Making a more scientific trading strategy

Hi Guys,

I've been reading the forums for a while and thought it was time I contributed.

I have been spread betting part time for about 3 months. Originally I thought it was a good way to profit from the recent volatile markets. I have been an investor for a long time and recently saw a lot of my gains (in normal shares) lost due to the 'Euro Debt Crisis'. SB was a good way to profit from what I thought would be an obvious bounce back from the crash with a small amount of capital.

I have been doing reasonably well so far but I know this cannot last so I have stopped all trading and have been working on putting together a more scientific strategy.

I have put together a fairly basic set of rules using MA's, MACD & Stochastics (I am pretty new at reading the charts so I'm sorry if this sounds stupid). I would like to be able to back test this plan to see if it is profitable. I currently just use the charts on IG which are ok but I guess most people use purchased software for this kind of this.

I wanted to see if it is possible to back test via a free source or am I going about this the wrong way.

I also wanted to see if many other people attempt to do this part time while holding down a full time job (where I cannot check the charts all day).

Any help or advice would be great.

Mav

Hi mavericktrader –

There are many ways to trade and many many ways to fail. MA-based systems generally throw up a lot of entry signals after which price fails to make target and hits the stop (always set a stop). This means the comparatively few winners have to be run as far as possible to balance the many small losers, and it is difficult to always exit at the end of a move up or down. But they’re as good a place as any to learn the mechanics of the game, your SB firm’s platform and your own preferences with regards style. But keep positions tiny until you’re consistently profitable (which won’t be soon if using an MA-derived strategy).

As far as intra-day trading with a f/t job is concerned , I work f/t and would not consider active trading alongside it. I do manage to put in orders at 9am but can’t screen-watch after that so they’re on auto-pilot until they hit the limit order / stop loss levels. I have also entered orders evenings for subsequent day’s action.

There are many free strategies on the site here but nearly all demand continuous screen-watching. But there are also many good tips and you will find other ways of doing this.

Good luck.

I have been papertrading my system for a while now and will soon go real. I also attempt to use a scientific approach- at least any strategy I use I have coded into my computer so that it is completely testable and I am able to keep my emotions out of my trading. I swing trade and use a couple visual indicators in combination to achieve what so far are pretty good results. I work a f/t job and run my system each night so that I can put entries or exit orders in the next morning 9 am. I am only paper trading now so I use the worst price I would be able to get within the first 15 minutes of market open to try to be realistic. I use a couple candlesticks as my entry indicators with other conditions present and I use even more candlesticks and entry conditions for my exits. A typical trade will be in the market for 5 days up to my longest of 16 days. No matter what you use to trade I do believe you are making a great choice to backtest your strategies first. Please post what trading system you decide to use. I have tried a few and finally gave up and programmed my own system from scratch.

I use an almost standard Big Ben strategy, this being an Opening Range Breakout system designed for the GBP/USD but which I have adapted for the FTSE100 index. I did minimal backtesting on this as ORBOs are an industry-recognised family of methodologies anyway, not my own original theories, and Big Ben is a well known variant, but am periodically enhancing the rules I use. The simpler the rules, the more reliably they can be followed and the more objective the enhancements. This does demand logging all trades and reviewing what went wrong / right on every single one, something scalpers would find difficult.

I realise what I have written above sounds like a discussion on chess, which is indeed how I see trading.

mavericktrader said:

I have put together a fairly basic set of rules using MA's, MACD & Stochastics (I am pretty new at reading the charts so I'm sorry if this sounds stupid). I would like to be able to back test this plan to see if it is profitable. I currently just use the charts on IG which are ok but I guess most people use purchased software for this kind of this.

I wanted to see if it is possible to back test via a free source or am I going about this the wrong way.

Click to expand...

Good luck to you. Pls keep in mind that tools like MA's, stochastics, MACD, RSI, and the likes were invented during the last half of the last century and subsequently used by thousands of technical traders in zillions of different combinations and methods for the purpose of finding consistent edges to profit. Using such tools is analogous to trying to win a war nowadays with rifles and grenades when your opponent is using satellites to guide missiles.

