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Can statistical methods be used to create a trading strategy? 58 replies

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How to create a trading strategy

in order to create your own new strategy, you really need to go through a lot, try, and as a result you will lose a considerable amount, because all known strategies are already so hewn
Choose between technical and fundamental analysis. Study and learn in the area. Practice your plan on demo and decide what strategy makes you feel comfortable.
Quoting scherzi
{quote} Agree, reinventing the wheel is absurd. The strategies are there, the problem is that most people won't take the time and effort required to learn and apply them. That is why I say "take one pattern" meaning one pre-existing pattern the aspiring trader will utilize to develop the strategy. When I say "create" I mean to implement, because most retail traders will adapt what they learn according to their own preferences because they won't have an institutional approach with preestablished restrictions.
I agree to an extent!
I took all the information that was out there paid/free we all know that rabbit hole..
I implemented all kinds of strategies that were good ones also but I always found the flaw in them all.
when I realized every person just sees the market in different ways. Even if they look at the same chart with identical time frames, it doesn't matter someone will always see a direct opposite outcome.

You must find what makes sense to you then apply that in creating a strategy.
Identify the time chart ( 1hr,4Hr, etc..) and abide by the rules! These change as you test the strategy but do not change
the strategy so much that even you don't recognize it anymore lol.

Good luck to all
#TradeLikeaBandit
  • Post #24
  • Quote
  • Edited 7:43am Jun 12, 2020 6:34am | Edited 7:43am
Quoting Quillianami
in order to create your own new strategy, you really need to go through a lot, try, and as a result you will lose a considerable amount, because all known strategies are already so hewn
I think that what retail traders do, do not affect the markets, thus most of our strategies have no actual impact on markets and no matter how many of us are applying the same style. Big money trades differently from us and they move the markets, so we do not have to be worried about how many other traders apply a particular method because the impact it has on markets is null. What banks do is constantly allocate assets for their clients most of the time. That is what actually moves the market, not a moving average or a double top.

In my opinion, the only thing retail traders must be concerned about is the conflict of interest with your broker. The brokerage model for retail traders has been built on the premise that 90% of the retail traders fail. This implies that all the education that most of the traders received is corrupted because the retail brokerage business is completely oriented towards getting all the money that the traders deposit on their accounts as soon as possible because:

- The brokers take the opposite trade their clients do (over-the-counter), meaning that if their clients win, they lose money.
- The other income proceeds from commission and spreads, meaning three things at least:

1) They will alter spreads to generate margin calls and to avoid TP levels to be reached.
2) The will alter prices if their clients are making them losing too much money and cancel their accounts to avoid bankruptcy.
3) They will encourage their clients to take as many trades as possible to get their commissions and income from spreads.

The best client for a CFD broker is the one that takes the maximum leverage, they will lend to you up to 1000 times your account without asking you any warranty so that you preferably can lose all your money in one day.

All the education that comes from the retail brokers and their IBs is completely oriented to misguide the traders because the broker survival depends on it. Most of the trading books do the same. Even if the styles described may be valid, the application is completely the opposite of what it should be.
well i don't beautify the thing.
there are very few profitable strategies.
90% of traders just lose.
Quoting tiborf71
well i don't beautify the thing. there are very few profitable strategies. 90% of traders just lose.
Well, the chances of winning are almost 50%. Any setup inside the volatility area with risk-reward ratio higher than 1:1 should be profitable.

The problem is not lack of strategies, but wrong risk and money management as well as unskilled people trying to play a game they have not learnt nor assimilated.

And mainly people not testing their own strategies before risking money with them. Most of the strategies have very valid concepts one can work with to make money.
Quoting scherzi
{quote} Except if you have an algorithmic strategy, discretionary trading requires a few months or years of market exposure. New traders won't be able to understand what is in front of them. You may pay thousands of dollars in courses and books, but it is your own practice and being determined to exploit one single strategy what most likely will give you the confidence and the pattern-recognition skills you will need to transform that simple idea in a money-maker activity.
very true

you need to start with strategies .

