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What is a reliable and sound system?

  • #1
  • First Post: Jan 27, 2008 2:42pm Jan 27, 2008 2:42pm
Hello all,

I'm building my own system and have my own opinions on things, but would like some others opinions in case my brain is running in circles. Here is the type of system I am interested in.

1. Highly reliable. Win ratio of at least 50% given the next parameter, but really I'm looking for something closer to 60%+
2. Risk/reward ratio of at least 1:1. I don't want to risk 100 pips only to make 50. Given the above parameter it might be easier to get reliability with a risk/reward ratio closer to 1:1.



That's it. How would you build a trading system around those two parameters? What would your TP/SL be? What would be your signals?

This may sound very broad, but I wonder if certain indicators are better for different trading styles. For example, are Fibonacci trading systems really meant more for long term trading systems where your win ratio may only be 33%, but when you win you win big because of risk:reward ratio of maybe 1:3 or more?

Another example is I doubt anyone is trading a currency pair fundamentally on a 1 minute chart. You can't scalp based off of fundamentals.

Funny how those two parameters sort of feed off one another where you change one and it affects the other.

So what type of system would you build around that?
  • #2
  • Jan 27, 2008 5:45pm Jan 27, 2008 5:45pm
Hi,

Im going to try my best to give you a polite and helpfull reply to your question. By the tone set in your post I would assume you are reasonably new to the forum and forex in general, Thats fine, everyone starts at some point and many people come in to 'the game' with the expectation that the journey would lead to a little discovery and result in a system that gives you BUY NOW, SELL NOW, CLOSE NOW signals. This isnt how it realy works.

Infact, you may be in a much better possition to others in this forum due to your 'newness'. My sugestion is to read the threads with 5 stars in both the disscusion and systems sections, focus on the ones trading price-action and youll be getting the best start available. And like always, I would direct you to babypips.com to brush up on basics.

There is a new thread started yesterday I think which you could follow, I feel this is going to be a very good thread to get you on your way.
Also there is a thread in the beginners section which helps with giving the trader an idea of what to expect from forex. Probably one of the most important things in getting a good start trading is reasonable expectations.

Ill dig the links up and get back here and post them.

The 'specs' for your desired system that you stated may sound average or 'run of the mill' but beleive me when I say, there are people who have been looking for a long time and still are just for a slight consistent possitive edge.
Thats the key-word ....CONSISTENT along with PATIENCE and DRIVE.

Good luck.

Leon
Living the adventure in my head.
  • #3
  • Jan 27, 2008 6:09pm Jan 27, 2008 6:09pm
Actually I am not new to trading, and I think you missed the point of my question. I've read plenty of systems and so forth, but they're not much help to the question I've posed. All the systems sort of explain how to trade the system, but they don't explain what type of trading it really is.

I'll give an example of what I'm talking about.

There was a thread posted over a year ago by Tdion which has since been removed by tdion. It was called the tdion pyramid in which you would pyramid in to a trending trade such that when you catch the one big wave of the year you can really rake in the profits. I forget how he would get signals. win% of the system was very low, but the risk:reward was something like 1:2000+. Compounding is a powerful tool.

Think of it like this. Are we to assume that every trading method has the chance to be 50% correct? No. I just proved that with tdions pyramid strategy of eventually finding that wave. Then there is the converse situation where we could probably easily get 80-90% win ratio, but our risk reward ratio would be terrible, something like 3:1 or so. I believe anything greater than 1:1 is shooting yourself in the foot.

I'm not specifically asking, "what system is the best." I'm asking for help in identifying what system would be comfortable for me. Don't point me to a thread of another system. What I mean by system is should I be building something based off of MA's, RSI, MACD, fibs, breakouts, etc..? I don't want to learn a system are built. I want to build my own. What I'm asking is, what types of systems are generally slanted towards the parameters I gave?

Should I be looking into breakout systems? Should I be looking into MA system to play the swings? Should I be looking for a pivot point system? What time frame? The longer the time frame generally the better risk/reward ratio, but then your win% drops as you need to forecast further into the future. Do you see where I'm going with this?
  • #4
  • Jan 27, 2008 6:39pm Jan 27, 2008 6:39pm
Quoting permanentjaun
What I mean by system is should I be building something based off of MA's, RSI, MACD, fibs, breakouts, etc..? I don't want to learn a system are built. I want to build my own. What I'm asking is, what types of systems are generally slanted towards the parameters I gave?

Should I be looking into breakout systems? Should I be looking into MA system to play the swings? Should I be looking for a pivot point system? What time frame? The longer the time frame generally the better risk/reward ratio, but then your win% drops as you need to forecast further into the future. Do you see where I'm going with this?
Hi-

I don't think that Leon meant any harm by his post.

As I understand that you are looking for a 'type' of system that fits your goals - at least 50% winners and at least 1:1 risk to reward ratio.

Obviously, a 1:1 risk to reward that is correct 50% of the time will not make you any money. But, I think I understand what you are asking.

