Developing your own system

[Stuart14]

Hi guys,

I'm in the process of developing my own system, playing with indicators etc that seem to suit me.

At the moment I have some wins and some losses which is fine. I'm disciplined and always trade the plan.

Tending to work off 5min candlesticks I find 10pip stops and 20 pip gains work, but am I doing myself a diservice?

I wanted to ask the proper traders here what they look for in each trade. Am i working on a too short term small movement system?

 

[LiggerPig]

Stuart,
If you're trading a written plan, you know your market(s), your indicators and you have good money management strategy to withstand losing periods you will know the answers already. You will have your results in a spreadsheet showing consistent rising profits over time? You will have modified your system either by computation or by trial and error or maybe both?

What you wrote sounds too vague. "playing with indicators etc that seem to suit me" , "I have some wins and some losses".
Yes, you are doing yourself a diservice - by not working harder on your system.

If you post your system with clear details on entries, exits, trade management and money management rules, and so on, I'm sure plenty here will be only to glad to help you develop your system.
At the end of the day though, you have to be comfortable with your system to remain "disciplined and always trade the plan"
BTW, Who do you mean by "proper traders"? I don't know anyone who would call themselves by that description!

 

[Stuart14]

Thanks for your reply.

When I sad "Proper Traders" I meant full time traders. I've been investing for many years (whilst working full time) but am now looking to move over to full time trading. As such my objectives have changed and i'm trying to develop a system that suits that. I'm looking to make 40% return on bank per year.

As the moment i'm trading trends intraday when they arise but the risk reward seems rather low. Although I think I could make it profitable I suspect that it is too narrow a system to make the returns I want from it, hence my posting on here.

So I will continue to work on the system and will post more once I have enough results to work with

Interestingly for over 100'000 users these forums seem very quiet.

 

[rnicoll]

Interestingly for over 100'000 users these forums seem very quiet.

*tumbleweed*

Sounds like you're on the right track, at least. As a non-pro, I tend to look at 15 minute charts mostly, and hourly charts to make sure I'm not bucking a longer-term trend. Be careful though, indicators have a nasty tendency to look like they're working over very short timescales, while they don't over longer, do backtest (either programatically or by hand if you have to).

 

[the blades]

Thanks for your reply.

When I sad "Proper Traders" I meant full time traders. I've been investing for many years (whilst working full time) but am now looking to move over to full time trading. As such my objectives have changed and i'm trying to develop a system that suits that. I'm looking to make 40% return on bank per year.

As the moment i'm trading trends intraday when they arise but the risk reward seems rather low. Although I think I could make it profitable I suspect that it is too narrow a system to make the returns I want from it, hence my posting on here.

So I will continue to work on the system and will post more once I have enough results to work with

Interestingly for over 100'000 users these forums seem very quiet.

Stuart,

I trade / invest (delete as applicable in stocks, holding for weeks. I use fundamental screens and technicals. Until recently I did this part time, now it's full time. I'm looking at mechanical system trading, though discretion may always be part of it.


You asked;

"Am i working on a too short term small movement system?"

I suggest this is partly down to you. I don't want to trade anything that ties me to the screen - so I look at longer term systems.

I'd rtaher accept less returns for a life away from the pc - or at least hours that suit me. Others will tell you that holding positions overnight is too risky. It depends on you.

What is clear is that trading over a few minutes - you're probably restricted to instruments that are very liquid and have tiny spread. And commission is inevitably a bigger cost to you.

What software (if any) are you using for system development? You might find more specific discussion on their boards. I use Amibroker and though it's a yahoo group (hence messy), the board is a mine of information.

Cheers,
UTB

UTB

 

[Stuart14]

My plan is to develop the system over the next few months. I have to use real money to do it, its just the way I work, but am using .1% of bank everytime, rather than 1%. The plan will be to tune it till it works then move it into a full time project.

Trend wise I start with a 4 hour to view the trend, and confirm it be the 1 hour. Then use 5 minutes to look for indicators of trend within trend, breakout or failiure.

Lots of people seem to say that their "Entry Point" is the least important part of their system. How can this be, surely entry is very important?

 

[Stuart14]

Thanks The Blades. I've got MT4 at home, but can't get it to work at work, so am using the charting software with IG Index.

Frankly I would love to have a system that wouldn't tie me to the PC all day, there is plenty else I could get on with, but personally I find that I miss stuff if i'm not watching the screen. I guess Risk:Reward wise as well, longer term requires larger stops and potentially larger draw down, and i'm trying to move away from there.

I still have my long-term investments, and my mid-term equity trades, but i'm trying to move away from them now. The markets over the last 18 months haven't done much for my longer term "hold and grow" view!!

 

[the blades]

Lots of people seem to say that their "Entry Point" is the least important part of their system. How can this be, surely entry is very important?

Cleverer people than me could probably explain - but I'm with you. For me, it's all about entries, exits and risk management. How you rank them in importance is beyond me.

