that money management exits, and psychology are the most important parts to any trading system. Psychology however is not really in the scope of this trading plan and there are some excellent texts available on the subject.

Please leave any comments, ideas or suggestions before we get started.
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