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One Way to Develop a Winning System

  • #21
  • Jul 11, 2007 9:34pm Jul 11, 2007 9:34pm
Quoting FXEZ

I'm not soliciting work, selling a system or otherwise trolling for customers, but if you happen to have a large wad of cash just burning a hole in your pocket then maybe we should talk.
With all due respect, everything I've read in this thread mirrors anything I've read in systems for sale...
  • #22
  • Jul 11, 2007 9:54pm Jul 11, 2007 9:54pm
Quoting stunew
With all due respect, everything I've read in this thread mirrors anything I've read in systems for sale...
Bless your heart Mr. cookie monster, I do believe that's your second consecutive off-topic post in this thread. If I didn't know better I'd think you're attempting to sprinkle cookie crumbs all over this thread. Pretty clever trolling for someone who confuses easily.
  • #23
  • Jul 11, 2007 10:07pm Jul 11, 2007 10:07pm
Thanks for your question. When you are dealing with a high % win system there is a very high probability that consecutive loss streaks will be broken. And so it is a natural to look to increase size on the onset of a streak. But something to be careful with is using an open ended martingale strategy. Ultimately the unforeseen, unlikely event happens and blows the account or uses up all the margin, creating a "must win" scenario.

But I think you can do some things that help profitability which also don't add to drawdown that much. One thing I did on a high win % system was to trade double the normal size after a 10% drawdown, and maintain the increased size on each new trade until a new equity high was reached, when size would then be reduced on new trades back to normal. By using that method new equity highs were achieved faster and overall drawdown only increased marginally. But be very careful about doubling size after each loss or any open-ended martingale progression. I feel comfortable about the one I mentioned because risk is bounded and it had a good impact on net profit : drawdown.

Quoting 4xtrend
FXEZ

I have developed a breakout strategy that won 87% and for the testing period never had a losing streak of more than 3 in a row. But use a stop 3 x the PT. It does come out profitable over the tested time but due to the 3x larger stop is not a major winner. Am I going of the tracks when using an adapted martingale type MM to up the profitability for this strategy. I am allowing for a straight 6 losers. ie: The total lots to trades 6 straight losers still fall within my risk% for the said account.

More specific:

686 trades = 601 winner + 85 losers

of the 85 losers only had 7 times 3 in a row.

+3430 pips up with adapted martingale type MM or

3005 - 1275 = +1730 taking straight loses.

I have tried smaller stop or larger TP and both decrease profitability.

Am I on the wrong tracks.
  • #24
  • Jul 11, 2007 11:01pm Jul 11, 2007 11:01pm
i am just going to add a strategy to your system that helped me a lot lately.

i used to be the one who was always waiting for that ultimate breakout where i would have the right trade (buy/sell) and the market would break out in my favour... but that ended up being a crash.

i realized that after you have a functioning system, the next step is your limits.

i came up with a personal "monthly gain calendar".

i broke down a month in 16 - 20 business days where for each day i have a set profit percentage from overall balance for that day.

for example.

i have a 5% gain for each bizday of the month.
if one starts with $500, the first day would have a gain limit of $25.

those $25 gain entirely depends on account type and currency dealt with.
its not a defenit PIP gain limit per day but its just an amount. PIPs amount to equal the daily gain limit would vary on account type.

if on first day the daily limit is achieved, one would close the trade. the equaty would be $525, therefore, the next day limit would be greater than $25 because the balance is now $525.

so one would have a trade open until his daily gain limit is achieved.


if you do the math, and calculate each day's predicted gain plus that day's equaty, after several months one will be very surprized by the numbers revealed.

500 + 5% (25) = 525
525 + 5% (26.25) = 551
551 + 5% (27.5) = 578
and so on.

after i reached a comfortable equaty limit (ie $10,000) , the daily gain is set a side or withdrawn.

thats my method that helped me.
comment freely.
slowly but steady is the answer.
  • #25
  • Jul 12, 2007 12:16am Jul 12, 2007 12:16am
Hi,
May I know if you are writing this alongside developing your winning system or if you've already developed a winning system and now share your experience so ppl can learn from you?
Quoting FXEZ
The second step is in clarifying what you want. Once you have a broad idea of what you want, it is time to refine the idea down and create an outline and develop an image of what the system might look like.