Maybe we make three assumptions:

1. Let us assume that your winning % is based on your entries - if you have solid entries you will make $ more often than not.

2. Let us also assume that your risk to reward ratio is based on your exits - if your anticipated exit is further away from your entry, then you are going to have a higher risk to reward ratio.

3. Perhaps we also assume that higher time frames (weekly, monthly) will also increase your risk to reward ratio. This makes sense because we are allowing more time to hit our profit target.

I would argue that all three assumptions are false. They are wrong.

Why?

Because it is your 'uncle point' - your stop, that is influences......

1. The winning % - most of the time if your stop is close to entry, you will DECREASE your winning %

2. Your risk to reward ratio. A tighter (closer to entry) stop will INCREASE your risk to reward ratio.

3. Most of the time, higher time frames do not allow a higher risk to reward ratio because your stop must be placed FURTHER from entry.


Thus, I think that a system that has VERY TIGHT (close to entry) stops will be best for your risk to reward ratio, BUT this ratio is also dependent upon your profit target.

You may find that certain price action patterns, trading of of support resistance, and even some systems based on oscillators will allow you an entry with a tight stop.

BUT, your risk to reward ratio is going to depend upon you holding out for your profit target.

There is a discussion on exits - I have never read a better discussion on exits ever than this one. It blew my mind and affected me more than any interview of any trader I have ever read......and some of my good friends, whom I respect dearly have been interviewed before in these sorts of books. This interview of Scott Barlow still stands as my favourite.

Scott Barlow in "Every-day Traders" by Nick Radge

---

The other thing that this discussion reminds me of is that YOU are the system, and as such the winning %, risk to reward ratio, all of that stuff takes a backseat to one thing - your SOL ratio. If you have a poor SOL ratio, it is quite likely that you will be done as a trader. I believe this very much. The numbers bear this out.
  • #5
  • Jan 27, 2008 6:50pm Jan 27, 2008 6:50pm
This is SOL.
Attached File(s)
File Type: pdf sol_free.pdf   218 KB | 464 downloads
  • #6
  • Jan 27, 2008 7:20pm Jan 27, 2008 7:20pm
I think I understand what you are asking here. First it is a good thing to set the goals of a system before starting to research it. In fact most people that look forever for the holy grail often never find it not because the holy grail does not exist but because they don't really know what they are looking for. So I think you made well your first step, even if for me there are still some missing points, which are:
1) how many signals per month per pair this system has to fire. I usually prefer 3 to 6 signals a month for every pair because with too few signals the system is not statistically reliable, but with too much signals the problem rises that you don't know what to do when you have more signals than your preferred max exposure would allow.
2) should this system be discretionary or mechanical? This point is very important because it will determine which tools you can use and which you cannot.
If it will be discretionary then maybe you will be able to use the indicators you mentioned (RSI, MACD, fibs, MA, support and resistance, trend line, etc...) if it will be mechanical the story is totally different as I see it. In fact I think that most people that try to build mechanical systems and fail, do fail because they try to have the computers to do what usually is well done by humans, not by computers. All the indicators you mention were created by humans for humans. In order to use them well you must be human, you must interpret them in a discretionary way, for computers they are almost useless.
Anyway don't forget that you can also do a hybrid, such as fire the signals with a discretionary system (you open the positions) and have the computer to manage the open positions. This approach has its merits. You
fully use you brain and you trading experience (that a computer cannot have) and still avoid emotion errors in the management part of the open trades. And you can have a life: you open the positions and have the computer complete the work for you while you enjoy life.
Anyway you have to decide these things before going on.
.Ubeee.
  • #7
  • Jan 27, 2008 7:37pm Jan 27, 2008 7:37pm
I am somewhat interested in systems with no predictive quality, and are designed for astronomically unlikely scenarios.

Let me explain.

Suppose we analyse 20 years of D1 data for any pair. We will see repeating patterns, and we realize there are countless patterns that never showed themselves. I am interested in building systems that survive all but the most unlikely events.

This may sound like pie in the sky, and for the moment it is. But if there is a way to profit in a completely random environment, while breaking even when not profitable, and leaving the account vulnerable only to astronomically small catastrophic events......
  • #8
  • Jan 28, 2008 9:42am Jan 28, 2008 9:42am
Quoting permanentjaun
Actually I am not new to trading, and I think you missed the point of my question. I've read plenty of systems and so forth, but they're not much help to the question I've posed. All the systems sort of explain how to trade the system, but they don't explain what type of trading it really is.

I'll give an example of what I'm talking about.

There was a thread posted over a year ago by Tdion which has since been removed by tdion. It was called the tdion pyramid in which you would pyramid in to a trending trade such that when you catch the one big wave of the year you can really rake in the profits. I forget how he would get signals. win% of the system was very low, but the risk:reward was something like 1:2000+. Compounding is a powerful tool.

Think of it like this. Are we to assume that every trading method has the chance to be 50% correct? No. I just proved that with tdions pyramid strategy of eventually finding that wave. Then there is the converse situation where we could probably easily get 80-90% win ratio, but our risk reward ratio would be terrible, something like 3:1 or so. I believe anything greater than 1:1 is shooting yourself in the foot.

