How to design a trading system
structure of the trading system
structure of the trading system must focus on behavior market, but rather the movement of the trend. To do this, first you need to understand components and life cycle of a trend. Taking into account the previously described behavior of speculators, and hence the price movement, we can assume that at any moment the markets are composed of, three trends. The first trend is the long, composed of several months, you must use to determine the direction of the market, and in the direction you want open position. The second observable movement of the market correction may be trend, which will consist of a few days, which is defined thanks to the use of more sensitive indicators. The last movement market a bit like a sideways trend, located between correction and continuation of the main trend is the short-term price movement in a day or two, are used for accurate input. For accurate output should be used as a short-term movement, but in this case the underlying trend will change no correction, but a new trend in the opposite direction. Following this understanding of the market for open positions must be used Two or more trend indicators to signal the opening position, and the oscillator and the trend indicator, or to close the position. A more detailed description of the use of these indicators are disclosed below.
Terms opening I position.
Quite an interesting analogy spend authors of "Computer Analysis futures markets, "Le Beau and Lucas between the entrance to the market and the firing of a gun on target: you must first aim (to find the direction.) Then the cock trigger (ready), and then gently pull the trigger (enter on market). In fact, the same two, and then search for the three-step process is the moment of entering the market. In the first place by less than sensitive indicator of trends in an order of the system determines main direction of the market, or the underlying trend. Then, after as long-term direction of the market has been defined, the next task? find a medium-term indicator, which will give a series of signals in long-term trend. These signals can occur at the end of the main correction trend. A series of signals will be needed due to the fact that the first interim medium-term indicator signal occurs before the long-term indicator will allow the system to trade in that direction. It is necessary to remember clearly the sequence of signaling by different sensitivity indicators according to which short-term signals arise first, then medium and finally, the long-term signals. By time will be determined by long-term trend, the first intermediate and short-term signals arise already for the system will be more important receiving repeated intermediate and short-term signals a few times in long-term trend.
There is a relatively large number of useful intermediates indicators, among which are the single and double sliding averages, breakouts channel signals of a parabolic system, the regression line trends. When the system is the importance of the individual intermediate indicator is normally suppressed in the combined system, in consequence of the fact that the system built around a combination of indicators that can at worst contradict each other. In such a situation it is important to choose an indicator which trader had to trust and who surely would give a series of short signals during a long trend.
Open positions run the market activity for followed by the intermediate signal. In addition, there is a choice mechanism run. For example, you can place an entry point to a new peak or trough movement, or select a point of entering the borders of today's peak or depression, placing the corresponding order. Some traders, being very cautious, decide to wait for the entrance to a series of peaks or troughs in the desired direction, but this tactic leads to loss of potential profits. If, however, trust the first signal system, the input can be selected at the first closing in the right direction, it is an occurrence makes it possible to exchange complex software MetaStock, based on which in the third part will be carried out testing and optimization trading system. The important thing to remember here is that is necessary to confirm price action signals the other indicators of the system and let the market run itself entry system. Most good traders profit immediately after the start system, because their systems tend to behave synchronously with all three trends from the beginning.
Terms of closing the position.
After the rules were designed to open a position determined by the rules and output, as defined, according to many Traders are more difficult. The problem is, that would be correct able to determine the end of the primary trend, or the beginning of a correction, more that need to be able to keep control of a minor in obtaining profit or loss.
It should be noted that the opening positions of the signal system does not always profitable, as trend indicators can and wrong, in this case to determine the stop signals, which system will close out positions. Losses for the stop signals are necessary for to avoid catastrophic losses. Any experienced trader uses stop signals are implemented protective suspensions, and traders, who speculate markets without interruption losses, are doomed to failure, and the only thing that can vary, so this is the time in which they go bankrupt. How to The authors have noticed the above-mentioned book: stop loss is similar to the contributions in the insurance policy and should be regarded as necessary cost of business.
When trade takes place in the expected direction, the trader faced with a choice between getting a fast, but steady income or continuation of trade in the hope of greater gain. How do traders in this situation? Probably one of the outputs can serve as floating suspension others may serve the same output oscillators whose ability to guess correction and the trend turning points are described below.
use of stop signals.