What markets will this system trade? What timeframes will be used or favored? How many trades will the system make and in what space of time? Will the system follow the trend or trade against the trend? Will the system be a stop and reverse system, a setup, stop, target system, or a grid type system? There are lots of ways to make a profitable trading system.

For me I’m looking to develop trend following systems. So I want to focus on the most trendy trading instruments. This means focusing on the currency pairs that carry traders focus on. The reason for this is that the carry trade creates an underlying fundamental reason for the currency to trend. This is a sort of bias that exists in the direction of the carry trade, and this natural bias is an inefficiency that I can exploit in developing my trading system.

I favor high frequency trading systems and all things being equal, shorter timeframes with more trades. I like high frequency trading systems because I’m more short term oriented, and I like instant feedback, smaller drawdowns, and faster equity increases from “banking” a trade. I prefer a SAR method, where longs are closed out by initiating shorts. I also prefer focusing on times of day when the markets are most active. In the latest system that I’m working on, I tend to focus on a 10 hour block of time that coincides with the most active trading. I realize that in a high-frequency trading system volatility is an ally and lack of activity is an enemy.

Because I’m focusing on high frequency trading systems, it makes no sense for me to focus my time testing longer term data. My testing is best when it is suited to the timeframes that I’m focusing on.

Furthermore, because I’m focusing on trend trading, I’m not keen on most indicators including MACD, RSI, Stochastic, etc., which actually are measures of momentum and not of trending. The moving averages aren’t my favorite either because they lag significantly, which is a bad thing when trying to catch trends using shorter timeframes.

Because I’m a trend trader I’m focusing primarily on breakouts leading to continuation. When the opposite breakout definition is reached, the position reverses. Although I prefer high win rate systems over low win rate systems (due to the smaller drawdowns), my experience has shown that lower win rate systems tend to be more robust, and often more profitable. So I’m happy trading a system that has a 40-60% win rate.
make some money, have some fun, leave some footprints
  • #26
  • Jul 12, 2007 1:54am Jul 12, 2007 1:54am
Quoting boostrade
Hi,
May I know if you are writing this alongside developing your winning system or if you've already developed a winning system and now share your experience so ppl can learn from you?
Great question. Over the past years that I've been involved in trading and with forex I've independently developed a few systems that I consider good with positive expectancies. I'm in process of system development of a new system right now and as I've been going through the process over the past few months, I wanted to record and share some of my insights and thoughts on the process. I'm motivated to do this partially for myself so that I can organize and remember my methodology by expressing it, and partially so others may look over my shoulder and get an insight into what I'm doing and to offer their own insights and feedback.

And in case anyone is wondering, no this thread isn't a buildup to a system sale or some kind of underhanded come-on. I've thought about organizing this thread into an ebook on system development that would be given away for free and may do that depending on how things develop and whether I want to put the time in to do that or not.
  • #27
  • Jul 12, 2007 5:28am Jul 12, 2007 5:28am
Quoting FXEZ
Bless your heart Mr. cookie monster, I do believe that's your second consecutive off-topic post in this thread. If I didn't know better I'd think you're attempting to sprinkle cookie crumbs all over this thread. Pretty clever trolling for someone who confuses easily.
I just wanted you to help me get a grip on your concepts, I mean, they almost seemed to have some order of intelligence for a while.

Not only do you have over 10 years of experience, with the cognitive skills of a novice, but you presume to know my own disposition?
You must be a speculative trader right? :d
So now that I've had my hand slapped by an 'expert', I'll be getting off this futile philosophical roundabout and back to the real world of winning real money.

How you like them apples?
  • #28
  • Jul 12, 2007 5:35am Jul 12, 2007 5:35am
Quoting FXEZ
[b] So I’m happy trading a system that has a 40-60% win rate.
Which = 50% Win/Loss Ratio.

Therefore, on your defined prinicipal.... I have 2 brilliant systems for you...

1) eenie, meenie, miney, mo.......
2) Flip a coin. Heads=BUY, Tails=Sell
  • #29
  • Jul 12, 2007 9:58am Jul 12, 2007 9:58am
Stunew,

Every so often someone comes along and writes some good insight to what many have no concept on, whether for hire or not, within their writings there is often a broad degree of education that can be disected. This is a good thread and can assist those that are interested in developing their own systems based on their own objectives, with sound ideas. Re the 40-60% winning ratio, before you comment with such sarcasm, do yourself a favour and grasp the concept of Win/Loss ratio, Reliability, Expectancy, and Money Managment techniques, then combine them all together within a "System". If your numbers are in sync with one another, which may even be a 45% W/L, you just might be very suprised at your findings. And another thing, any true trader does not think in terms of "winning" money in Forex, but rather earning. Winning is for the casino!

