Systematic Trend Trading

Cheers 60. I get a real blast from your posts as well. They provide lot's of food for thought and help keep the stuff between my ears sharp:-)

Finally broke below my trail level, just need a close now. Most of my trading is waiting, what I don't need to do is make judgements about where the market will go - that is for a reason, I have not seen evidence that humans are good at it in these types of environments.

"In markets, monte carlo "testing" provides some value, but the fact that it masquerades as providing additional rigor, and comfort, is both erroneous and deceitful.

Why? Because there are so many more potential paths in the open future than have ever existed in the limited past."

Hehehe. I can smell Wayne Himelsein in that. Too true :-)

I ran some tests on the EURUSD daily charts, testing different take profits targets, ranging from 2R to 5R. 5R had fewer winners and larger drawdowns, but ended up more profitable.

Now, at a point, you mentioned 5R targets; seems you trail now at 7R. I would like to know how you manage open trades. When do you move to BE; And trailing at 7R, does that mean you move SL to 7R once you get a close below 7R and leave your trade on until it is stopped out or what?

Pardon if my questions seem too basic, but my testing has made it clearer to me that the entry does not matter a bit; it is the exit b and so long as the profits when you exit are way, way larger than your losses, you are good.

a very smart fellow, I studied all the wrong things at school.

I loved following the cricket World cup, what made me giggle was how often the forecasters/experts got it so wrong

https://www.evidenceinvestor.com/act...passive-grows/

Seeing Complexity
Visualizing Complex Data
Sharks, the S&P 500, and lévy flights

https://seeingcomplexity.wordpress.c...-levy-flights/

Trading and the problem of random reinforcement
In Beating the Financial Futures Market (Wiley, 2006) Art Collins makes a case for systems trading over discretionary trading. His argument is that the very nature of markets works against the discretionary trader since they are “overwhelmingly random noise with a small trend component. The latter is what mechanical traders largely hang their hopes on, but it’s not perceivable on an individual trade basis. You need many trials to expose biases the same way Vegas needs many bets to exemplify the fact that their long-term edges are ultimately insurmountable.” (p. 1) Discretionary traders are attuned to the noise and very, very few can extract anything meaningful from it.

Moreover, Collins argues, the discretionary trader is rewarded in an arbitrary fashion. Unlike most areas of life where repeated experience results in learning, “trading doesn’t conform because good ideas (whatever they are) won’t necessarily produce winning trades any more than bad decisions will become losses. People get frustrated trying to form rules around an overload of information.”

That is, the discretionary trader is essentially receiving random feedback. And “researchers have scientifically demonstrated that the hardest behavior to break or modify is that which is rewarded in an arbitrary fashion. A lab rat that only occasionally receives food, a drug rush, and so forth when he pushes a lever will continue to hit it until his paw is raw.” (p. 2)

Ah, you might reply, but what about random reinforcement in dog training? Didn’t you quote Scott Page in your October 12 post as saying that when you’re teaching a dog to sit you shouldn’t give him a treat every time as a reward? Yes, but here’s the big difference. First, the dog trainer rewards only the sought-after behavior; she doesn’t give the dog a treat if he doesn’t sit. Second, the dog trainer rewards the appropriate response most of the time, so there’s not a lot of randomness. The element of randomness that is introduced into the training process supposedly strengthens the link in the dog’s brain between the trainer’s command and the dog’s response; it doesn’t turn him into a compulsive wreck.

By contrast, the market (especially in a small time horizon) rewards both bad behavior and good behavior, punishes both good behavior and bad behavior, and may do this more or less randomly. And, contrary to Collins, I would suggest that it doesn’t single out the discretionary trader for this random reinforcement. The market is a terrible, perhaps even deranged teacher! You can’t take your cues from how this teacher reacts to your behavior.

There’s been a lot written about replacing an external reward system with an internal one—rewarding yourself for sticking to your plan, following your rules, being disciplined. There’s no doubt that this task is psychologically extraordinarily difficult because it flies in the face of a lifetime of experience where, at least for the most part, a person is rewarded by the outside world for doing the “right” thing and punished for doing the “wrong” thing. I for one don’t take much solace in giving myself an expensive “A.”

We need to get out of this random feedback loop. And I don't think we can do it by substituting less powerful feedback for more powerful feedback. We have to substitute for this debilitating random feedback something that’s even more powerful. Taking our cue from Art Collins (and, yes, I understand it’s not exactly original), one solution is to substitute the continuous for the discrete. The market gives us discrete feedback; it can recognize only one trade at a time. If we shift our focus from these discrete data points to a line that connects them in a meaningful way—to wit, our equity curve, we presumably have something that no longer exhibits the properties of randomness. (Or, if we do, we know that we’re doing something very wrong.) In the simplest terms, if our equity curve is sloping upward, we know we’re doing the right thing and are being rewarded. If it’s sloping downward, we know we’re doing the wrong thing and are being punished. Yes, there will always be some random reinforcement in the equity curve, but with any luck it will make us more obedient (and wealthier) dogs—oops, traders.

http://readingthemarkets.blogspot.co...of-random.html

Kaboom. I am going to have to share that great piece 60. I hope you don't mind? :-)

more good stuff

https://www.collaborativefund.com/bl...f-uncertainty/

Something I strongly disagree with is this mantra of finding a strategy that fits your personality. You need to find something that works and adjust your behaviour accordingly. Most people have no idea what their personality is, how to measure it or how to fit a trading strategy to it. The result is most people end up trading what feels comfortable and appears easy, big mistake.

Find something that works.

one win in the bag and a nice stack of shorts built on EJ... could be a big week... waiting game with a heavy dose of uncertainty

revisiting the random walk, levy flight diagram... When you plot these movements on a Japenese candlestick chart it appears ordered, patterns appear in the randomness.

Big thumbs up on this. Let's ensure an edge first before we even get to psychology :-)

Sorry DJo, I missed this question.

For this test I have been waiting for a close over 7R and then trail at 6R, over 8R, trail to 7R etc etc, If it breaks over 10R I trail where feels right. Don't get bogged down too much in specifics though, in general trailing is good, wider trails will have higher returns but deeper drawdowns, tighter trails will control drawdowns at the cost of returns...... all suffer from long runs of losers, thats a hard one to get comfortable with but push through it.

I'm glad you ran the test over multiple exits, it highlights how slim edges work over longer runs and how letting trades run longer offers an edge. As you have noticed you do need to be careful with position size to control those drawdowns, the best advice with position size is always be conservative. The one thing you must avoid is blowing your account and position sizing mistakes will do that for sure.

Welcome to the thread and please feel free to ask any questions

Thanks for the response and thanks everyone for a great thread.
Just so you know, the position size was 0.25% of my account size. With that, I should be able to manage the drawdown, I think.