Monday, July 20, 2009

Trading system

I’ve exchanged some emails with readers of this blog, so it looks to me that some information was wrongly interpreted. I would like to use this post to clear things up a bit:

Trading system is one of three important components of one’s trading and I believe that we start our development with trading system which should be foundation of our success. 

Three components of trader’s development:

1. Trading System

2. Money Management

3. Discipline/Psychology


As I stated above - trading system is the first component profitable trader has to have under his/hers belt. Without profitable trading system one will not be able to make it, simply because systems with negative expectancy DO NOT make money.  

Finding proper trading system for each person is difficult task as system that suits me, might not suit somebody else. We all have different personality and it is absolutely OK not to have same interest in life and same trading systems. But, what matters to all of us: System must deliver, as it must have positive expectancy!

Expectancy: 

(Average Win * Winning %) - (Average Loss * Losing %) > 1

or

(Average Win * Winning %) / (Average Loss * Losing %) > 1

As there are thousands of blogs/web pages about trading systems, let’s simplify things a bit: 

Systems are either mechanical or discretional. 

Mechanical systems are driven by strict rule(s) and they trade every time condition(s), defined by rule(s), is (are) met. Some typical mechanical systems are: moving average crossovers, moving average penetrations, price brake outs, etc.

Discretional systems are designed around some of trader’s observations. As an example: Trader notices that if market does not make new high of the day in first hour of trading, then there is good probability for the market to fall. Then, in each and every single situation of this kind, trader might use news, technical or fundamental analysis, etc. to accept or reject assumption that market might fall and with all of that in mind he/she will make his/hers decision.

Systems could be designed around different time frames and some are to be used intraday, while other will hold position overnight. Simply, there are numerous systems - in many time frames, based on many different criteria, but all of them must have one common quality, to even be considered by a trader: Systems must have positive expectancy. 

I shall recommend one thing here: When you design your system, please write down all criteria for execution of trades. If you don’t have a system on paper with everything stated nice and clear - you simply don’t have system, as what you have are just words that might-work-or-might-not when money is on the line.

Trade with trend!

23 comments:

Anonymous said...

Well written Icko. Thank you for all the advice you have been giving me as well. We have chatted on Leading Diagonal (Milan). I would like to ask you a couple of questions about with what software you are trading with and where you get your data feed etc. Most of my questions might be considered silly or irrelevant, but i will have to ask them just to be sure. I am considering trading full-time and would really appreciate your help, or just your thoughts. Thank you again. mfrossouw@googlemail.com

Alsi Trader said...

Hello Milan and thanks for the comment.

I’m happy MetaStock user and another platform to consider is TradeStation that I am not familiar with, but I am aware of numerous blogers/traders who are using it.

OTS and DIRO trading platforms do provide some charts as well, but that is not enough for my liking and back-testing needs.

When it comes to data-feed: I am using Hisat (www.hisat.co.za) and I am relatively happy with them, while internationally based eSignal remains as more expensive option.

When it comes to my thoughts and assistance – Please read through all 18 blog-post here on my blog and if you have any more questions, please do not hesitate to ask in open forum, as I would prefer to communicate in public in order to have as many readers as possible to benefit from information provided. Also, by communicating in public we might get company joining our correspondence - I will always appreciate that, as it is learning opportunity for me too.

Just to make it easy to follow – Please post your list of questions within this blog-post, so we can just continue conversation.

If this is not working for you, please let me know.

Enjoy your day and thank you for the interest.

Anonymous said...

Thank you very much as allays very helpful. I was wondering if it would be possible to back-test a system on lets say forex data, because it free , and then apply those thoughts and theories on the lets say ALSI, on the ALSI's charts of course. Please don't laugh I honestly don't know if there would be a difference, otherwise I would not be asking. Alternatively is there any way to get some ALSI charts for free, just to back-test theories, they don't have to be live they can be very old but I would need a couple of years worth of charts???? PS I do not want illegal charts or software. Just before people are wondering

Alsi Trader said...

Hello and thank you for continued interest.

I believe that system A should work across correlated markets - as same news affect correlated markets in similar ways. However, on Market 1 System A will produce Result X, while on correlated market 2 very same system will produce Result Y. That Result X may be much better than Result Y, with an assumption that after slippage and brokerage Y is >0. So, on two correlated markets same system can be profitable and that is, for my liking, logical enough.

Than we come to your question – Can one test Forex system and apply it on ALSI? I am not sure about logic about of this, as I do not understand why something that works on Forex would work on ALSI and even if it does I would wander if such correlation is just result of pure coincidence.

Please read following links on testing (in this order):

http://www.verticalsolutions.com/notes/intro_to_testing.html
http://www.verticalsolutions.com/notes/simple_tools.html

When it comes to few years worth of ALSI data – OTS as trading platform has only 5 days of historical data and I am not aware of source from whom you could obtain (for free)
required volume of legal ALSI data. Also, I am not a fan of illegal data sources, so I would not have any answer even if you asked about it 

If you would like to enquire about the price of historical data for ALSI, please contact www.hisat.co.za.

Hope this helps.

Please do not hesitate to follow up with more questions if more info is required.

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