Making a 2+2 trading system

[eastbay]

[ QUOTE ]
Kimichi,

Nice post covering alot aspects of TA...but there is NO magic bullet foolproof sytstem that will conquer the markets.....period.

This is what makes the best traders in the world what they are...they have the talent/discipline/split second ability making qualities needed to be flexible in their decisions,and not being tied into a numbers specific system or program.


[/ QUOTE ]

Tell it to Jim Simons and his crew. He is on the record as saying they never override their automated systems.

eastbay

[Ps3tn0NcYk]

Start at a base system first.

3. Daily
4. Equity Index (to smooth for unexpected exogenous events)
5. Trade set up is the money engine obv
Start simple and expand from there
6,7,8,9 are all subsets of 5 imo
10. Rigorous back testing is a good idea
11. If you plan on writing a book, i guess

[kimchi]

[ QUOTE ]

4. Equity Index (to smooth for unexpected exogenous events)

[/ QUOTE ]
Stops can protect against nasty surprises and if I trade a volatile stock which regularly gaps overnight, then I have the option to use guaranteed stops.

My bias (illusion) is that any market can be traded in a simlar way, but I'm leaning towards liquid midcap equities with little or no dividends (dividends screw up my simple models). However, I'm planning on trading shorter term than I have previously and a quick eyeball at my broker's FTSE ex-350 quotes (ie somewhere between FTSE AIM and 250) shows spreads approaching 0.5% which may be too much like paddling upstream. I haven't checked other markets' small cap spreads but I imagine they're at best the same.

The upward bias in stocks however (and the limit on the amount a market can fall), has made trading from the short side significantly less EV than the long side during previous backtests.

I think following highly liquid, highly traded markets like some commodities, forex, DJIA puts you up against the high stakes pros:


from the above Simons article:
[ QUOTE ]
As the selloffs in July and August showed, many quant funds are chasing the same investments. For example, as of June, Renaissance and rival AQR Capital Management LLC had four of the same top 10 stock holdings: Johnson & Johnson, Lockheed Martin Corp., International Business Machines Corp. and Chevron Corp.

[/ QUOTE ]

These guys have to trade the same big markets as their position sizing limits their scope. The little guy with his piddly little account (me) can skip around these guys without worrying about slippage, but can probably also do so on relatively illiquid and less followed (less efficient?) markets.

[ QUOTE ]

5. Trade set up is the money engine obv
Start simple and expand from there
6,7,8,9 are all subsets of 5 imo


[/ QUOTE ]

I'm wondering why you think so. I believe money management is the most important part of a system as your edge is worthless if you bust out. Exits are also more important than entries as they define your initial risks and your profits.

It's evident from many threads on these boards that most people concentrate on entries. "When do I sell GOOG" suggests the investor bought without clearly defined exit criteria. He might have made a perfectly timed elegant entry, but appear not to have considered the exit. It's so easy to allow a winner to turn into a loser, or to prevent a small winner turning into a big winner without proper exits.

I think all the above points (1-11) are related, but need to be considered individually to meet whatever objectives are decided upon in #2

[mak15]

i think talking about points 2-11 is kind of pointless until you/we figure out point 1.

i'm quite interested in following such a project and possibly contributing and even putting some money into the market if we actually devise a decent system, but discussing exit points and money management seems silly when we havn't even begun figuring out an edge.

[RockyElsom]

What security would this hypothetically trade?

[Ps3tn0NcYk]

[ QUOTE ]

I'm wondering why you think so. I believe money management is the most important part of a system as your edge is worthless if you bust out. Exits are also more important than entries as they define your initial risks and your profits.

It's evident from many threads on these boards that most people concentrate on entries. "When do I sell GOOG" suggests the investor bought without clearly defined exit criteria. He might have made a perfectly timed elegant entry, but appear not to have considered the exit. It's so easy to allow a winner to turn into a loser, or to prevent a small winner turning into a big winner without proper exits.


[/ QUOTE ]

In short term trading entries and exits points are all you have- so we are agreeing here. The points sit at the center of a trading system. Specific price zones will define the risk of a particular trade- which is equally important.

Probably most important is stress testing a system for situations that might lead to a total blow-up of the account capital. The equivalent of a "major leak" in poker.

I always ask "how much can I lose" or "where am I going to sell and take a loss" before assessing the potential for upside opportunity. A randomly picked backroll number -- ie "$5000" -- is not a target or a stop loss because it runs the risk of being determined by your personal financial situation rather than the specific influences impacting the direction of the trade. One ought to size positions in a fashion where bankroll never faces a crippling loss with one trade.

But risk management is irrelevant in the absence of the logic layer that determines when one enters and exits a trade.

[kimchi]

I decided to think about my objectives first, since until I make some kind of inventory, I won’t really have any guidelines on what I want from this exercise. What is it I want to achieve? I think this is pretty much mostly a personal issue, but I’ll make a few generalisations about my own situation as it relates to the mechanics of using a trading system.

I’ll have available the equivalent of $25,000 for this particular system. I have stable money tied up elsewhere but while it isn’t money I can really afford to lose, I won’t top myself if I did. I think this is a reasonable amount so that it is meaningful and I’ll be able to practice decent position sizing using most of the instruments I intend to trade.

I have an income and don’t need profits from trading. If I take this system live, then I hope to have more than $22500 after 1 year in this account. I think it is reasonable to assume I might not make any money (at least in the first year) but my initial profit objectives are actually to limit my losses to less than an average 1% per month over the course of a year. People might flame me for this, but it is not easy losing this little while learning to actively trade. Unless you’ve never tried actively trading, or your name is Timothy Sykes, you’ll know what I mean.

Attainable objectives, baby!

