Futures Contract Data

In Chapters 1 and 2 we looked at those performance measures that could be derived directly from Trade Station's performance summary, and those that we had to export into a spreadsheet program for further analysis to make them more forward looking. In Chapter 2 we also concluded that to achieve the latter, we had to base our calculations on percentages rather than dollars or points. If you are a commodity futures trader, one of the main hurdles to overcome when testing trading strategies on...

Longterm Volatility Filters

Lor long-term systems, we must think a little differently. For short-term systems, the purpose of the filter was to identify the type of trend that holds as many and as favorable short-term moves as possible. For the longer-term system the trend is, per definition, already defined. Instead, we must find the most opportune, short-term entry point as early as possible within this trend. For one thing, this means that we no longer can trade the system randomly. In theory, the best way to achieve...

The Black Jack System

In Part 2 we built a system, which we called Black Jack, the name implying that the system should be able to exploit minute market discrepancies and that if we only stay at it long enough we should be able to make a profit not much from each trade, but slowly and surely build up a stake worth retiring on. We started with a couple of preset entry and filter criteria, based upon common sense and market knowledge. This time, we will reverse our procedure and start with no such criteria at all, but...

Back To The Future

The financial markets are not random and there are ways to take advantage of this nonrandomness with the help of mechanical trading strategies. The good news is that you do not have to be a rocket scientist to do so. You only need a tad more knowledge than you hold about the topic already. Unfortunately, knowing too little about a specific topic sometimes can be more devastating than knowing nothing at all. The big fish in this industry realize that, so they have no incentive to educate you,...

Max Consecutive Winners And Losers And Percent Of Profitable Trades

You should try to keep the maximum numbers of consecutive winners and losers as low as possible and the percent of profitable trades as high as possible. The number of consecutive losers is especially important, if you like to feel comfortable with trading the system. For a correctly built system, however, with a relatively high number of profitable trades, these numbers hold very little value and should be looked upon more as freak occurrences than anything else. When you examine your system,...

The Standard Deviation Breakout System

Let us do one more long-term system in this meticulous manner before we move on to the shorter-term systems and yet another way of examining how best to exit a trade. As we mentioned in a previous chapter, the Standard Deviation Breakout SDB system is very similar to the original DBS system version la , but despite the similarities it also has a few specific features that makes it very suitable to form the base in a portfolio of systems, or as a starting point for diversifying out into other...

Trend Filters For Shortterm Systems

A basic moving average filter should form the base of any filter testing procedure, in which you test which lookback period works best together with the original entry technique on a wide variety of markets. A simple 200-day moving average trend filter. A simple 200-day moving average trend filter. Alternatively, you could incorporate the on-balance-volume OBV indicator that weights each day's price action with its volume, creating a new time series that holds both price and volume information....

Dynamic Breakout Systems

Ever since the mid-eighties when Richard Dennis and Bill Eckhardt made a huge success with their turtle tradersbreakout systems have been on everybody's 1 A group of aspiring young traders trained by Richard Dennis. Dennis named the group turtles after having visited turtle farms in Singapore and having decided to grow traders as the farms grew turtles. mind. The concept is easy enough never mind trying to pick tops and bottoms if the market is going up, you buy, and if it is going down, you...

The Dynamic Breakout System

In Part 2 we discussed several different versions of the Dynamic Breakout System the DBS system before we settled for version lb, which had a reversed volatility relationship for the exits. That is, when the historical volatility increased, the lookback period for the exit decreased. The underlying reasoning was that if a higher volatility, as an indication of higher risk, makes it more difficult to enter the market, then a higher volatility also should make it more difficult to stay in or...

Slippage And Commission

Although there is no way around these costs once the system is up and running, you should not concern yourself with slippage and commission when building and researching a trading strategy. This sounds strange, but there are several reasons for this. First of all, when you're back-testing on historical data, you should not try to squeeze out as many dollars or points as you can, but rather try to capture as many and as large favorable moves as possible, while spending as little time in the...

Picking Tops and Bottoms

When it comes to trying to trade shorter term, or picking tops and bottoms, many system traders usually start out trying to use any or all of the many oscillator-type indicators that have swamped the field of technical analysis in recent years. Examples of such indicators are RSI, Stochastic, Momentum, Rate-of-change, MACD, and Plus and Minus DMI. Many others exist, and the list can be made much longer, but those mentioned above are the most common and popular ones. These indicators are...

Drawdown

Many traders and analysts prefer to calculate the drawdown as the maximum intra-trade drawdown, or total equity drawdown TED , including both closed trade drawdown CTD and open trade drawdown OTD in the same figure. To build a robust trading system, however as already mentioned in Chapter 1 , this is not the way to go about finding the optimal solution. The problem really consists of several parts. First, you must make each and every trade as efficient as possible, by dividing the OTD into the...

Maximum Intraday Drawdown

How many of us have not heard the old adage your worst drawdown is still to come While this is likely to come true sooner or later, it does not have to happen first thing tomorrow, provided you have done your homework correctly. Unfortunately, the information most system testing software provides you will not be enough, because the number given is in dollars, without any relation to where and when this bad trade sequence struck. For instance, with a point value of 250 for a S amp P 500 futures...

Profit Per Trade

Figure 2.4 shows you the dollar profit for every trade made with a simple stock index and bond system traded on historical data for the S amp P 500 stock index future contract, using dollar-based calculations. Notice how the profits and loss- The dollar value of a series of Individual trades. es per trade have increased dramatically for the last hundred trades or so. In this case, the average profit per trade comes out to 755, which also can be seen in Figure 1.1. Now, contrast this to Figure...