I'm not specifically asking, "what system is the best." I'm asking for help in identifying what system would be comfortable for me. Don't point me to a thread of another system. What I mean by system is should I be building something based off of MA's, RSI, MACD, fibs, breakouts, etc..? I don't want to learn a system are built. I want to build my own. What I'm asking is, what types of systems are generally slanted towards the parameters I gave?

Should I be looking into breakout systems? Should I be looking into MA system to play the swings? Should I be looking for a pivot point system? What time frame? The longer the time frame generally the better risk/reward ratio, but then your win% drops as you need to forecast further into the future. Do you see where I'm going with this?
Well, Im sorry about my posts unusefullness and missjudgement that you were new to FF/Forex/trading.

There are many Sytems posted here at FF, I feel that most angles regarding mixtures of technical indicators have been covered many times over. We see many people jumping from system to system with these kinds of methods. Some work and some have many added features that I do not see the need for.
But the ones that move to trading PA and TLs and such, learning the way the market moves, rather than watching for the indicator to move, IMHO are the best suited for the CONSISTENCY over the long haul.

Strange that you mention the snowballing of a possition, Just a couple of days ago I read an ebook I was given by a friend......... 'bird watching in lion country', other than him describing why we are infact doing this (bird watching in lion country) he gives explenation to his system he uses for trading his managed accounts.
Identifying Longterm trend and adding possitions as it progresses, then as you reach an area where you are less sure of the trend you reduce your exposure by closing some possitions. Possitions are added to the trend when price reverts back to the median and you continue doing so untill the trend is over.
The only problem is in the book,he refers to following the 'fundamental trend' rather than the technical trend. As I could not do this and take the time to monitor fundamentals I have decided the best way would be simply draw TL's under the move on the daily charts, or use a HMA on a very low period.

If you would like to read the ebook I could send it you, you may have read it alread and in that case it doesnt matter.

The tone of my first post, even though I tried to be helpfull was because I assumed the question was directed like this...

'I WANT A 60% WINRATE
I WANT .........
SO GIVE IT TO ME.'

Lol, glad it wasnt.

Good luck and Good trading.

Leon
Living the adventure in my head.
  • #9
  • Jan 28, 2008 9:59am Jan 28, 2008 9:59am
Quoting Leonlorenzo
Well, Im sorry about my posts unusefullness and missjudgement that you were new to FF/Forex/trading.

There are many Sytems posted here at FF, I feel that most angles regarding mixtures of technical indicators have been covered many times over. We see many people jumping from system to system with these kinds of methods. Some work and some have many added features that I do not see the need for.
But the ones that move to trading PA and TLs and such, learning the way the market moves, rather than watching for the indicator to move, IMHO are the best suited for the CONSISTENCY over the long haul.

Strange that you mention the snowballing of a possition, Just a couple of days ago I read an ebook I was given by a friend......... 'bird watching in lion country', other than him describing why we are infact doing this (bird watching in lion country) he gives explenation to his system he uses for trading his managed accounts.
Identifying Longterm trend and adding possitions as it progresses, then as you reach an area where you are less sure of the trend you reduce your exposure by closing some possitions. Possitions are added to the trend when price reverts back to the median and you continue doing so untill the trend is over.
The only problem is in the book,he refers to following the 'fundamental trend' rather than the technical trend. As I could not do this and take the time to monitor fundamentals I have decided the best way would be simply draw TL's under the move on the daily charts, or use a HMA on a very low period.

If you would like to read the ebook I could send it you, you may have read it alread and in that case it doesnt matter.

The tone of my first post, even though I tried to be helpfull was because I assumed the question was directed like this...

'I WANT A 60% WINRATE
I WANT .........
SO GIVE IT TO ME.'

Lol, glad it wasnt.

Good luck and Good trading.

Leon
Hi Leon,

Good post! Can you send me the ebook?Thanks in advance

Good trading to you.

Zu
  • #10
  • Last Post: Jan 28, 2008 10:30am Jan 28, 2008 10:30am
Quoting tdion
I am somewhat interested in systems with no predictive quality, and are designed for astronomically unlikely scenarios.

Let me explain.

Suppose we analyse 20 years of D1 data for any pair. We will see repeating patterns, and we realize there are countless patterns that never showed themselves. I am interested in building systems that survive all but the most unlikely events.

This may sound like pie in the sky, and for the moment it is. But if there is a way to profit in a completely random environment, while breaking even when not profitable, and leaving the account vulnerable only to astronomically small catastrophic events......
Sounds like a VERY difficult thing to do, trading drives me crazy enough without starting down those lines, lol.
Its amazing how hard consistency is to acheive.

At the moment I have a trade that is made once a day, 3pip SL and 25pip TP. From november the profit factor is 4.3. If I thought its success would continue I could start planning which house and car to buy. But I feel its days are numbered.

Youve chosen the best market for random movements!! I hope something comes up.

Good trading

Leon
Living the adventure in my head.
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