UTB

 

[Stuart14]

LOL!! Glad you agree! You can have the best money management, discipline etc in the world, but if you enter at the wrong point it will cost you everytime!!

 

[rnicoll]

Cleverer people than me could probably explain - but I'm with you. For me, it's all about entries, exits and risk management. How you rank them in importance is beyond me.

Scenario: You open up your trading application, flip a coin, and depending on whether it's heads or tails you buy/short the FTSE 100 on the day. You now have a 50% chance of being right.

Theoretically (VERY THEORETICALLY), one of two things can now happen:

The market moves against you, and you close, for a small loss.
The market moves for you, you hold on, and hopefully make a large profit.

Don't get me wrong, not a strategy I'd ever want to try, but...

 

[Stuart14]

I get that. But then surely if you opened a chart on the FTSE and the trend was up the bet would not longer be 50:50?

 

[rnicoll]

I get that. But then surely if you opened a chart on the FTSE and the trend was up the bet would not longer be 50:50?

It's a little odd.

The chances of it going up may not be 50% at any given moment. However, the chances of a coin flip picking the correct direction are 50%. That making any sense?

 

[Stuart14]

Yeah I get that. You are basing the outcome on the coin regardless of what the coin's result is deciding. Interesting view.

If that worked though, you could just open 2 positions on say the FTSE. One long, one short, both with tight stops and hope that whichever way the trend went you'd win. Problem is intraday volatility would probably wipe you out over and over again.

 

[the blades]

It's a little odd.

The chances of it going up may not be 50% at any given moment. However, the chances of a coin flip picking the correct direction are 50%. That making any sense?

I don't get it (I'll admit it)

Yes, once in a trade, the only thing we can manage is the exit.

But we don't enter on a coin flip, we enter because we're at (for eg) support, or an indicator is oversold, or some other thing is in play that has historically been proven to suggest the market will go in your direction. Why isn't that important?

UTB

 

[Chorlton]

Cleverer people than me could probably explain - but I'm with you. For me, it's all about entries, exits and risk management. How you rank them in importance is beyond me.

UTB

Hello All,

Regarding whats important there are differing views. Some say that all three are equally important and have equal weighing. Others say that the Entry is more important as without one you don't have a trade, while another group believe the Entry is the least important.

Personally, I fall into the last category. But I should explain at this point that this is partly due to the timeframe I normally trade (weekly).
My view is that the longer the timeframe, the least important the entry. Once in a trade, whether one makes a profit or not, is based on the exit and the money management techniques you employ.

There has been a lot written on this subject and I have seen an example where a random entry was used and the system still made a profit...although I'm not suggesting that this is a serious approach !!!

All the above is IMO so if others disagree with this then thats mine with me. At the end of the day whichever approach you adopt has to make sense to you and provide you with a level of confidence.

All the best,

Chorlton

 

[the blades]

Once in a trade, whether one makes a profit or not, is based on the exit and the money management techniques you employ.

Eyup Chorlton,

I'm surely missing the point (nothing new here).

Let's say I go long on oil at £140 a barrell and the price falls for the next 2 years to $50 per barrell. How do money management and exits help me?

UTB

PS - message on other thread for you.

 

[Stuart14]

Chorlton, I thinkI know what you are saying, ie whether you get your trade in at the exact entry point you desire, or 1,2 or 5 points away doesn't matter, as long as you trade it well and exit properly. I understand that, and agree. But the post above clearly counts as well. If your entry is completely wrong surely money management, position sizing etc won't help, (although with a stop you won't get hurt as badly as above!)

 

[Chorlton]

Eyup Chorlton,

I'm surely missing the point (nothing new here).

Let's say I go long on oil at £140 a barrell and the price falls for the next 2 years to $50 per barrell. How do money management and exits help me?

UTB

PS - message on other thread for you.

Why would you be in the trade for that long then??

The above comment is not as daft as it may sound. Look, I'm not saying that Entry is totally irrelevant. Yes, we would like to have some confidence that the trend will continue initially but IMO the key to making a consistant profit is achieving a positive expectancy.

Too many try to achieve a very high win rate (>80% or whatever) by focusing on the Entry, when in reality this is not that important. Trending Based Systems have a win rate below 50% (40% is more realistic) yet they can be very profitable.

Since becoming involved in System Development I've realised that one can sometimes turn a mediocre strategy into a profitable one simply by changing the Money Management / Position Sizing rules. When I look back at my own system, most of the work that has made a difference has been around the exit and MM Rules. When trying to tweak the Entry the overall profit was really affected as much.

Chorlton

 

[the blades]

yes, my rather simplistic post didn't take stops into account. But if there is no edge to your entry, I wonder if stops wouldn't just be death by a thousand cuts.

UTB

 

[the blades]

Too many try to achieve a very high win rate (>80% or whatever) by focusing on the Entry, when in reality this is not that important. Trending Based Systems have a win rate below 50% (40% is more realistic) yet they can be very profitable.

Again, I'm confused. How can you have a trend based system that doesn't rely heavily on entry? The essence of the system is that it enters on a trend......no?

UTB