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Is the "system" part really so easy to come by?

  • #41
  • Mar 14, 2007 9:31pm Mar 14, 2007 9:31pm
"Discretionary vs. systematic" is the same in trading as "art vs. machined production" in real life. Obviously, creation of a masterpiece requires more talent, knowledge and dedication but may eventually lead to a creation of a very high value product. The "machnined production" requires fewer skills and provides more consistent results but with lesser value in it.
  • #42
  • Mar 14, 2007 10:21pm Mar 14, 2007 10:21pm
Quoting FXTerminator
It has already been proved that you can make money with a random entry (buy/sell a currency pair if coin is head/tail) IF, and only IF, your exit is not random.
where has this been proven?
Relax and be happy.
  • #43
  • Mar 14, 2007 10:23pm Mar 14, 2007 10:23pm
Quoting Keys
My advise is take your system and backtest and optimize it and see what stops would have made the most profit.
errr...this is mearly predicting the past. predicting the future is how you make money.
Relax and be happy.
  • #44
  • Edited 10:46pm Mar 14, 2007 10:31pm | Edited 10:46pm
Quoting merlin
where has this been proven?
The idea of making money with a random entry system has already been discussed elsewhere in this forum but here it is:

"Tom Basso designed a simple, random-entry trading system … We determined the volatility of the market by a 10-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1% risk model for our position-sizing system. … We ran it on 10 markets. And it was always, in each market, either long or short depending upon a coin flip. … It made money 100% of the time when a simple 1% risk money management system was added. … The system had a (trade success) reliability of 38%, which is about average for a trend-following system."

From 'Trade Your Way to Financial Freedom', Van K. Tharp
  • #45
  • Mar 14, 2007 10:38pm Mar 14, 2007 10:38pm
Quoting merlin
errr...this is mearly predicting the past. predicting the future is how you make money.
True, but again, there is only one optimum stop, given a specific trading system.

Example.

Stop loss = 75 pips, profit after 1000 trades = -5300 pips (loss of 5300 pips)
Stop loss = 50 pips, profit after 1000 trades = -1100 pips
Stop loss = 25 pips, profit after 1000 trades = +4200 pips.

Clearly, the 25 pip stoploss is the winner in this brief example.
In other words, you can turn a winning system into a losing system just by changing the size of the stop. Every system has its optimum stoploss, assuming the system gives you a statistical edge to begin with. This is of course not to be confused with optimization.
  • #46
  • Mar 14, 2007 11:17pm Mar 14, 2007 11:17pm
Quoting jbamaj
I don't have much trading experience yet. However, I think human nature is what it is in any discipline. There are just some people who want to appear to be "the smartest person in the room."

I'm a preacher. That pretty well means the source material that I use in my "discipline" is basically limited to one book that, in most editions, is around 1,000 pages long. Its been around for a long time and still reads the same way today that it did a long time ago. But you'd never know that from endless books written by authors who claim to have discovered some new teaching or thought from it. I doubt seriously they have come up with something that the mulitudes of authors who have written before them for 2,000 years had not yet discovered. There are just some preachers who are not content to say the same old truths in the same old ways. You can't get noticed that way.

Sounds like that is what is happening above. There's no glory in doing what james16 has been showing in his chart thread, or just using a simple MA system, etc. And for many people that's not enough.

Again, I don't trading well yet, but the best preachers I've ever heard didn't wow me the creativity of their thinking, but with their grasp of the same old "boring" truths that even a child can learn.

I suspect the best traders are the same. Their good because they have a grasp upon the "boring" fundaments of price actions and tried and true indicators, not by their creativity of their "holy grail" system. Am I close?

