Professional Analysis of an MCX Gold Trading System with Positive Expectancy.

[DSM]

Thanks Gulu Gulu for your thread. It's informative as well as objective. The point that I want to make is that the 3+3 point spread in Gold (in my view is quite low) If any system is giving a buy or a sell signal, It is quite likely that there will be a run up or a breakdown in price that is captured by most indicators. Late entries, or entries after the trend has been established usually are punished by large difference in bid/ask spreads. So this is one aspect that you may want to take into account or look into.

Another important point in trading Gold is that it is prone to heavy as well as volatile price movements. This may happen basis news. So having a SL in place at all times is very important aspect of trading Gold, more so considering its contract value.

My 2C. Look forward to your thread/post.

 

[GuluGulu]

Hi DSM

Thank you for your concern. The objective of this thread is not always to analyze my particular system, but it is being used just as an example. Any trader can put his own system into this framework and he or she will be able to know the strength of his system or any advisory call etc.

I know the point you raised, particularly the spread in GOLD and news driven things etc.

The system is currently being traded Live and execution is fully automatic through a Private Server having 100mbps connection with very low latency. This eliminates complete manual intervention and human error. It places trade within few millisecond of any signal generated without fail and putting any stop-loss violates the logic behind this system. In Live condition, this setup has achieved a spread of 3.5+3.5 points average till now.

 

[GuluGulu]

Brief Concept of R-Multiple.

Suppose you have a very good trading system like this you are comfortable with placing trades. And suppose you have INR 100,000 capital to start with, and you got your first signal to go long on GOLDPETAL at 2801. A GOLDPETAL is equivalent to 1-Gram GOLD future in MCX. Suppose your system also notified you that for this trade, the Stop-Loss value would be 22 points or at 2779. What will you do? How much shares do you buy? Assume we are dealing with pure cash value instead of leveraging for futures contract.

Professional traders welcomes a risk of 1 to 2% of their capital per trade depending on their confidence and system performance. Suppose you don't want to take much risk and decided that you will risk about 0.5% of your capital. So 0.5% of INR 100,000 or INR 500 is all that you would risk in this trade. You also decided that you will move at a linear fashion for first 10 trades irrespective of outcome. Linear fashion means, for first 10 trades you will risk maximum INR 500 in each trade whatever the trade outcome may be; and after 10 trades you will evaluate the final capital and then decide new Risk money.

So with a 22 point Stop-Loss per GOLDPETAL in the first trade, you can purchase maximum number of GOLDPETAL that is equal to:
Maximum Shares to purchase = Amount Risked / Stop-Loss per share
In our case, that is INR 500 / 22 = 22.72. You can't purchase 0.72 quantity, so with 0.5% capital risk, you can buy 22 GOLDPETAL. Now suppose, this trade hit a Stop-Loss. You lost INR 484.

2nd trade signals, And suppose this time you won INR 1576. And you completed your first 10 trades. Below is sample 10 trades. Positive value is Win, Negative value is Loss.

Trade 1 : - 484
Trade 2 : 1576
Trade 3 : 1856
Trade 4 : - 484
Trade 5 : - 484
Trade 6 : 284
Trade 7 : -484
Trade 8 : 1308
Trade 9 : 528
Trade 10 : 718

Here you will see there are 4 losses and 6 gains. Losses are always protected by your initial Risk of INR 484 per trade (assume there is no abnormal market condition such a gaps or runaway market etc.). But in 6 winning trades, you made different money in each trade depending upon market condition and as long as your system indicates to hold that trade.

So you know your Risk pretty well before placing any trade. In this example, it is INR 484 per trade in all 10 trades. Should you stopped out in all 10 trades, your total loss could never go below INR 484 x 10 or INR 4840. We define this 'Risk' as 'R'. So here the 'R' is INR 484.

Now let's define your all Profit and Loss in terms of multiple of your initial Risk or R.

This is called 'R-Multiple'.

If your Risk is INR 484 and you have a gain of INR 1576 in next trade, you then have a 3.26R gain. Similarly if you have a 1R of INR 484 and somehow your loss in any trade due to some abnormal condition becomes INR INR 856, you have a 1.77R loss. Look below for all 10 trades and you will find your Win/Loss in terms of this 'R-Multiple' for all your 10 trades.

Trade 1 : - 484 -1.00R
Trade 2 : 1576 +3.26R
Trade 3 : 1856 +3.83R
Trade 4 : - 484 -1.00R
Trade 5 : - 484 -1.00R
Trade 6 : 284 +0.59R
Trade 7 : -484 -1.00R
Trade 8 : 1308 +2.70R
Trade 9 : 528 +1.09R
Trade 10 : 718 +1.48R

In these 10 total trades, you have a total loss of 4R and a total gain of 12.95R. Your net gain is 8.95R.

 

[cloudTrader]

After reading your thread , it certainly makes one thing clear & that is about your true dedication to learn something indepth.