There are five types of the most popular stop signals used creators of trading systems:
1. Source stop signal (max loss stop): Signal flow which is carried out when a pre-specified percentage loss of the original invoice or a fixed amount of money are in the open position.
2. "Floating" stop signal (trailing stop). The position is closed in the event that a pre-determined amount of current earnings is lost, there is a stop signal follows the market, and when the profit decreases a certain percentage or amount stipulated that the positions are closed. Floating stop signal refers to a witness suspensions.
3. Removing the profit (profit target stop): This stop signal closed position when achieved a certain amount of profit, initially given trader.
4. Breakeven (breakeven stop). Allows user to determine the level of current earnings, and when the market exceeds this level, the opening price position is a stop signal to the output. So the trader actually insure their investment.
5. The lack of activity? stop signals in time (inactivity stop). This type of stop signal is triggered when the market fails to able to provide a certain percentage of income toward the open positions within the indicated period.
In addition to selecting the type of suspension should solve the problem quantity of suspension. Stop loss is generally divided into two categories: near and far. Ideal as a stop should be of those that are located far enough to barely extend beyond the random or from a technical point of view, meaningless price movements, and at the same time be close enough for comfortable control risks the trade. In fact, these goals are mutually exclusive ideal suspension each other, forcing the search to bring to stops that are set either very close or very far away. You should consider all "pros" and "against" each of the options.
close stops offer a distinct advantage of small losses on each position and restrained the overall risk on a portfolio of open trading. However, this procedure leads to a weakening of the financial and psychological the discomfort of many stops on the auction, which could would be very profitable, if allowed to go to original position their own way. Traders can get around this problem by simply defining a convenient method of re-entering, which will return them to the market in the initial direction just in time to catch most of the rest of the potential income. However, as always, is a compromise. This logical step to return the market will inevitably lead to increased activity of the system, which significantly increases transaction costs and slippage costs.
system using close stops to face disadvantage, as expressed in the increased percentage of losing trades, but will the privilege of lower average losses. The system is far from stopping, will tend to increase the percentage of winning trades against to a system with close stops. Remote station does not interfere with the problem of re-entry and is in control slip and the cost of the fee. This completes the picture significantly increased average losses on trade and significantly increased overall risk in the portfolio. It seems that there is the lesser of two evils or acceptable compromise between these two equally unpleasant possibilities.
On the basis of technical indicators can be developed not quite perfect, but still a reasonable procedure, which will include the basic principle of the job stops, avoiding most of the problems associated with random fluctuations in the price. As one of the possible approach would be to use a standard deviation of prices from the moving average and then place a stop a few steps the standard deviation of the rolling average.
As a practical matter, and perhaps as an effective alternative sophisticated approach, the standard deviation can be used by the average daily price range as the minimum distance for the job stops, that will help avoid most of the small fluctuations in price, resulting in to twitching. To do this, you can simply set a 5-day or 10-day moving average of the peaks or troughs, and then place the initial stop the minimum distance to be equal to the distance between the moving averages. While the market moves favorably, too, can stop coordinated this distance. This technique helps to avoid what is called "random fluctuations during the day, "because it holds enough to stop far, to avoid daytime fluctuations. To stop position require abnormal fluctuation within a day or a series of hostile daily price changes. Perhaps, this method does not provide an ideal stop but it can be very useful in the sense of finding the minimum distance to stop to avoid any twitching.
other acceptable methods of setting stops that fit the definition of ideal suspensions are the points on the graph, such as support and resistance levels, peaks and valleys of recent days, Parabolic Stop and possible envelopes or trend lines, but methods such as support and resistance levels are resistant programming and therefore unrealizable as part of trade system.
popular exit strategy.
There are some of the most popular exit strategy. One of them? method of entry and holding positions for sale. This method is more like investing than the medium-and commerce works for long periods. The method of entry and holding more for those traders who do not mind huge losses and painful losing periods, which will enervate and very expensive short trends. This method is useful for trade only their own well-capitalized and requires a lot of confidence in the experience and discipline, and soon the requirements of large pension and mutual funds. The main component risk of this method is the pursuit of high income countries is that the unit trader almost inevitably ends up in the middle of a severe output period losses. The vast majority of traders can not survive species of large incomes that they have missed, and they are psychologically unable to withstand the inevitable loss, regardless of how well they were trained or educated. At the same time, large mutual and pension funds in accordance with their strategy may be more flexible.