Jonathan
Very VERY well said.......
Same Whore .... Different Dress
  • #47
  • Mar 14, 2007 11:40pm Mar 14, 2007 11:40pm
Quoting Keys
My advise is take your system and backtest and optimize it and see what stops would have made the most profit. I guess it's all relative to what tighter means to you. There is an optimum, and tighter than that is bad.
My advice would be to build a system allowing to define where the stops to be placed before considering taking the actual initial position.
  • #48
  • Mar 15, 2007 12:04am Mar 15, 2007 12:04am
Quoting jbamaj
I suspect the best traders are the same. Their good because they have a grasp upon the "boring" fundaments of price actions and tried and true indicators, not by their creativity of their "holy grail" system. Am I close?
Jonathan
Not necessarily. I can tell you that charts are in fact quite readable. And readable pretty much like a text. I would compare it to a text written in hieroglyphics. The problem is that not everyone takes enough time and efforts to learn market's language and its rules despite there is a “rosetta stone” exist in the form of TA.
FA is a different story and applies totally different approach to trading matters. You can't build a mechanical system based just on FA. In its pure format FA is totally discretional. However, there is even a bigger problem with FA exists. It is there because of the myth that the market is driven by fundamentals. In fact it's just not true. The market is driven by sentiment which is not the same as "fundamentals". It is something much harder to get a reliable info about and thus much more difficult to analyze.
  • #49
  • Mar 15, 2007 12:27am Mar 15, 2007 12:27am
Quoting FXTerminator
"Tom Basso designed a simple, random-entry trading system … We determined the volatility of the market by a 10-day exponential moving average of the average true range. Our initial stop was three times that volatility reading. Once entry occurred by a coin flip, the same three-times-volatility stop was trailed from the close. However, the stop could only move in our favor. Thus, the stop moved closer whenever the markets moved in our favor or whenever volatility shrank. We also used a 1% risk model for our position-sizing system. … We ran it on 10 markets. And it was always, in each market, either long or short depending upon a coin flip. … It made money 100% of the time when a simple 1% risk money management system was added. … The system had a (trade success) reliability of 38%, which is about average for a trend-following system."

From 'Trade Your Way to Financial Freedom', Van K. Tharp
It would be interesting to see some numbers or better yet, an equity curve. This is a nice narative, but not a proof. You know, how many trades, for how long a time period, etc.
  • #50
  • Mar 15, 2007 1:12am Mar 15, 2007 1:12am
Quoting Igrok
Not necessarily. I can tell you that charts are in fact quite readable. And readable pretty much like a text. I would compare it to a text written in hieroglyphics. The problem is that not everyone takes enough time and efforts to learn market's language and its rules despite there is a “rosetta stone” exist in the form of TA.
FA is a different story and applies totally different approach to trading matters. You can't build a mechanical system based just on FA. In its pure format FA is totally discretional. However, there is even a bigger problem with FA exists. It is there because of the myth that the market is driven by fundamentals. In fact it's just not true. The market is driven by sentiment which is not the same as "fundamentals". It is something much harder to get a reliable info about and thus much more difficult to analyze.
I completely agree, sentiment drives the market. The key is to understand market sentiment. Many people try to predict sentiment using FA when such method only works if human are totally rational. Majority of market participants are not rational most of the time. The same goes to people who claim to do FA by trading the news. News is sentimental not fundamental.

mathematician,
I agree with you that tight stop loss is good as long as you reenter the position when you get stopped prematurely. This is my experience. I use to place my order with 15-20 SL. When I get stopped I checked if my initial guess was right. If I am right, I reenter. This works well for me. I manage to stay at breakeven during hard choppy market. One day, I tried increasing the SL bigger (40-50) and try to master my psychology by not exiting unless SL is hit. I lost 10% of the equity in a day LMAO.
For me it's better to lose 100 pips after 10 trade than losing 100 pips after 2 trades. The former gives a chance to rethink your position after each SL hit (to reverse or to reenter).
  • #51
  • Mar 15, 2007 4:29am Mar 15, 2007 4:29am
Yes yes, the point of my story was that all else being equal: maximizing pips gained over pips risked is more important than simply maximizing pips gained.

A 50 pip gain on 10 pips risk is better than a 200 pip gain on 50 pips risk. The former makes a profit equal to 5 times the risk, the latter makes a profit of 4 times the risk. If you scale your lot sizes according to a fixed percentage of your capital on each trade, then the former will translate to more actual monetary profit. Even if the the number of lots traded is the same: the former allows you to be wrong 5 out of 6 times and still break even and the latter only allows you to be wrong 4 out of 5 times to break even.

Of course the question is: How much more likely will you be wrong with a tighter stop? Indeed, in the end it's really the expected return that matters most. But I just wanted to point out a flaw that I had in my thinking: Where I was trying to optimize a system by minimizing the number of stop outs, when in fact it was more profitable to allow for more stop outs but have tighter stop.
  • #52
  • Mar 15, 2007 6:35am Mar 15, 2007 6:35am
ive seen it posted elsewhere and though i cant prove its right, i like the idea of it as its a stab at per trade optimization - you exit when your system gives you an exit sign. clearly you could choose to see whatever signs you want to that get you out faster. i think in short stops too, but then sometimes i get into an over-optimization mode and it leads to over-trading... a clean exit and a clean slate helps me reorient. i still am learning to properly stalk.

