Designing a System from scratch

C

CreditViolet

Guest
#1
Ok here i will post about designing a system from scratch
One by one

First consideration - Time Frame
It is important to decide the timeframe that u are going to work towards in ur system. This really comes down to how much time u are prepared to spend trading and how active u require the system to be in terms of the number of trades. Broadly speaking there are four main timeframes:

Timeframe--------Period------------Data Used
Long-Term--------Months----------End of Day
Medium-Term------Weeks----------End of Day
Short-Term--------Days-----------Intra Day
Day-Trade------Up to 1 day-------Intra Day

Long Term trading systems will save on commission costs and have larger profits per trade. Shorter term trading systems will rack up the commission costs and generally make less per trade but the frequency of trading opportunities will make up for this. For example:

System 1 makes an average of 250 points per trade but only trades 4 times a year.

System 2 only makes an average of 10 points per trade but trades 200 times a year.

System 1 makes 1,000 pts a year but system 2 makes 2,000 points a year. However if we allow 5 pts per trade for commission and slippage then system 1 costs 20 pts/year whereas system 2 costs 1,000 pts/year.

Both systems make a similar net profit over the course of a year however there are a number of points to bear in mind:

* With only 4 trades per year for system 1 every trade is important and must be taken. It is likely that the bulk of the profits will come from only one of the trades so this must not be missed. With system 2 producing a new signal every day it is not so reliant on individual trades.

* System 1 will require a larger capital base to trade as the trades will have to ride wider swings.

* System 2 will require a lot more work to trade as intra day data will have to be monitored.

* System 2 will be psychologically easier to trade as the equity draw down periods will be shorter. Well designed and robust day trading systems will rarely have losing months.

The frequency of trading is an essential element of any trading system and our choice of timeframe will help to determine it. There is no right answer it is very much a case of what suits the individual trader.
 
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C

CreditViolet

Guest
#2
Second step

Choosing an Instrument to Trade
The next thing u need to do when designing a trading system is to decide what u are actually going to trade to match your objectives. There is a huge range of instruments available to traders from the underlying instruments such as stocks or currencies to derivatives such as futures or options

In order to develop a trading strategy it is extremely important to obtain historical data for the actual instrument that we intend to trade. Although derivatives based on the same underlying instrument will move generally in tandem with each other it will not be exact. The futures will move more quickly and to greater extremes than the underlying cash index. U cannot, therefore, develop a system using the cash index and expect it to perform to the same degree when trading futures or any other derivative.
 
C

CreditViolet

Guest
#3
Third step
This is the meaty part about trade setup.Will get back with this tomorrow.Meanwhile couple of important terms to remember

Expectation/Expectancy of a trade = (PW * AW) - (PL * AL)
Expectation of profit factor = (PW * AW) / (PL * AL)

where

PW = probability of a winning trade
AW = average size of winning trade
PL = probability of a loss
AL = average size of a loss



CV
:eek: :eek:
 
#6
CreditViolet,
It's worth information.
But I am not able to understand your formula
Expectation/Expectancy of a trade = (PW * AW) - (PL * AL)
Expectation of profit factor = (PW * AW) / (PL * AL)

Please explain little bit more how we can find PW, AW and other parameters.

Thanks
Anjaynay
 
#7
CreditViolet said:
Ok here i will post about designing a system from scratch
One by one.....
.......very much a case of what suits the individual trader.
CV, you really are generosity & originality at work (whichever you way you may want to prioritize). You could'nt be putting it across any straighter & simpler than the way you are teaching.

""Never too late to learn" they say, don't they? Am waiting for lesson #2. Please keep them coming.

Another humble observation-cum-request; pls replace those 2 :eek: in your signature with n x :) . There's nothing eekish about any of your postings, all pure wisdom. So........
 
#8
CreditViolet said:
Third step
This is the meaty part about trade setup.Will get back with this tomorrow.Meanwhile couple of important terms to remember

Expectation/Expectancy of a trade = (PW * AW) - (PL * AL)
Expectation of profit factor = (PW * AW) / (PL * AL)

where

PW = probability of a winning trade
AW = average size of winning trade
PL = probability of a loss
AL = average size of a loss



CV
:eek: :eek:


Wow.........Fantastic.......Keep flowing....

Shri.
 
C

CreditViolet

Guest
#9
anjaynay said:
CreditViolet,
It's worth information.
But I am not able to understand your formula
Expectation/Expectancy of a trade = (PW * AW) - (PL * AL)
Expectation of profit factor = (PW * AW) / (PL * AL)

Please explain little bit more how we can find PW, AW and other parameters.

Thanks
Anjaynay

Expectancy tells you how much you can expect to make on the average (over a number of trades) per amount of money risked.

You can calculate the values of PW etc by going through your trade records.By looking at how many times u had winning trades and losing trades and then multiplying them by the average winning or losing trade.I suggest you read Van Tharps Book and also his software ,the link for which I posted in the software section.Its a very important but neglected term in trading.

CV
:rolleyes: :rolleyes:
 

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