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  #1  
Old 11-28-2007, 03:30 AM
kimchi kimchi is offline
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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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  #2  
Old 11-28-2007, 04:17 AM
CallMeIshmael CallMeIshmael is offline
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Default Re: Making a 2+2 trading system

I wouldnt be able to add much/anything in terms of market knowledge, but if you want some programming/math guys, Id be interested in the experience.
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  #3  
Old 11-28-2007, 05:10 AM
NickNick NickNick is offline
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Default Re: Making a 2+2 trading system

Sounds like a good plan.

I doubt I'll be able to add anything constructive as I'm really just learning at the moment, but will chip in if I think it'd be helpful1!

I'd ideally like to see something developed for Forex, as this is probably the most accessible market - I am currently learning trading 0.01 lots, so can buy/sell as lttle as $1000 at a time. Would it be suitable for any pair or for a certain one?

If there is any testing you'd like me to do, just let me know!
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  #4  
Old 11-28-2007, 11:56 AM
eastbay eastbay is offline
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Default Re: Making a 2+2 trading system

Aside: I never understood the idea of "forward testing". It is just the slowest possible way to do backtesting: later.

eastbay
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  #5  
Old 11-28-2007, 01:16 PM
stephenNUTS stephenNUTS is offline
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Default Re: Making a 2+2 trading system

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.Their money management disciplines are uncanny as well

All the things you covered are GREAT tools in becoming/enhancing a traders chance of success....but the HUMAN element is what separates the great ones from the one hit wonders

Go ask the quant geeks with thier phd's in math,what happened during this recent market meltdown with their recent exposure to the CDO instruments tied to the sub-prime disaster?

They majority of these 'fool proof' long/short HIGHLY levered hedged vehicle "traders"....lol.... all scratched their heads saying ... what just happened?

"But we WERE UP almost 30% for the year ,and are now we are down 60%" .....as they had NO idea of a liquidation exit plan,with many of these so called quant programs crowding the trade.Many of them will now be looking for a new job to boot,or just leave WS.I cant tell you how many of thse ideas/programs eventually BLOW UP over the years

I am still in LV now...,as I have stated before ,I am going to start a thread about trading/investing when I return home,that covers ALL of the traits IMHO needed to be a successfull trader/investor(esp. the human/physcological importance of the markets)...not just some mathamatical theoried program ,that might work on paper for a short time frame.....when eventually "mr. market" decides to rear its ugly head and teaches this new system of the week a lesson as well

Sorry to say guys...I only wished it was that easy for ALL of us

TTYL,
Stephen [img]/images/graemlins/cool.gif[/img]
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  #6  
Old 11-28-2007, 01:52 PM
eastbay eastbay is offline
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Default Re: Making a 2+2 trading system

[ 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
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  #7  
Old 11-28-2007, 05:35 PM
Ps3tn0NcYk Ps3tn0NcYk is offline
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Default Re: Making a 2+2 trading system

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
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  #8  
Old 11-28-2007, 06:38 PM
hapaboii hapaboii is offline
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Default Re: Making a 2+2 trading system

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.
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  #9  
Old 11-28-2007, 06:46 PM
chisness chisness is offline
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Default Re: Making a 2+2 trading system

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
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  #10  
Old 11-28-2007, 07:21 PM
Foghatlive Foghatlive is offline
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Default Re: Making a 2+2 trading system

[ QUOTE ]
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

[/ QUOTE ]

Damn, that was one long article. I guess you could say he's the Chris "Jesus" Ferguson of Hedge Funds.
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