[is the "system" part really so easy to come by?]
[Does any system last? Or is the market too dynamic such that it eventually "learns" your "edge" and washes it away?]

i take these as more of philosophical rather than practical questions, since if you didnt believe that you could profit, you probably wouldnt be here, so bear with me if i go off the deep end. id say yea in my short time in fx ive seen a million systems with another order of variations, theyre easy to come by. there are definitely market phenomenon that have 'worked' in some form since people began tracking them. i once had a physics professor that would go on about how if you threw a ball against the wall, there is a chance, though it is approaching zero, that all the atomic nonsense will line up properly and the ball will go through the wall as if it wasnt there. of course you could try over and over until the end of the universe and it might not ever happen. this is telling me that there are in existence systems, totally 'random' or not as random, that will work, or have the possibility of working, essentially forever. the holy grail people refer to so much is a totally random 'system' that just happens to be right every time...

we try to remove randomness from a system, with TA or FA because we have neither eternity nor bottomless pockets. if we take a system trade by trade, all systems have winning and losing trades, right? hmm, well then all systems work and all systems fail. can we ever provide why it failed, not just when? does a system provide a why, or was it just self-oriented to begin with?
mathematician, isn't your 5th axiom kind of like knowing why, since it smacks of system creation?

[5. Whatever strategy you come up with will probably need some modifications over time. The trick is to know when you should stick with it and when you should modify it.]

TA is like looking through a veil, you can see everything thats happening, albeit as an amorphous, writhing blob. but come close, and ill club ya! market sentiment is ir/relevant this way. FA is like looking through a scope, once your sights are lined up, the target moves. one shot, one kill. insider information works like this also, as its very specific in its purest form.

i think its easy for us at FF to get lost in charts because we are pretty much screen traders and its all we have access to, i mean i dont see us banding together in groups to aggregate our own real world market surveys, we are instead sharing chart notations in groups... pretty much every system i see here is set up pretty much not to see value in strict terms, but to see fluctuations. are these kinds of systems 'market impeders' or not? on the one hand we can say the a market is efficient only after all profit has been extracted from it, but it was inefficiencies that gave someone profits in the first place, right?

["Discretionary vs. systematic" is the same in trading as "art vs. machined production" in real life. Obviously, creation of a masterpiece requires more talent, knowledge and dedication but may eventually lead to a creation of a very high value product. The "machnined production" requires fewer skills and provides more consistent results but with lesser value in it.]

the idea reminds me a paper i read in the past discussing original/copy... does the original piece of 'art' lose or gain value if (perfect) copies exist? if a copy is valued less in our eyes, is it only because we know its a fake?
  • #53
  • Edited 1:23pm Mar 15, 2007 12:53pm | Edited 1:23pm
Quoting mathematician
But I just wanted to point out a flaw that I had in my thinking: Where I was trying to optimize a system by minimizing the number of stop outs, when in fact it was more profitable to allow for more stop outs but have tighter stop.
Again not necessarily!

Tighter stops or larger stops it does not matter, what's important is the OPTIMUM stop, given a specific trading system.

During the (oh so important) backtest, you will quickly discover that only one specific stop generates more profits for your particular trading system, any other stop (no matter how "tight" or large) will only DECREASE your profits.

Secondly, and this is what I have discovered through years of backtesting, most winning trading systems are totally COUNTER-intuitive, while trading systems based on ideas that "make sense" at first glance are always the biggest losers !! :surprised

So ALWAYS test any trading idea, especially the one that seems "sound" and "logic", like your "it was more profitable to allow for more stop outs but have tighter stop" .... It could be true but you will NEVER know for sure unless you put this idea to the (back)test.