Less popular exit strategy is a method of sighting Released as traders closed, reaching pre-determined price goals. However, each strategy has a downside. In this case, There are some major problems with the ability to predict certain levels with some degree of accuracy. Each can be noted some obvious support and resistance levels that may cause trend fluctuate, but with the exception of this general analysis, in general, it is doubtful that a more accurate aiming is actually reasonably possible. None do not know where the market goes and is unlikely to be able to predict with any accuracy what.
trader, using sighting outputs, takes advantage of, consisting in the fact that he did not face the problem of monitoring large losses unrealized gains. On the other hand, he will definitely suffer of frustration that many prices have not reached the predicted targets. The trader will also have to learn to withstand disturbances brought by supervision order was received less income, while you can could get more if there is a little more patience.
Another well-known strategy? this is a compromise that provides advantage of rapid revenue and leaving at the same time, the possibility for sale. The bottom line is that the trader simply uses dual trading account and receive income from one position to priberezhennoy price target, and the second position allows you to be open in the hope of big win. This method requires a large capital investment in comparison from one trading account, but it has obvious advantages in the case of guessed trend. Quick return on a single contract is always give more freedom for the second, and you can not afford to be very patient. Putting on the account of one win, we can give the second position is sufficient time in order to avoid a premature stop.
In addition to the benefits of this strategy there are negative aspects. The obvious drawback of a double strategy is that if position is open in the wrong direction, then the loss incurred will be at two positions instead of one, with the usual strategy. Dual strategy can be an excellent choice as an exit strategy for only If the trader has a very good strategy for the entrance, and convinced that the majority of trading will start in the right direction. But before you start using this strategy, you should make sure, as would behave, such a strategy on historical data, especially When the entry strategy did not work correctly.
Another method of release, which could be applicable to one account, gives at the beginning of some room to maneuver on market in the form of large suspension until such time until it becomes overbought or fails to provide an unusually large movement in the predicted direction. Then you narrow the income stops to protect a large portion of the profits, but at the same time be able to generate revenue and further, if the market will continue moving in the right direction.
As an indicator which signals the onset of overbought market can be used shestiperiodny relative strength index, from signal which will have to raise the stop. For example, when the indicator Relative Strength is above 75, and then drops to 10 or more points should be raised to stop the minimum price for the last three trading days and adjust them with the rise of the market. This procedure often allows you to stay on a strong market and throws very close to the top.
use of oscillators and trend indicators.
Consider the benefit of trend indicators and oscillators to guess the completion of the trend or the beginning of the correction. As we know all the technical trend indicators are trend following. Their very construction, whether it's moving averages or directional system, says that they respond to is the past price changes signal the beginning of a new trend only after it appeared, but do not predict its occurrence. They help to discover a new trend or to determine the nature and strength a new trend as early as possible after its occurrence. But what does after its occurrence? This means that some time will already be lost, and during that time the trend will change and will move prices in an undesirable direction. Consequently, the trader will lose some profits, if he no protective floating suspension.
way out of this situation, the delay can be indicators or oscillators oscillation? some alternative indicators following the trend. Unlike the latter, the oscillators are very effective namely the lack of clear trends when the market dynamics is reduced to the movements within a relatively narrow horizontal corridor prices, otherwise known as "Market corridor." That corridor of prices, as has been described in the first of work, replaced the main trends. These are periods when the bulls are no longer able to push the market higher, and the bears have not yet felt its force and remain inactive. This market price is so often the corridor change direction that the most difficult problem is to catch beginning and end of short movements up or down. In such circumstances, most systems, following the trend, are ineffective or unprofitable. At the same time, the use of oscillators allows a trader to successfully close positions and withdraw from the transaction.
efficiency of the oscillator is not limited, however, just outside the "corridor of the market." In conjunction with the analysis of price schedules in the period of a trend in the market oscillators able to predict short-term critical periods in the dynamics of market activity? so-called overbought and oversold market. In addition, the oscillators can be seen in advance of the market weakening trends? before this is clearly reflected in the price dynamics: thus, the discrepancy between the direction of the curve of the oscillator and the dynamics of prices shows that following a trend of the market is coming to an end, and soon will come U-turn.
strong underlying trend due to sharp price changes oscillator drives high up in the overbought zone. In Overbought oscillator is until the power of the trend, as measured by the ability prices to rise as fast, not waning. Then comes the period of short-term sideways, consisting of two or three days. During this period, prices have do not change? there is a short-term weakening of the primary trend. Exactly on short-term sideways curve of the oscillator comes from the overbought, as evidenced by a decrease in the rate of growth of prices. The signal of the oscillator may signal output, after which the trend or change in opposite, or will be corrected. At the end of the correction system will need to re-entry, which is written in the following paragraph This part of the work.
