Designing a System from scratch

[CreditViolet]

Now coming to the next step we need a framework with precise entry and exit signals which is commonly called a setup.There are as many setups as there are traders,infact I have to keep them indexed to keep track of them.I would post couple of them having good risk to reward ratio.I had better start a new thread and link it here as this thread will become very difficult to read otherwise.There will be a lot of new terms introduced and it will be difficult for me to explain each and everyone of them in detail so I will provide links or suggest books regarding those.
Also one point I would mention here is that if you are serious enough to have your own system than there can be no half measures,every part right from setup to position management has to be written down and double checked so as to avoid any contradictions or errors.Those who dont have access to charting software can have tape based strategy as trade setup while keeping the other parts similar to those mentioned here.Minimum requirement will be access to excel and notepad.

Another important about setup selection bfore we go on to the next step is about mixing different non-correlated strategies.People who have trendfollowing systems will do better only if they add some sort of contra trend setups which may help them trade in markets which are moving sideways.By merely looking at a chart many can conclude that markets do move sideways for considerable period.My support for the theories of gann,fibonacci and elliott is precisely for that reason.They add a new dimension to market forecasting which is not possible with normal market indicators.Also a very important thing to consider is that these theories focus entirely on price itself unlike various other theories which derive their relationship from price without considering it in its entirety.Tony Plummer books are good read explaining them.

So lets get on with it with the setups

 

[CreditViolet]

Ok a simple setup first

Inside Bar
Inside bar - current bar's range is within the previous bar's range ie an inside bar has a low greater than the previous bar's low and a high less than the previous bar's high.

See the attached pic for various inside bar setups.These can also be done on OHLC bars as well.

After you see inside bar setup, a filter need to be added .Can be a momentum indicator like a stochastic.The thing for look will be a stochastic crossover as the insidebar unfolds.It can act as a confirmation to your entry signal.

Its a very good pattern to trade.Many reasons.For one, an inside bar means that there was just not enough interest in the stock to move it decisively one way or another. As sure as day follows night, so does an increase in volatility follow the restricted trading of an inside day.Whenever you have an IB the market is consolidating into a tight range of low volatility.A market will always explode out of a tight range. A market will not explode out of a market that has already run up. The natural market cycle is to go from low volatility to high volatility and back again.

Ok to sum it up one by one
Buy Setup
1.Wait for an IB to form
2.One you have identified the IB then you need to have a stochastic cross confirmation to the upside before you can enter.
3.To find confirmation look at the stochastic in the chart that you look for IBs.
4.If upward cross present than you can enter in the indicated direciton.

Sell Setup is exact opposite of this.


Will get back with couple more setups before proceeding to other parts
Will do tomorrow

CV

 

[CreditViolet]

Where can one get Intraday futures data and wht abt analysing in Cash and applying it in futures...????
Do not tell me Viratech as it is the most expensive and also it does not give intraday data...but way too expensive...
My time horizon is a week and i want to trade Futures or more preferabley options can u suggest Options analysing How to select which ones to buy and how price movements affec Option prices...and predict Premium rates.....??????

Well to answer your first question,the strategy i mentioned can be executed on many brokerage platforms available.All you need is some charting tools.You can get data and charting through them and if you kno abt DDE you can tweak it to get live charting without any need for third party data.

Options are a different ball game and need an entire thread to its own.

Cheers
CV

 

[CreditViolet]

Ok till now we got the following steps
1.What to buy
2.When to buy

Now comes the next step of how much to buy.
There are many different ways to vary the number of contracts or shares when trading. Some of the most commonly used methods are listed below.

1.Fixed number of contracts. The same number of contracts or shares is applied to each trade; e.g., two contracts per trade.
2.Fixed dollar amount per contract. A fixed dollar amount of account equity is needed for each contract or share; e.g.,5000Rs of account equity per contract.
3.Fixed fractional (also known as fixed risk). The number of contracts or shares is determined so that each trade risks a specified fraction of the account equity; e.g., 2% of account equity is risked on each trade.
4.Fixed ratio. The number of contracts or shares increases by one for each "delta" amount of profit earned per contract. For example, if the delta is 3000Rs, and the current number of contracts is two, you'll need 6000Rs of profit before increasing the number of contracts to three.

That goes for position sizing.Eventually it depends on the amount of capital in your account as some sizing rules require certain size for consistent account growth.

So in our inside bar setup,you can choose a sizing rule which suits you.For eg sake we will use the fixed fractional strategy fixed to 2% of account equity.
Note however this is different than setting stoploss which we will cover next.
Many people confuse stoplosses with moneymanagement.That part may well be callled position management.

Cheers
CV

 

[sh50]

This looks like one of the all time great posts- deserves a song instead of a poem( Jaideep are you listening). I will get back after going thru it thoroughlly but you keep adding wonderful posts the way we add positions when bullish on a stock.

It certainly helps our position. May you always keep up this trend and keep pyramiding on your knowledgeable posts. 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

CV,
Thanks, now I got it.

Anjaynay

 

[jaideep]

This looks like one of the all time great posts- deserves a song instead of a poem( Jaideep are you listening). I will get back after going thru it thoroughlly but you keep adding wonderful posts the way we add positions when bullish on a stock.

It certainly helps our position. May you always keep up this trend and keep pyramiding on your knowledgeable post. Thanks.

Did you ask if I was listening?
You really must be kidding;
With posts such as these,
CV's got us all drooling.

Like I've said earlier here,
CV's got me ll ears;
To me he's teaching "TRADING
WITHOUT MANY TEARS".

And you dear sh50,
You are so very nifty,
At similes & metaphors
and all that is shifty.

So go stand on a cloud,
And sing right out loud;
CV's postings make great teaching,
And my verses good sound.

 

[sh50]

Jadeep, You are right about your verse and sound
Since Technical analysis can really confound
It is a boon to have CV around
He not only enables us to break new ground
But fecilitates an understanding that is profound
One hopes that in this forums and life, such people abound

As for you, my dear CV
For the benefit of all you should appear on TV
Your posts in this forum are as spicy(substance and style) as an embellishing gravy
Since Techincal analysis can prove both heavy and wavy
Posts like these can be as captivating as an alltime great(classic) movie
Without your posts , it would almost be impossible to acquire trading savvy
Keep them coming; there is just one word to describe them- groovy

This post is just too good.

I dont remember seeing these formulas anywhere in system tester.

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

The rest of the article is also very enlightening. I suppose what you have said about inside day would be equally true for NR7, NR3,1234 and other volatility setups- I mean stochastics to indicate a breakout.

What you have written initially about timeframes and short term and long term profit differences plus when to buy and what to buy is very interesting.

Why dont you write a book? I think it should have a very good response. There is a dearth of books by Indian authors.

That apart, I hope one day we have an affordable technology for a videoconference forum to enable people like you to explain and remove any ambiguity. It would make you a kind of celebrity straightaway which is more well deserved than all these so called professionals who dont part with their knowledge readily.

 

[veneet]

g8 work..

 

[investock]

There are as many setups as there are traders,infact I have to keep them indexed to keep track of them.

Hi CV,
Thanks for the very nice article on Designing a system.

I have been groping in the dark for a long time on what is wrong with my trading. I was confused about so many often contradicting sggestions on Moving averages, Indicators etc., and did not know when to use what.

You have mentioned in your article: "There are as many setups as there are traders,infact I have to keep them indexed to keep track of them."

Is it possible to let me know the various systems that exist ? Or could you please point me to a source where I could know the various systems ?

I shall also be greatful if you could advise me with your experience, what is the best suited system for Cash and Derivatives trading in Indian conditions.

Thanks