You would be surprised how many seemingly "sound" trading ideas fail the minute you start the backtest!
  • #54
  • Mar 15, 2007 5:59pm Mar 15, 2007 5:59pm
Quoting merlin
errr...this is mearly predicting the past. predicting the future is how you make money.
Predicting future is done by models. Models are built by studying and describing past behavior of some entities. Any science and any application of science is based upon the assumption that if some rules governed past behavior of these entities, the same rules will continue doing so in future. Forex is not different from any other domain that can be studied with scientific methods. Fxterminator is 1000% correct. Within a given system, there is only one stop loss value, one take profit value, one position size, etc., that produce the highest profit expectancy. IMO, if there is a Holy Grail in trading, it is in using valid methods for optimization. And, as it has been already suggested here, once you know that the set of values you use are ***the*** optimal values, it's much easier for you (well, for me, at least to fight psychological problems and lack of discipline.
sans peur et sans reproche
  • #55
  • Mar 15, 2007 7:08pm Mar 15, 2007 7:08pm
Quoting ilanr
...IMO, if there is a Holy Grail in trading, it is in using valid methods for optimization. And, as it has been already suggested here, once you know that the set of values you use are ***the*** optimal values, ...
That's interesting. I wonder if you have ever re "optimized" 1,000 bars later & if you have, did the test return the same number?
  • #56
  • Mar 15, 2007 8:10pm Mar 15, 2007 8:10pm
Quoting FXTerminator
Again not necessarily!
You would be surprised how many seemingly "sound" trading ideas fail the minute you start the backtest!
Hehe, I'm not surprised at all. It seems all I ever see are ugly back tests.

Indeed there will be one optimum stop which works best in the back test where orders are not replaced...and there will be one optimum stop for a back test where orders are replaced.

It will be the optimum stop for that set of historical data. The question is: Will it be the optimum stop in the future? Who knows. I'm sure that if you change your data set, say include more history or less, you will get a different optimum stop level.

Perhaps a very strong system would be one where the optimum stop level doesn't change much when you break the data up in to different pieces and test over all the subsets of the history, e.g. test it over one year for 5 separate one-year tests starting 5 years ago. See if the optimum stop remains relatively stable over all tests.
  • #57
  • Mar 15, 2007 8:10pm Mar 15, 2007 8:10pm
Quoting Bemac
That's interesting. I wonder if you have ever re "optimized" 1,000 bars later & if you have, did the test return the same number?
exactly, that's the question.
  • #58
  • Mar 15, 2007 9:29pm Mar 15, 2007 9:29pm
Quoting mathematician
exactly, that's the question.
A strong and robust trading system will have a very tight range of "winning" stop loss levels, let's say 27, 28 and 29 pips, no matter how many new, fresh data series you inject to the backtest or forward test, that's all I am saying.

Of course the optimum stop loss will vary slightly over time, but not that much and only within some optimum range.

In other words the system's performance rapidly decreases once you are outside a certain range. In this example you would notice a rapide decrease in profit if the stop loss is under 27 pips or over 30 pips for this specific trading system.

All trading systems have their own optimum stoploss and target limit and your backtest will show you the good values to use for trading.

I have seen traders here saying something like this: "Oh I sometimes use a tighter stop and sometimes I use a large stop".

Oh boy, that's definitively not the best way to trade, far from it.
  • #59
  • Mar 15, 2007 10:46pm Mar 15, 2007 10:46pm
Quoting FXTerminator
A strong and robust trading system will have a very tight range of "winning" stop loss levels, let's say 27, 28 and 29 pips, no matter how many new, fresh data series you inject to the backtest or forward test, that's all I am saying.

Of course the optimum stop loss will vary slightly over time, but not that much and only within some optimum range.

In other words the system's performance rapidly decreases once you are outside a certain range. In this example you would notice a rapide decrease in profit if the stop loss is under 27 pips or over 30 pips for this specific trading system.

All trading systems have their own optimum stoploss and target limit and your backtest will show you the good values to use for trading.

I have seen traders here saying something like this: "Oh I sometimes use a tighter stop and sometimes I use a large stop".

Oh boy, that's definitively not the best way to trade, far from it.
I disagree completely. A very robust system will make you money no matter where you put the stop. That's why it's called a robust system.
  • #60
  • Mar 16, 2007 12:20am Mar 16, 2007 12:20am
Quoting aicccia
I disagree completely. A very robust system will make you money no matter where you put the stop. That's why it's called a robust system.
Really?

Then set your stop at 1000 pips and your take profit at 1 pip and see if your "very robust" trading system is STILL making money after 5000 trades...
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