As has already been stated, a perfect stop loss could be developed, if you try to put a stop bit random price abroad jumps. However, even an ideal stop may be mistaken in the event the market of large players who are trying to market utyanut toward correction. In this case, if one of those stops work at the moment trend still continues to move, need a method re-entry, which will return back to the trader's market, at a time when short-term trend to resume motion in the direction of long-term trend. The method re- entry will help to avoid disruptions due to the omission of any significant price movements.
The previous section discussed some of the techniques closing positions, which depended on the correctness of system operation. A good way distinguishes a winning trade from the loser, and probably this is the single most important element of any system. Unfortunately, the traders very often close positions before the end the main trend that can More significantly increase the profit system. In cases where the trend continuing need a way to re-enter the market. Strong trends are rare and too valuable to lose them, so that the closing position, a trader must be confident that he can return to the market, if the previous stop was premature.
mechanism of signals for the repeated occurrences of may be quite different from the main entries, because the market is in the middle of a strong, well shown by the trend, with fluctuations in prices are significantly higher than at the beginning of a trend. Being in the middle of the trend, the trader has to be do not need signals trend indicators, and only signals from oscillators small orders for greater sensitivity.
oscillators that determine the overbought or oversold, may very well work in determining the re- occurrences. Assume that the system was stopped flying stop sign on profitable long position in the correction of prices, which was stronger than would be expected. You can watch the behavior of the index the relative strength or stochastic in such a situation to receive the signal the end of this deviation. One technique is to wait for the stochastic oscillator falls below a certain level and then turn back. Falling to the stochastic any value below 40, followed by a rise, should initiate usable re-entry. Typically, trading on the purchase, in the case of no trend of the market caused by falling below the stochastic 20 or 30 and subsequent rotation. However, since the trader was in the a clear upward trend, it is unlikely that the stochastic oscillator reach very low marks in the 20 or 30 .. The stronger the trend, the higher level of probable spread of the stochastic oscillator. If the stochastic oscillator falls only to 50 or 60 and then reverse, probably system receives the output signal, closing the original position and should not be thinking about rejoining. After the launch of the new trade purchase can put a new stop loss below the level of depression correction, and then raise it to the point of no loss, when the reached a new peak. These trends are dying slow and difficult, so chance to get a good trade in re-entry rather high, especially if you can enter after a fall, without waiting for the next peaks.
The secret of success is re-entering to wait until the end of time correction, and begin quickly purchased, as Once the system found the direction of the primary trend. Waiting until the market produce a new peak is too long wait, but you should make sure a sufficiently strong evidence to show that the correction does completed. Here you can talk about a very subtle point that requires careful consideration along with the availability of sensitive and reliable indicator.
As an example of how sensitive can be re-entering the indicator should give a method of using very short-term oscillator, such as a three-day index of relative strength (RSI) as a starting signal re-entry. Usually three-day RSI so often gallops that he is a little bit as an indicator. Since this is a very sensitive indicator, any correction, fairly strong in order to halt the system and close the original position, drop the three-day relative strength at a very low level. When RSI turn back the mark of 50, you can conclude that the correction ended. Therefore, you need to buy the next day, when the market emerges from the peak of the day, who had raised up to RSI value of 50.
RSI technique allows two signs of the trend continuation (the 50 and confirmation), and at the same time it is fast enough to return trader in the market well before reaching a new peak. Other counter trend indicators such as Stochastics,% R and the index of commodity channel can also be used in this way. % K-a sensitive indicator, which will work almost as well as a three-day RSI. Idea is to use one of these indicators for signal the end of the correction. To do this you must set indicator is more sensitive than usual, because in this case need to measure precisely the short correction, rather than the underlying trend.