Regarding the approach you are taking for trading , has generated lot of interest in me as I myself wanted a lot to trade in Gold but somehow couldn't find real interest in its movement , maybe because after trading in BNF & Crude Oil , Gold seemed somewhat a slow scrip [personal observation]. But now would surely like to look into Gold with a new approach .

Regards.

 

[Vijay Rao]

Thanks Gulu ji, for coming back. It is pleasure to have you on the forum and share your strategies and experience in trading systems. I am very active trader in equities and rarely trade in commodities, but I am sure your inputs will inspire people like me to trade in commodities actively and that to in Gold.

I am sure this thread is going to be one of the most popular threads.

Vijay

 

[GuluGulu]

In the above hypothetical example, you initially calculated (0.5% of your initial capital) and you know your R before you place any trade. But what if you do not know the R value for a system?

This happens with many system, for example, in our MCX GOLD Trading system you are always in a position, whether long or short. And this system flips the position depending on the market conditions. In this condition, you do not know when the market will flip, and you do not place any stop-loss. So how will you determine the R value which will dictate your loss?

Now let's look at all the 65 signals that the system generated. You can see, first trade is a winner, then next trade is a loss. This is continuous system. In the first trade. the system went 'Short', at 28048. It closed the short at 28011 with a gain of 37 points and went long there (2nd trade) exactly at 28011. The second trade is closed at a loss of 191 points at 27820. In the third trade, it then again went short at 27820 and closed it at 27574 with a 246 points profit. And this way it continues trading one after another. Notice the system has positions always in the market, either long or short. It is thus operating without any pre-defined Stop-Loss or Take-Profit level and flipping between long or short depending on the market conditions. Notice the 4th trade it holds for 13 days and made a very good gain of 3034 points. This is the beauty of any trend-following system, but it occurs very rare. May be just 3-4 big trends in a year. And also notice that, unlike our first hypothetical system that has a fixed Stop-Loss of INR 484, this system has made different kind of losses in different trades.

So, it seems this system has no fixed 'R' value compared to the previous hypothetical one.

What will you do in this kind of system where you don't know your risk, your 'R' value? How do you determine at the first trade, how much to risk from your capital?

The most generalized method to determine your 'R' is the average of all losses over many samples of trades. Statistically at least 30 trades as bare minimum. The more the better. A good value is 100 trades. So, in such cases, before you put real money, either you have to back-test or do some real market demo-test to gather at least 30 trade data.

So let's do a little calculation for the MCX GOLD Trading System. We have 65 trades at hand.

 

[GuluGulu]

Total Trades = 65. Total Loss Trades = 26. Total Winner = 39.
Total Loss = INR -586,200. Average Loss per trade in INR = -586200 / 26 = INR -22,546

This is your 'R' value. So after 65 trades, your 'R' value would be INR -22,546. Of course this will change as you go with more and more trades under your belt and your calculations will become more and more precise as you move ahead.

So now let's start analyze our Trade Samples to determine our Profit-Loss in terms of R-Multiple distribution.

You will find, the system has made a total profit of INR 16,40,515 and made a total loss of INR -586,200.

So, Average Profit per winning trade is INR 16,40,515 / 39 = INR 42,064
and Average Loss per losing trade is INR -586,200 / 26 = INR -22,546

So now, you can easily calculate all your profit-loss per trade in terms of 'R-Multiple' as shown earlier in our hypothetical GOLDPETAL example.

 

[GuluGulu]

Now for those who are following this thread and really want to learn in detail about how to analyze a system; I give you a home task.

Calculate the 'R-Multiple' of those 65 trades and PM them to me. You can put the values in an excel sheets too.

I want people to join me in this journey who really have that eagerness to achieve something good. For those, I shall give periodic home-task. This way you will be on your way to become a Professional Trader like me who can be able to Trade for a living like a Pro.

I am giving you 7 days to complete the first home-task.

For those who are facing problem in sending PM's, I have created a new gmail address for them. You can send your home-task to

Gold.is.Future (at) gmail. com

May God Bless all of us.

 

[cloudTrader]

Now for those who are following this thread and really want to learn in detail about how to analyze a system; I give you a home task.

Calculate the 'R-Multiple' of those 65 trades and PM them to me. You can put the values in an excel sheets too.

I want people to join me in this journey who really have that eagerness to achieve something good. For those, I shall give periodic home-task. This way you will be on your way to become a Professional Trader like me who can be able to Trade for a living like a Pro.

I am giving you 7 days to complete the first home-task.

May God Bless all of us.

Hi Gulu Gulu , I liked your way of explaining things & this is the first time I am seeing a home task in this forum .

My PM system is not active in the forum yet so will be unable to contact through PM.

Regards.

 

[GuluGulu]

My PM system is not active in the forum yet so will be unable to contact through PM.

Hi,

Reason for giving a home-task is that people should have willingness to study something seriously.

You can send your home-task to

Gold.is.Future (at) gmail. com

May God Bless all of us.