Backtesting is a good idea but it won't help you to find an edge, it will only help you to avoid unprofitable ideas. If you get to understand this you will save a lot of time and money. Read this article about the proper use of backtesting: Proper Use of Back-testing | Price Action Lab Blog

Hi Guys,

Thanks for all of the replys. It's good to see that there are other people making money from trading while holding down a full time job.

numbertea, you mentioned that you use a system over night to work out the next days trades. I'm interested in what the system is and how has it been built. I have seen many people use excel spreadsheets with live market data downloaded into them to base the next days trades on. Is this what you use or is it something more complicated.

I have also looked at price action labs but the cost of the system is a high investment for the size of my trading account. Once I am up and running then it may be something I would consider. Is there any way of backtesting using a more cost effective system. Any suggestions would be great.

Thanks to ronblack as well for his feedback on the indicators I wanted to use. I really wanted to prove the backtesting before looking at anything more complicated. I am still in the early stages of setting up a plan so I will keep this post updated on what i finally decide to use.

Mav

Recently I have been looking at software on the market.
One of these is neuroshell. It is scientific without the hard bit of programming it and therefore merited some interest.
However the cheapest unit is $1400+ right up to $3,500. On top of this there are loads of add-ons at$300 each plus paying for a data feed plus broker's fees !!
The high cost with no guaranteed return has put me right off ! But may be worth you having a look.

To have a full time job while trading can be hard. As anything else here it depends on the time frame you choose to trade with. if you´re scalping you will be able to do it only at some moments because you will find hard to be sticked to the screen for long periods of time.
i would recomend you to try to have at your screen the volumes, when a high volume is beeing traded you´ll find enough volatility and that will help your trades, with low trading volumes try to stay out no matter how luring a chance could seem.

Pat494 said:

The high cost with no guaranteed return has put me right off ! But may be worth you having a look.

Click to expand...

The only guarantee is that you won't find any software with guaranteed return.

I remember you talked about price pattern software before and that you had a previous version of Price Action Lab. Do you still have it? Are you using it?

ronblack said:

The only guarantee is that you won't find any software with guaranteed return.

I remember you talked about price pattern software before and that you had a previous version of Price Action Lab. Do you still have it? Are you using it?

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As usual it looked good BUT didn't really deliver. After my PC collapsed I haven't sought to reclaim it even although the principle is probably ok. It just looked at the basic instrument. Might have been better if it could also take into account indicators too !

As far as I know amongst all the whizzo products out there for sale NOT 1 offers any guaranteed returns !! Newbies beware !!

I think in the quest for a scientific trading strategy, what you're really doing is trying to reduce something inherently complex and ever-changing (market activity) to a set of robotic entry and exit criteria.

Strict rules-based strategies (and the traders who blindly follow them) are doomed to failure in my opinion as markets change and the effectiveness of certain strategies ebb and flow. A much better approach would be to focus on learning the fundamentals of trading and assorted trading skills that will never leave you - once you learn the fundamentals, developing strategic thinking is easy without having to resort to static trading rules.

TradeCrushers - I am engaged in developing just such a set of entry and exit criteria as you say, and I share the fear that these will fall out of effectiveness as markets change behaviour patterns. This is already observable in my own results.

I continue to refine the entry and exit rules and seek for criteria that would demand sitting out on low-probability trade options. But there seem to be things going on in the markets which are not showing up on charts. Obviously, trending and ranging price patterns show up: also increasing and decreasing volatility etc.: these can be seen and allowed for in any rule-based system. But it seems there are other factors in market behaviour that prevent automatic systems outperforming for significant periods but which do not chart. Any ideas on these would be appreciated.

tomorton said:

TradeCrushers - I am engaged in developing just such a set of entry and exit criteria as you say, and I share the fear that these will fall out of effectiveness as markets change behaviour patterns. This is already observable in my own results.