and even if you know that market is going up you need a set up to enter......
As for me in the strategy creation we should give the most time to 2 moments:
1. Choose the right trading style
Trading can be long-, medium-, short- term. There is no ready-made recipe of your choice - everything depends on your temperament, the size of the deposit, the goals set and many other factors.
The timeframe used will depend on which trading style you choose. The style also determines the choice of technical indicators, currency pair, etc.
2) Define ways to fix losses and profits
There seems to be no special question about profit fixation. However, there are traps here, too. Very often a trader closes a deal that could bring even more profit. It is necessary, as they say, to give profit to grow.
However, the second part of the proverb sounds like "minimize losses". Here too, everything isn't limited to the classic stop-loss order. You can use locks on positions, different methods, the banal "overrun" of losses, finally. Everything depends on your preferences. The main thing is that the strategy brings profit, not loss.
Creating your own trading strategy is a fast and time-consuming process. It is unlikely that you will be able to create a fairly effective strategy from the first time. However, this isn't a reason to get into despair. Start with simple systems, gradually complicating them and using more advanced and effective indicators - don't be afraid to experiment.
Quoting Sainrad754
As for me in the strategy creation we should give the most time to 2 moments: 1. Choose the right trading style Trading can be long-, medium-, short- term. There is no ready-made recipe of your choice - everything depends on your temperament, the size of the deposit, the goals set and many other factors. The timeframe used will depend on which trading style you choose. The style also determines the choice of technical indicators, currency pair, etc. 2) Define ways to fix losses and profits There seems to be no special question about profit fixation....
Besides, discretionary trading causes notable fatigue and one needs to secure a minimum profit because if you get hit too hard and it is already late (end of the day, end of the week, end of the month....; depending on your timeframe), one may be too exhausted to recover.

And it is different if your first shot is positive or not. If you start losing money, I think one needs to switch the money and risk strategies for instance. Or if one holds a series of consecutive losses. And conversely, if your trading cycle is positive, you should also start altering these strategies to improve your profits when you are being in synch with the markets.
Quoting brandyklein
Following steps make an efficient plan to follow for trading: Choose a relevant market to trade Select the time frame for your trading Keep a check on the trends through some effective tools Know your entry and exit trigger Define the risks and rules Backtest the strategy for trading you are going to follow..
If you limit your trading to the trend, you:

1) Must define what is the trend for you.
2) Cannot trade without a trend.

I mean, the points you mention are valid except the need of trading a trend. There are many different approaches to trading that do not require to define a set of rules to establish what is a trend, and therefore that are not based on trends nor conceived for trending markets in any case.

The trend was commonly referred to as how certain market indices were evolving and was used to track assets in relation to their correlation to the markets they belonged to. That notion has been misunderstood and deteriorated through decades. Individual assets do not follow trends if we stick to the classic definition of the trend. You could find, in any case, very interesting parameters related to seasonality maybe.
I remember times when i manually tried many variations of strategies just to confirm that it does not really work
that was some pain and suffering

luckily today i have my research automated, but even so its hard and fails from time-to-time.

What i can tell to me it was easier on higher time frames also its easier when you go in the general direction (like you search for strategies that go long on stock indexes etc)

gl.
Quoting dkrock
I think, (but do not actually know), the biggest problem facing most Forex retail traders is a lack of knowledge. I think most of them are sales people, industry workers, service workers, medical workers, restaurant workers, etc, and have no experience whatsoever in reading graphs, let alone building them. They fall victim to what looks like the supposed way to trade...draw lines to connect highs and lows of previous trades, without putting any thought into it at all. If the market is continuously moving and each new trade is a unique event, why...
@dkrock -- I can't say that I trade like you, though I wish I did. Your posts are always informative and insightful and cause me to think more deeply. I wish you would post more often -- and I know others do, as well.

I like the approach you described -- it makes sense. And, of course, the missing piece is how to identify the candles that fit the description. I don't claim to have the answer, but I thought I would toss out an example of how I've been approaching the problem.

Below is a chart I marked with preferred entry points -- in hindsight, of course:
Attached Image (click to enlarge)
Click to Enlarge Name: vertical-lines-without-centered-TMA.png Size: 4 KB


And the next screen shot is the same chart with an overlayed centered TMA where the upper and lower bands are 1xADR above and below the midline.
Attached Image (click to enlarge)
Click to Enlarge Name: vertical-lines-with-centered-TMA.png Size: 10 KB


So -- I rely on two obsversations:
1. Price (almost) always tends to a midline (fair value) like all systems do.
2. I use ADR as an anchor to trade away from.

Some times this works out to be a short reversal, other times it works out to be a long-running trend. In my case the biggest challenge is overcoming false positives.

As you point out, historical data is irrelevant (unless you happen to have a working time machine). We trade in real-time. I will say that historical data is valuable in the sense that it can be used to help train your brain (and indicators) to look for patterns.

