Article A Simple Trading System

T2W Bot

Staff member
Dec 19, 2004
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#1
In this article we present a simple trading system that we developed based on the concepts outlined in The 10 Power Principles of Successful Trading Systems.
Step 1: Selecting a market and timeframe
One of the most popular markets these days is the e-mini S&P, and that?s not without a reason: It’s a 500 company index. One of the largest in the world and that means you have excellent and consistent liquidity, superb volatility, tremendous leverage and no uptick rule. It’s a truly bi-directional market that shorts just as easily and safely as going long. It?s a fully electronic market, offering all the advantages of electronic contracts.
We decide to trade the market intraday, i.e. we will enter and exit a trade on the same day, because we do not want to expose our position to the risk of holding it overnight.

Step 2: Define entry rules
In my opinion swing trading is actually one of the best trading styles for...
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Hittfeld

Active member
Jun 3, 2003
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Heidiland
#5
Markus,

May be I am a bit slow - as usual: But I don`t understand the "improvement" on the s&p numbers :

You start with a net profit of 13,525 and end after optimisation at 8,100 ?

Furthermore your rule no 5 recommends five trades per week: Would you prefer to start one swing trade per day - or diversify over other markets?

Thanks

Hittfeld
 
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the blades

Well-known member
Aug 21, 2004
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Sheffield
#6
Spam Man said:
Congratulations Mr. Heitkoetter! You have given birth to a beautiful curve-fit system.
Hello Spam,

I may have missed the point here (probably have :eek: ) but the system uses a single parameter (or 2 if you include the stdev), at the same setting, over a number of markets.

Why do you consider it to be curve fitted?

Cheers,
UTB
 

nine

Well-known member
Sep 5, 2003
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#8
Hi UTB,

The curvefit accusation is quite interesting. Although I think the principle is quite valid for index trading (and could even be improved by scaling in as it moves away from the entry point) I also think that you have more parameters than you realize:

- moving average length
- std deviation for the bands
- stop loss size
- holding period

I don't think its curve fitted but I would test it on some different period samples as well as different equity markets because the equity markets are highly correlated (in volatility as well) and you may find that they dont give a good test. Try the HSI as well. Regarding the stop loss I have rarely found the SL to improve a system but it often reduces the variability of the trade outcomes in a useful way.
 

Spam Man

Well-known member
Jun 29, 2005
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Holding pattern over Heathrow
#9
the blades said:
Why do you consider it to be curve fitted?
Run enough backtests and you'll come up with plenty of systems, both simple and complicated, that work well in the past but fall apart during forward-testing because they don't have an edge. That's not to say that someone trading this system exactly as is would definitely lose money - but if they didn't it would be down to good fortune.

If a backtest was run over time periods other than that shown in the article, my guess is the performance would be significantly different, and probably worse. The author is welcome to prove me wrong.

To be honest I wouldn't know where to start trying to find an edge based on Bollinger Bands. It would require the market to display a kind of stationarity which doesn't exist.

Incidentally, aren't Bollinger Bands drawn after the close of the bar? If so, you wouldn't be able to trade this anyway. Perhaps there's some kind of offset that I don't know about.
 
#10
Hittfeld said:
Markus,

May be I am a bit slow - as usual: But I don`t understand the "improvement" on the s&p numbers :

You start with a net profit of 13,525 and end after optimisation at 8,100 ?

Furthermore your rule no 5 recommends five trades per week: Would you prefer to start one swing trade per day - or diversify over other markets?

Thanks

Hittfeld
Hitfeld,

When "optimizing" a system I don't try to "maximize profits"; I am trying to improve a couple of key figures. In this particular example the net profit decreases, but the average profit per trade increases and the max drawdown decreases. Overall the system becomes more robust.

IMO you can supercharge a robust trading system with proper money management techniques, even if it is only slightly profitable. More important is a smooth equity curve.

Regarding your second question:
Yes, the system does not meet the requirements of rule no 5. Despite the comments of SpamMan I don't think that it is easy to find a system that is profitable, robust and meets all the rules outlined in the 10 Power Principles. But being very selective when developing or purchasing a system will increase the probability of success. :)

Markus
 
May 10, 2004
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USA
#11
Are we skeptical about the system because of its components? ... back test process? ... both?

On paper, the simple system described would appear to be easily fooled by trending markets, as is true for many oscillator-based systems. It's not uncommon for prices to be outside their Bollinger Bands for several days. The initial results of the sample system, though, show promise I did not expect.

I wouldn't trade this system before running it through more tests. Nor would I conclude it is "curve-fit" before determining that it is.
 
#13
Spam Man said:
If a backtest was run over time periods other than that shown in the article, my guess is the performance would be significantly different, and probably worse. The author is welcome to prove me wrong.
SpamMan,

As I wrote in the article: I don't believe that there are any good "hybrid" systems that work in trending markets as well as in direction-less markets. IMO you use either a trend-following method that does well in trending markets and don't lose a lot in direction-less markets, or you use a trend-fading approach.

The presented Bollinger Band System is a trend fading method and worked well in the past 2 years because the indices weren't trending as much as they did prior to 2003. And here's why I think that the indices won't start trending again any time soon (but that's just another opinion, right? ;)):

http://www.rockwelltrading.com/rockwell-trading-articles/backtest_right_way.htm

To be honest I wouldn't know where to start trying to find an edge based on Bollinger Bands. It would require the market to display a kind of stationarity which doesn't exist.

Yes, the results are obviously different if you apply a trend-fading system on a trending market. That's why we still need traders with brains: You have to determine whether a market is rather trending (e.g. currencies) or rather direction-less (e.g. indices).

IMO this can't be done by computers (yet) and needs human judgement.

Spam Man said:
Incidentally, aren't Bollinger Bands drawn after the close of the bar? If so, you wouldn't be able to trade this anyway. Perhaps there's some kind of offset that I don't know about.
Most software packages draw Bollinger Bands "on the fly", i.e. they use the current trading price for calculating the Bands. As the close will be within 1-2 ticks of the current trading price the previous "estimate" is close enough for a trading decision.

Markus
 

Spam Man

Well-known member
Jun 29, 2005
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Holding pattern over Heathrow
#14
Markus_H said:
As I wrote in the article: I don't believe that there are any good "hybrid" systems that work in trending markets as well as in direction-less markets. IMO you use either a trend-following method that does well in trending markets and don't lose a lot in direction-less markets, or you use a trend-fading approach.
That's a sensible comment - though I can't see it anywhere in your article.

Markus_H said:
Most software packages draw Bollinger Bands "on the fly", i.e. they use the current trading price for calculating the Bands. As the close will be within 1-2 ticks of the current trading price the previous "estimate" is close enough for a trading decision.
Let's not beat around the bush - this point alone invalidates your backtest. The price at which your backtest shows you entering a trade will almost always be different to that at which you would have entered if watching the bands being drawn in real time.
 
Nov 1, 2004
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Hugo,MN
#15
I think people are missing the point of this article. To me, it is the process of building a system, not that this particular system is any good.

Peter Schumacher