I continue to refine the entry and exit rules and seek for criteria that would demand sitting out on low-probability trade options. But there seem to be things going on in the markets which are not showing up on charts. Obviously, trending and ranging price patterns show up: also increasing and decreasing volatility etc.: these can be seen and allowed for in any rule-based system. But it seems there are other factors in market behaviour that prevent automatic systems outperforming for significant periods but which do not chart. Any ideas on these would be appreciated.

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Could try using adaptive indicators, which change as the market changes ?

That's a good point Pat494, except how (apart from the obvious such as price, volatility etc.) to recognise the market is changing? And which indicators would be best anyway?

tomorton said:

That's a good point Pat494, except how (apart from the obvious such as price, volatility etc.) to recognise the market is changing? And which indicators would be best anyway?

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There isn't 1 infallible indicator imho !
Just the usual macd etc. until some whizz-kid figures out an artificial intelligence that works.

Well, agreed on that - 1 'master' indicator won't do. Then again, having 5 is not 5 x better than 1, and having 50 is not 10 x better than 5, picking the wrong indicators neutralises some good ones, and more information does not always lead to better decisions, sometimes just better-informed mistakes.

What really aggrieves me is the observation that all systems fail unexpectedly - sometimes they consistently succeed when price is in a trend and volatility is high, sometimes they consistently fail in a market of the same general chart / indicator characteristics. The consistent factor is inconsistency. Surely there is more for us to find than this?

mavericktrader said:

Hi Guys,

I've been reading the forums for a while and thought it was time I contributed.

I have been spread betting part time for about 3 months. Originally I thought it was a good way to profit from the recent volatile markets. I have been an investor for a long time and recently saw a lot of my gains (in normal shares) lost due to the 'Euro Debt Crisis'. SB was a good way to profit from what I thought would be an obvious bounce back from the crash with a small amount of capital.

I have been doing reasonably well so far but I know this cannot last so I have stopped all trading and have been working on putting together a more scientific strategy.

I have put together a fairly basic set of rules using MA's, MACD & Stochastics (I am pretty new at reading the charts so I'm sorry if this sounds stupid). I would like to be able to back test this plan to see if it is profitable. I currently just use the charts on IG which are ok but I guess most people use purchased software for this kind of this.

I wanted to see if it is possible to back test via a free source or am I going about this the wrong way.

I also wanted to see if many other people attempt to do this part time while holding down a full time job (where I cannot check the charts all day).

Any help or advice would be great.

Mav

Click to expand...

I THINK YOU ARE ASKING YOURSELF THE RIGHT QUESTIONS!!!!

they were kind of the same questions i had when i first got started. I was especially concerned with scientifically testing what the meaning of a high probability trading strategy actually was... (nobody online gives you that definition because they dont have one)

look, im exhausted, & this topic is a topic that can take hours to discuss let alone write about. you see, those same questions led me to a few conclusions myself. in doing so, i produced a video for myself on my personal trading journal/blog. it discusses my concepts of a Trading Science & how I actually prove that trading scientifically is profitable. ok, the only thing is, the video is like 2 hours and it is boooooring to most people who dont have any interest in trading.... you wanna be a trader, so im assuming you wanna learn some free S@1& and you won't care how long it takes because you have the desire to do anything in your power to be a consistently profitable trader... Right?!?! Here is the link to my "movie":

Trading Science: Rules of Engagement

you also mentioned something very smart... backtesting a strategy before applying it to the market... genius if you ask me... most people will probably yell and scream and tell you to just jot down some notes down on toilet paper... those people aren't making any money and theyre mad at the world and theyre hoping you will become miserable like them.... ignore those people... got that?!?! ok good...

you see, i wanted to backtest all my ideas too one day... right... well it turns out, that everybody online, well, theyre there because they want to separate you from your money because the market separated them from theirs.... so they try to sell you things... you know, mentors, systems salesmen, EA advisors... all of that.... needless to say, i never found what i needed to find because none of them were actually interested in developing an actionable product to be used by actual TRADERS... got me?