Northpro


Quoting stunew
Which = 50% Win/Loss Ratio.

Therefore, on your defined prinicipal.... I have 2 brilliant systems for you...

1) eenie, meenie, miney, mo.......
2) Flip a coin. Heads=BUY, Tails=Sell
  • #30
  • Jul 12, 2007 10:09am Jul 12, 2007 10:09am
Quoting stunew
Which = 50% Win/Loss Ratio.

Therefore, on your defined prinicipal.... I have 2 brilliant systems for you...

1) eenie, meenie, miney, mo.......
2) Flip a coin. Heads=BUY, Tails=Sell
The key to making money trading is simple.. cut your losses and let your winners ride.. As long as your winners (or for northpro's sake "earnings) are bigger than your losses you can win 3 out of every 10 times and still make money... In fact most trend followers are only correct about 30% of the time.

and yes, eenie, meenie, miney, mo does work.. A famous trader did an experiment once to prove that all you must do is cut your losses and let your winners ride. He used a coin flip to enter the market.. heads long, tails short.. he traded it in ten markets simultaneously and just used a strategic exit in which he could keep his losses small and it MADE MONEY! crazy, I know. Most people spend their whole life trying to create the perfect entry strategy when it is one of the least important aspects of a trade plan.
  • #31
  • Jul 12, 2007 12:27pm Jul 12, 2007 12:27pm
I'm in a similar situation and gradually settling down to a hedge system, a carry trade system and a mtf system. I find that THE MOST IMPORTANT thing in trading is actually money management, things like how many lots to trade, how much risk to bear, when to cut loss and take profit. I hope to contribute more to your thread as i'm making more pips in running these systems
Quoting FXEZ
Great question. Over the past years that I've been involved in trading and with forex I've independently developed a few systems that I consider good with positive expectancies. I'm in process of system development of a new system right now and as I've been going through the process over the past few months, I wanted to record and share some of my insights and thoughts on the process. I'm motivated to do this partially for myself so that I can organize and remember my methodology by expressing it, and partially so others may look over my shoulder and get an insight into what I'm doing and to offer their own insights and feedback.

And in case anyone is wondering, no this thread isn't a buildup to a system sale or some kind of underhanded come-on. I've thought about organizing this thread into an ebook on system development that would be given away for free and may do that depending on how things develop and whether I want to put the time in to do that or not.
make some money, have some fun, leave some footprints
  • #32
  • Jul 12, 2007 12:28pm Jul 12, 2007 12:28pm
Totally agree!
Quoting superdezign
The key to making money trading is simple.. cut your losses and let your winners ride.. As long as your winners (or for northpro's sake "earnings) are bigger than your losses you can win 3 out of every 10 times and still make money... In fact most trend followers are only correct about 30% of the time.

and yes, eenie, meenie, miney, mo does work.. A famous trader did an experiment once to prove that all you must do is cut your losses and let your winners ride. He used a coin flip to enter the market.. heads long, tails short.. he traded it in ten markets simultaneously and just used a strategic exit in which he could keep his losses small and it MADE MONEY! crazy, I know. Most people spend their whole life trying to create the perfect entry strategy when it is one of the least important aspects of a trade plan.
make some money, have some fun, leave some footprints
  • #33
  • Jul 12, 2007 1:51pm Jul 12, 2007 1:51pm
Quoting stunew
I just wanted you to help me get a grip on your concepts, I mean, they almost seemed to have some order of intelligence for a while.

Not only do you have over 10 years of experience, with the cognitive skills of a novice, but you presume to know my own disposition?
You must be a speculative trader right? :d
So now that I've had my hand slapped by an 'expert', I'll be getting off this futile philosophical roundabout and back to the real world of winning real money.

How you like them apples?

I want to apologize for being sarcastic in my previous reply to you. It sounds like you're just trying to understand what I'm talking about. And I also realize that some of the ideas discussed in this thread are quite esoteric and lacking in specific examples. I didn't want to get into a thread about designing an actual system because to do so I would either need to create a new system (which would take me away from my current system design project), or talk about my current system's design (which I don't want to do because it is still undergoing major changes and I think in the end I won't release it to the public domain for a number of reasons.)