I work during the day but have enough free time. I want to trade using EOD data, but may only be able to adjust (guaranteed) stops during trading hours. I currently live in Asia, so the easiest markets for me to trade would trade during European business hours (GMT 0 - +2) so I can enter orders before the open and adjust them before, or close to the close.

I have a little more time to devote to this system than others. One of my systems involves spending 5-10 minutes per day checking some prices. The medium term system takes a little longer, plus some time to prepare a trade if there’s one available or being managed. I expect to spend a few hours each night managing this system and record keeping depending upon how many markets I can trade, or how often signals are issued.

I need to learn more about statistics as related to trading so I can properly analyse results. (if anybody gas a recommended book/website then let me know).

I also need to learn to program some backtesting software. The entries, exits, and position sizing I use is simple yet still difficult to program (for me) into various backtesting software. I've previously done all testing in Excel and while it allows you to become more intimately aware of your systems behaviour, it takes a [censored] long time.

I’m not going into detail about my personal finances or experience except to say I’m not flush and have limited experience and reasonable success (ie-haven't busted yet!) trading. Follow me to stockmarket rags, SHOE.

[kimchi]

Also, if people are interested and want to contribute/flame - please keep responses in the relevant sub-threads.

ie-this subthread is titled 'objectives'

[hapaboii]

Interesting read on Simons that was on berg the other day. Here's just a few parts of it.

By Richard Teitelbaum
Nov. 27 (Bloomberg) -- On a hot afternoon in September,
Renaissance Technologies LLC founder Jim Simons is too busy to take a phone call. It is, he says, from Cumrun Vafa, a
preeminent Harvard University professor and expert on string
theory, which describes the building blocks of the universe as extended one-dimensional filaments.
``Get another time when I can talk to him,'' Simons tells
his assistant. Then he mentions that the next day, he'll be meeting with Thomas Insel, director of the National Institute of Mental Health, to discuss autism research. And he's slated that Saturday to host a gala honoring Math for America, or MFA, a four-year-old nonprofit he started that provides stipends to New York City math teachers.
``I'm undoubtedly involved in too many things at the same
time,'' Simons says in his 35th-floor office in midtown
Manhattan. ``But you make your life interesting.''
String theory, autism, math education: It's fair to ask how Simons, 69, manages his day job overseeing the world's biggest hedge fund firm. The answer, judging from the numbers, is very well.
Renaissance is on fire: Its Medallion Fund -- which uses computers and trading algorithms to invest in world markets -- returned more than 50 percent in the first three quarters of 2007. It had about $6 billion in assets as of July 1.
Simons registered that performance as subprime and related markets were collapsing, sending two mortgage-related hedge funds run by Bear Stearns Cos. into bankruptcy. The turmoil pummeled the Goldman Sachs Global Alpha Fund, a rival to Renaissance's funds, which fell more than 25 percent during the same time. Morgan Stanley's computer jockeys lost $390 million in a single day in early August.


Doubling Assets

Along with routine personnel and marketing tasks, Simons takes time for the researchers and programmers who stop by his office to discuss mathematical and statistical issues they've encountered as they work on new trading strategies.
More than 200 employees, of whom about a third have Ph.D.s,
work in East Setauket. Another 100 are based in Manhattan, San
Francisco, London and Milan. ``He creates an environment where
it's easy to be creative and works hard to keep the [censored]
level to a minimum,'' says former managing director Robert Frey,
who worked at Renaissance from 1992 to 2004.
Even without the new commodities fund, Renaissance's assets have more than doubled in a year from about $16 billion on Sept. 30, 2006. That growth has catapulted Renaissance past such titans as Daniel Och's Och-Ziff Capital Management Group LLC, Ray Dalio's Bridgewater Associates Inc. and David Shaw's D.E. Shaw & Co. to become the world's largest hedge fund manager, according to data compiled by Hedge Fund Research Inc. and Bloomberg.

Leaving Academia

In 1977, frustrated with a math problem and eager for
change, he abandoned academia to start what would become
Renaissance, hiring professors, code breakers and statistically minded scientists and engineers who'd worked in astrophysics, language recognition theory and computer programming.
``All the quants in the world are trying to follow in Jim's footsteps because what he's built at Renaissance is truly extraordinary,'' says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering and chief scientific officer of quant hedge fund firm AlphaSimplexGroup LLC. ``I and many others look up to him as a tremendous
role model.''
The tendency for fund managers to try to emulate Simons may become more curse than blessing in the years ahead. As the selloffs in July and August showed, many quant funds are chasing the same investments. For example, as of June, Renaissance and rival AQR Capital Management LLC had four of the same top 10 stock holdings: Johnson & Johnson, Lockheed Martin Corp., International Business Machines Corp. and Chevron Corp.

Wise-Cracking

Renaissance is under increasing pressure to stay ahead of the pack -- and to keep its secrets under wraps. Save current employees and a few former ones, nobody knows precisely how the firm makes its millions. Medallion stopped taking new money from outside investors in 1993 and returned pretty much the last of their capital 12 years later. Today, the fund is run almost exclusively for the benefit of Renaissance staff.
The wise-cracking Simons himself is mum on virtually all of its details. What can he say about Medallion's trading strategy?
``Not much,'' Simons says with a chortle, and then takes a drag on one of the Merit cigarettes he often smokes.
What kind of instruments does it trade?
``Everything.''
How many different strategies does it use?
``A lot.''
Simons says his Ph.D.s laugh when they read the far-fetched theories about what their fund might be doing. One chat room participant speculated that Renaissance uses audio hookups to futures exchanges and analyzes the noise from the pits with voice-recognition software.

[chisness]

I just read that before I saw this post. Since this is 2+2, also:

"At MIT, Simons worked hard and played hard -- mostly late- night poker."

and link: http://www.bloomberg.com/apps/news?p...efer=exclusive