maybe im just being overtly 'real' because im exhausted from TRADING... but i just think as traders we all have to be hyper vigilant out there... it really is the Wild West... anyways!!! what the hell is my point right?!?! Well, my point is that Im giving away free S@1&!!!! I dont know how to make visa take credit card payments on my behalf, i just know how to Take my Profits TRADING... know what I mean?

sure, this is an informal light hearted post... ok maybe not.... here is the link to the page thats going to get you a copy of the tool that I developed to backtest every market and every time frame so that i could approach the market with 100% mathematical certainty and scientific OBJECTIVITY...EVERYTIME! I want to share it with the world because i think everbody needs this, especially if theyre losing money. I call it the ProTrader Dashboard:

For Traders: Forex Trading Systems – Stock Software & Free Spreadsheet

all you have to do is put your email into the box and click the button that says, "FREE Spreadsheet"... and its yours... why do I need your email????

***Mind you, there are a few outside advertisers advertising their products on my site... Make sure you only click on the link for the free spreadsheet....

because i want to start a conversation with you so i can find out whether or not you think the ProTrader Dashboard is even worth a "u know what expletive"...

i told you i was light hearted...

look man, download the tool, open it, erase all of the existing data so you can replace it with your own, and start backtesting.... im telling you, nobody gives away free S@1& like i give away free S@1&... this thing took me 15 months to develop and it is SICK!!!!

then, IF you think it really is awesome, join my trading team and register onto our social network called TradeSocial so we can trade together and learn from each other's experiences conquering the markets for the same team:

Trading Pit

If you hate it, which you wont, you can just tell me what a horrible spreadsheet it is and everybody on T2W will know that free S@1& sucks... but you'll see, that wont be the case this time... im all in on this one....



i havent decided to sell this and i dont know if i will... but right now its free... so just take it... you likely will not find ANYTHING LIKE THIS FOR FREE ever again...

PS. I trade full time, i found having a job adversely affected my trading performance so i was forced to pick a career if you will...

Also, if you do download the Free Tool it will be rather difficult for you to look at it on a dell laptop because its a pretty huge file designed to be displayed across six 24" screens on a serious computer. your dell laptop WILL have issues processing all of the functions calculated by this tool... an overclocked quad core processor would be ideal... you will have to deal with a lot of scrolling on the laptop.... fyi...

if you really want to know i have the Falcon Trading Systems F-37x... look them up so you can get set up right for your Trading Business....

The problem with trying to find a 'scientific' trading method and strategy is basically this -

Most people are trying to find rules/methods with a load of past price data and a £400 Dell computer. Some are even doing it by hand.

But the big banks, funds and trading houses are collectivly spending probably in excess of $5billion per year on research and development, and have been doing so for the last 15 years.

That means 2 things, first they're looking at the same patterns you're looking at because their computers are tasked with looking at every possible price pattern there is, plus the ones you didn't know existed.

Also, look at their results. Generally they're not pretty unless in a big bull market in which cases their results are excellent. But then again so are the results of monkeys throwing darts at a quote screen (wherever the dart hits, that's the insturment to buy).

What this all means is it's generally futile for anyone to look for price patterns that can be programmed into a computer. Yes, it has and can work, but not for many and only really those with the best minds and research capabilities. But even then the results are probably going to be in the 10%-30% a year bracket (risk/adjusted though which is good).

10%-30% a year will basically get most people on this board nowhere as you have to assume most people don't have 6 or 7 figure accounts.

So what to do?

As others have suggested here, the big money is to be made with understanding how markets work and then becoming a discretionary trader. If you could take everyone here on this board who's making proper money and has been for a minimum of a few years, I'd bet big money that 98%+ of them are discretionary traders........

Good luck

If 95% fail don't feel bad about it, you're in good company !