I also wanted to comment on your statement about me being an expert. I'm not. I'm just a trader who has persisted and has had a degree of success in trading but who still has A LOT to learn.

I do appreciate your comments as they have stirred up quite a bit of good discussion and hope you will continue to add to this thread in whatever way you see fit.
  • #34
  • Jul 12, 2007 1:56pm Jul 12, 2007 1:56pm
Appreciate sharing your system. It sounds like a money management based system. Do you take losses also, or do you just wait for your open positions to hit the target? If you do take losses, this sounds like a concept I've seen elsewhere where you allow your account equity to drive the closure of positions when you reach new equity highs. It's actually a very good concept if it is combined with the right kind of system.

Quoting greatserge
i am just going to add a strategy to your system that helped me a lot lately.

i used to be the one who was always waiting for that ultimate breakout where i would have the right trade (buy/sell) and the market would break out in my favour... but that ended up being a crash.

i realized that after you have a functioning system, the next step is your limits.

i came up with a personal "monthly gain calendar".

i broke down a month in 16 - 20 business days where for each day i have a set profit percentage from overall balance for that day.

for example.

i have a 5% gain for each bizday of the month.
if one starts with $500, the first day would have a gain limit of $25.

those $25 gain entirely depends on account type and currency dealt with.
its not a defenit PIP gain limit per day but its just an amount. PIPs amount to equal the daily gain limit would vary on account type.

if on first day the daily limit is achieved, one would close the trade. the equaty would be $525, therefore, the next day limit would be greater than $25 because the balance is now $525.

so one would have a trade open until his daily gain limit is achieved.


if you do the math, and calculate each day's predicted gain plus that day's equaty, after several months one will be very surprized by the numbers revealed.

500 + 5% (25) = 525
525 + 5% (26.25) = 551
551 + 5% (27.5) = 578
and so on.

after i reached a comfortable equaty limit (ie $10,000) , the daily gain is set a side or withdrawn.

thats my method that helped me.
comment freely.
  • #35
  • Jul 12, 2007 2:10pm Jul 12, 2007 2:10pm
Quoting stunew
Which = 50% Win/Loss Ratio.

Therefore, on your defined prinicipal.... I have 2 brilliant systems for you...

1) eenie, meenie, miney, mo.......
2) Flip a coin. Heads=BUY, Tails=Sell
There was an interesting thread on this topic a while back by a guy named Mr. 50%. I think he posted a journal consisting of several coin flip trades and ended up with a positive record using his money management system. It was a small sample but a net gain nonetheless and an interesting thread that is worth a read if only to get Mr. 50%'s philosophy on system design.

Northpro and superdezign have added some excellent commentary on this subject, and since I think your comments are actually sarcastic, I'll just let what they said speak for me.
  • #36
  • Jul 12, 2007 2:13pm Jul 12, 2007 2:13pm
Quoting boostrade
I'm in a similar situation and gradually settling down to a hedge system, a carry trade system and a mtf system. I find that THE MOST IMPORTANT thing in trading is actually money management, things like how many lots to trade, how much risk to bear, when to cut loss and take profit. I hope to contribute more to your thread as i'm making more pips in running these systems
Does MTF stand for multiple time frame system? And if so, are you using the longer time frames as a trend filter and entering on the shorter time frames for timing purposes? I'm curious about this approach because backtesting multiple timeframes isn't that easy to do. But it is something that I want to spend more time looking into.
  • #37
  • Edited 4:16pm Jul 12, 2007 2:50pm | Edited 4:16pm
To sum up for easy reference the first 3 steps that I’ve talked about thus far:

Determine what you are trying to accomplish. For example, my goal is to create a fully objective trading system that uses high-frequency data to take advantage of the inefficiencies in the forex market. I’ll define high-frequency data as shorter than one hour in duration, and inefficiencies as fundamental biases that exist in the currency markets, such as the carry trade influence.

Clarify the goal into more specific terms. For example, at my system’s base I use a stop and reverse (SAR) methodology for testing possible trade setups and combinations of rules. I want to focus on those rules that produce a net profit when coded up as a SAR system because my belief is that this will provide a system base that has a positive expectancy. I determine a core technical base (such as channels) that I want to use as the foundation for my system, and focus on trend-following rather than countertrend trading. Since I’m using a trend-following approach, I select a target market that tends to trend, and for that I select among the carry trade currencies because of their natural bias for trending and directional movement.