I'm not claiming my way is better than yours or anyone else's -- I'm still learning and working things out -- and I enjoy the challenge of trading forex (and writing software). Without thinking about it I suspect many traders take a similar approach as you. @dkrock -- my point here is to let you know your insight is appreciated and because you are so articulate when you describe your thinking then it makes it even more concrete for me. Thank you...
My personal opinion is trade from one time frame and set a limit on the target and stop loss as a ratio that suits the traders preference. I seemed to of found a preference for price action trading off the daily charts where I set my targets to 100 pips and stop loss to 50 pips. This is a style that skips the r/r and money management crap where a trader knows well that if he/she only trades pin bars off sup/res zones then he would obtain an overall win/loss ratio. From the past 15 years it seem evident that the 20ema acts as a strong sup/res in a trending market. Therefor, only taking trades from the 20ema rejection and targeting 100 pips you will discover that this method alone has a win rate that exceeds 70%. Use this with price action, patterns and rejections you then have a sound and very rewarding trading method. The so-called experts may say to drop down into lower time frames to get a better entry but I say why look at any other time frame when you have gained confidence from trading just the one time frame- Keep it simple.
I felt compelled to share my experience in this thread becos IMHO the thread title is quite expansive and open ended.
Imo there are basically 3 different basic types of forex trading(not investing) strategy for retail traders.
1. Scalping strategy
2. Intraday short term strategy
3. Multi day mid term or longer term strategy.
Each strategy has a different set of rules for entry, stoploss and profit targets.
The common denominators are:-
1. Strategy must be concise (not more than 5 sentences) and simple to read and execute.
2. Profit target for scalp is normally up to 45pips.
Intraday 60 up to 130pips.
Mid and long term 150pips up to trend change signal being triggered.
3. A tradeable or so so strategy profit factor is at least 1.5x against risk/stoploss.
A robust strategy profit factor must be at least 2x.
A top strategy is 5x till topping or basing signal generated.
Any strategy less than 1x is a losing proposition unless it is for arbitrage or hedging purpose.(mainly institutional players or money managers)
4. Different traders normally use different technical or visual indicators as a rail guard to help them. The common denominators must be adhered and implemented in order to be a accomplished trader.

Having said that 95% of all retail traders are either scalpers or martingale traders using disproportionate risks or stoploss to chase small profits. This type of tradings are unsustainable and may implode eventually.
Conversely an accomplished trader trading strategy encompasses all the three strategy mentioned above.

This is my personal observations based on my 30 plus years journey as a hybrid traders and a retired junket follower.
Anyone is welcomed to disprove my observations and I will be pleased to
accept any further discourse in a well meaning way as in Truthful are the wounds of a friend than the many kisses and sweet words from a deceitful stranger.

Cheers and good luck to all.
Oh, I see that was some insights there. I think that people have a different test as a result they have different ways to create for now trading strategy. But I like your perspective on the topic. Good Luck!
Scherzi this informaiton is gold.

I did not see consistency in my trading until I implemented most of the talking points in your post.

Thank you for posting.

Give the market little, Aim to take a lot!
Quoting viso.laci
I remember times when i manually tried many variations of strategies just to confirm that it does not really work that was some pain and suffering luckily today i have my research automated, but even so its hard and fails from time-to-time. What i can tell to me it was easier on higher time frames also its easier when you go in the general direction (like you search for strategies that go long on stock indexes etc) gl.
The lower timeframes usually go in the direction of the higher ones. I agree.
Quoting peterhenders
My personal opinion is trade from one time frame and set a limit on the target and stop loss as a ratio that suits the traders preference. I seemed to of found a preference for price action trading off the daily charts where I set my targets to 100 pips and stop loss to 50 pips. This is a style that skips the r/r and money management crap where a trader knows well that if he/she only trades pin bars off sup/res zones then he would obtain an overall win/loss ratio. From the past 15 years it seem evident that the 20ema acts as a strong sup/res in...
The redrawing effect can be compeltely eliminated by shifting 1 period your EMA.
  • Post #39
  • Quote
  • Edited 3:15am Aug 6, 2020 3:04am | Edited 3:15am
Quoting genghistar
I felt compelled to share my experience in this thread becos IMHO the thread title is quite expansive and open ended. Imo there are basically 3 different basic types of forex trading(not investing) strategy for retail traders. 1. Scalping strategy 2. Intraday short term strategy 3. Multi day mid term or longer term strategy. Each strategy has a different set of rules for entry, stoploss and profit targets. The common denominators are:- 1. Strategy must be concise (not more than 5 sentences) and simple to read and execute. 2. Profit target for scalp...
In terms of risk-reward ratio, I also think that a higher RRR is better. I usually discard any setup that does not offer at least 3:1 RRR.

Besides one can scale out and in while the trade progresses, there is no need to win/loss all each time or to maintain a fixed trade size in every trade. Most of the time I spend is to refine set-ups in order to get the highest possible RRR with good accuracy.
Quoting scherzi
{quote} In terms of risk-reward ratio, I also think that a higher RRR is better. I usually discard any setup that does not offer at least 3:1 RRR. Besides one can scale out and in while the trade progresses, there is no need to win/loss all each time or to maintain a fixed trade size in every trade. Most of the time I spend is to refine set-ups in order to get the highest possible RRR with good accuracy.
Nice.. are you trading this strategy already?
If you are then you must be the most accomplished trader I have run into.
Wow what a rare honour for me.
Which pairs r u trading? Any chance to showcase your fantastic skill by making some live calls? Would be a real knock out for me man.

Pls the floor is all yours

Cheers
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