Article Developing a Trading Strategy

[T2W Bot]

1. Introduction
A trading strategy is simply a pre-determined set of rules that a trader has developed to guide their trading. The advantages to the trader of developing a trading strategy are:


– It removes emotions from trading. A trader following a strategy knows what to do whatever the market does. A trader that does not have a strategy tries to make decisions when the market is open and is liable to become emotionally attached to positions. They may experience panic and indecision when the market does not move in their favour, as they do not have a prepared response.



-Saving time. Developing a trading strategy that has an edge is hard work. However, once developed the rules can easily be automated freeing the trader from having to watch charts all day and allowing time to develop further strategies.

However, developing a trading strategy that is effective can become a complex process. There are computer programs available (such as TradeStation...

Continue reading...

 

[barrys]

Very clear writing and reasoning, a pleasure to read such a well-reasoned article.

 

[bbmac]

Great addition to the site the 'knowledge lab,' well done to all involved.

 

[peterpr]

A solid, illuminating example of rigorous strategy/system design

 

[JonnyT]

The article hasn't touched upon where the market ends though.

Because it breaks a high or low doesn't mean it will continue.

I guess all will be revealed in part II.

All in all a good start but I would have liked to have seen this tested with more data and particulary more current data.

 

[sidinuk]

Thanks for the comments!

JonnyT, the objective of the article is to demonstrate a systematic approach to developing a mechanical system rather than producing a particular system. This is why I have only used 6 months of data - you are right though, it's better to test with a lot more data. However, in part II I will show the results of out of test data for all of 2003 and from Jul04 to now. So we can see whether the system holds up on non-tested data both before and after the actual data used (Jan-Jun04) to develop the system. Again, this is really only to show the importance of testing on out of sample data to make sure we haven't over optimised for a particular data set.

 

[contrakt]

thank you

 

[Mr. H]

Tim,

Thank you very much for your article on "Developing a Trading Strategy".
I like your approach of selecting your parameters based on the Maximum Expectancy of the Strategy.

 

[Tuffty]

Oh no. I only read the first 3 sentences and I strongly disagree ....

"A trading strategy is simply a pre-determined set of rules that a trader has developed to guide their trading. The advantages to the trader of developing a trading strategy are:

- It removes emotions from trading."

Well, I read on a bit and I understand what I think it's saying in that it reduces the emotion from individual trades. In my experience the statement "It removes emotions from trading' is misleading. What I think system trading does is put that emotion in a different place. In effect the trader is trading systems and with that come exactly the same emotions that accompany an individual trade for a discretionary trader.

If it read "It reduces emotions regarding individual trades" it would make more sense to me and I think reflect more accurately what system trading does. The system takes away one’s need to make any decision on individual trades thus reducing any emotional input.

The rest of the article looks interesting and I didn’t find myself strongly disagreeing again!!

Sidinuk…I was surprised to learn that accountants may have emotions!!!

 

[sidinuk]

Perhaps you are right - it wasn't system trading that removed emotion it was because I didn't have any to begin with!!

My point was that if a system tells you exactly when to buy and when to sell then, providing you follow the system, you don't become emotionally attached to individual trades and let hope, fear or greed take over your trading decisions.

I do agree with you though, it doesn't completely remove emotion - it's still great to score a big winner and depressing to hit a long drawdown. Perhaps instead of being emotionally attached to individual trades we can become emotionally attached to individual systems. Ah ha, now that emotion must be removed - we need a system to trade the systems!

Sidinuk…I was surprised to learn that accountants may have emotions!!!

 

[FetteredChinos]

toss a coin to choose which system to trade on a particular day?

Ah ha, now that emotion must be removed - we need a system to trade the systems!

 

[AC007]

excellent.
Thank You

 

[ddunne82]

I am interested in trying to develop a trading system based on this breakout idea for the dax futures contract. I have the data, but am unsure of how to write a program to test the parameters, change the settings etc.

Any help would be greatly appreciated.

Regards,

David Dunne

 

[djely9]

I'm confused. So in the first 135mins if there was a high of 3950 on the FTSE the strategy would be to wait for the market to break this high. We would then sell the market at 3951???

 

[djely9]

I'm confused. So in the first 135mins if there was a high of 3950 on the FTSE the strategy would be to wait for the market to break this high. We would then sell the market at 3951???