Create some assumptions and test those assumptions. Now that I’ve identified the target market, and the core technical base (channels), I need to start drawing some channels on my shorter-term charts and start making some observations about how the market actually moves in relation to the lines I have drawn. The objective is to start generating hypotheses, and then determining how to code and test those hypotheses into specific computer algorithms. A single hypothesis, such as “using a channel and a momentum indicator together will improve upon using a channel alone,” may take several days to code up, and test the various permutations.

First I need to determine how well a channel alone performs on my selected instrument. Then I need to compare those results with the results I get from combining my channel with the various momentum indicators that I have chosen to test. And there may be many ways of using each momentum indicator. For instance, I might think an RSI move below 30 indicates a buying opportunity when combined with a certain channel break. I might also hypothesize that RSI moves above 70 are actually bullish. Or I might abandon traditional indicators and come up with my own definitions of momentum, and test those. The objective is to test many things and let the data lead where it will. There should be lots of optimization done at this point, to ensure that there aren’t great opportunities just waiting to be discovered that are being overlooked.
  • #38
  • Jul 12, 2007 2:52pm Jul 12, 2007 2:52pm
The fourth step is in deconstructing the system one element at a time to determine what is actually driving the profitability of the system. It has been said that there are many profitable systems out there, and all of them are difficult to locate. I would add to that by saying that of the profitable systems “out there” very few of them are in the category of “highly profitable” as I define it. The main statistics that I use to determine a highly profitable system are win %, Net Profit / Max Drawdown, Max Drawdown, and Net Profit. In particular I focus on the Net Profit / Max Drawdown statistic because it does a good job of describing how much leverage may be used to trade a given system to achieve a certain actual max account drawdown when trading the system live. I need at least a 5 and prefer systems that have ratios of 10+. (Note: I use the absolute value of the max drawdown to figure the Net Profit/Max DD ratio) These highly profitable systems are not easy to find. I suppose that is why they are highly profitable.

One of the major difficulties of testing on grid systems is coming up with a reliable max drawdown figure and margin utilization comes into play as well. That is one reason why I prefer the simple stop and reverse (SAR) type of system for testing and initial development.

Essentially when you deconstruct your system element by element, and run an optimization to determine how robust the system performs in its given state, you figure out very quickly which system elements are helping and which are hurting system performance. I realize that it sounds simplistic, but those elements that are hurting system performance, according to the statistics that you are using should be eliminated. And those elements that help system of course should be kept. And the question should be asked, what could I do to make that concept work even better? And a new round of testing can ensue that may lead to an even better combination of elements. During this process accidental discoveries are sometimes made. Testing the opposite conditions can on occasion yield better results, even though this improvement may not have been foreseeable.
  • #39
  • Jul 12, 2007 2:55pm Jul 12, 2007 2:55pm
So the point of step 4 is to take a system that is showing promising backtesting results, and evaluate it component by component. It is this way that we learn from our systems what works and what doesn’t. And we can use this information on future systems or to further enhance the current system.

And as we’re deconstructing the system it is very likely that we will run upon components that can be removed, and we will have ideas about what might make the existing design and components work together even better. This is where intuition comes in and we allow ourselves to focus on improving our system and test those insights.

The thing you will discover from taking your system apart is that either your testing was flawed in some way (due to error or mistake at the outset) and there is nothing there (in which case you’re back to the drawing board), or that you really do have a decent system, and you will start to understand the areas that may be further enhanced to increase system performance and where your system may be weak. In either case you’ll be taking a look under the hood at the working parts of your system and learning from what you’re finding. And that will help you create even better systems.
  • #40
  • Jul 12, 2007 6:40pm Jul 12, 2007 6:40pm
yes there are losses and somedays you might not see an opportunity to open a trade. that just puts you a few days behind schedule, thats no big deal.

now if you combine your trading system and my money management, you got yourself a fully functioning system (imo)


Quoting FXEZ
Appreciate sharing your system. It sounds like a money management based system. Do you take losses also, or do you just wait for your open positions to hit the target? If you do take losses, this sounds like a concept I've seen elsewhere where you allow your account equity to drive the closure of positions when you reach new equity highs. It's actually a very good concept if it is combined with the right kind of system.
slowly but steady is the answer.
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