Build Your Own Trading System

[tradecopy 10]

Everyone knows that trading is high risk.

 

Imagine yourself to be a soldier, who is your best friend to make you survive in the battlefield ? right, Weapon.

then, do you get your weapon ? if you do, just stick to it. but if not, how to get your own weapon ? or, how to build your own weapon ?

 

there are some steps you need to do:

 

1. Start with a concept

 

This step is the most important in this plan. Because the concept will be the core of your trading system. Develop your own concepts of how markets work. You could read about trading systems and study what others have done, there is a great deal of useful information out there. But most importantly, think for yourself.

In general, you should know what you would use to win in this market, chart pattern ? Elliot wave ? or something else.

2.Turn your idea into a set of objective rules.

 

After you have your concept, you should determine what your system is supposed to do and how it will do it. it is with this step that you produce the details needed to accomplish the programming task. You need to take the overall problem and break it down into more and more detail until we finalize all the details.

 

Let’s see an example:

A trader trades with chart pattern break-out. Following are the question he should answer:

a. Which patterns he would use ?

b. In which timeframe ?

c. How to confirm the break-out ?

d. What about the markets actions after the break-out ? how to add-positions according to those actions ?

e. How to measure the duration of the trend after the break-out ? how to track the trend and take profits ?

f. How to choose the best chart pattern when there are two or more patterns during a certain time ?

g. How to decide the positions according to the quality of the chart pattern ?

h. How to monitor himself ?

 

3. Historical test on the charts.

 

Following the rules you just determined in step 2, let’s check the trading signals that arer produced on the charts. We want to see whether our idea has been stated properly, and also, we want some proof that the idea is a potentially profitable one.

 

There are some standards to check:

a. During periods of winning, profits are larger than 40%, Drawdown is less than 10%

b. During periods of losing, losses are less than 20%

c. Winning rates are larger than 65%

 

so, after the 3 steps, we know exactly how we are trading. yes, we get the weapons. but, does it mean that we are ready to hunt money in the market ?

Not exactly ! the weapon is only part of the trading system.

 

(to be continue.....)

 

PS: sorry for my poor english. I'm not sure if you could understand what I post. if not, please let me know.

 

Best wishes

[SpearPointTrader 10]

I would add, make sure the method wins more than it lose, both monetarily, and the win loss ratio (how many trades win, vs lose)

Edited October 9, 2011 by SpearPointTrader

[tradecopy 10]

Hi, spearpointtrader, thanks for your reply.

 

I already include the monetarily and win loss ratio.

 

in winning, profit larger than 40%

in loss, loss less than 20%

winning rate larger than 65%

 

 

  SpearPointTrader said:

I would add, make sure the method wins more than it lose, both monetarily, and the win loss ratio (how many trades win, vs lose)

[steveh2009 10]

Trying to ensure that the winning pct is high only ensures that your avg win/loss ratio will be lower (than you want). There is an inverse relationship between the two.

 

In other words, you can kiss that dream of finding a 2:1+ win/lose ratio with a 65%+ winning pct trading system goodbye because it doesn't exist for any sustainable period of time to be a viable long-term average.

 

Your efforts will be better spent looking for 20-50% winning systems which add to positions as the trade goes your way. These systems tend to have very small, fixed losses related to their gains which can show individual wins as high as a 40:1 risk/reward. [so why care about losing more often when 1 trade can potentially wipe out 40 losers? Your recovery factor can be phenomenal in these systems.]

 

What you're not emotionally attracted to in trading can give you the best chance of not only survival, but prosperity as well.

[tradecopy 10]

certain chart patterns have certain winning rates:

 

head and shoulders: 50%-80%

double tops and bottoms: 50%-70%

rounding patterns: 70%-85%

triangle patterns: 50%-70%

 

for those rates, I'm talking about these patterns in the weekly and daily chart.

 

and also, for certain chart patterns, we have the certain method to measure the minimum profit target.

 

so, winning rates are certain, Stop loss are certain, minimum profit target are certain.

then, we set A=(minimum profit * winning rate)/ (stop loss * losing rate)

before we open a trade, we should calculate what the A is. only when A>2, we open trade. if not, give up this trade.

 

and i do believe that some experienced traders could get profits from the system you refer to. but it is not good for the newbie. when a newbie met a consecutive 40 losing trades, are you sure he still has the courage to open the 41st trades ?

 

for the newbie, the first expectation is to survive in this high risk market.

 

 

  steveh2009 said:

Trying to ensure that the winning pct is high only ensures that your avg win/loss ratio will be lower (than you want). There is an inverse relationship between the two.

 

In other words, you can kiss that dream of finding a 2:1+ win/lose ratio with a 65%+ winning pct trading system goodbye because it doesn't exist for any sustainable period of time to be a viable long-term average.

 

Your efforts will be better spent looking for 20-50% winning systems which add to positions as the trade goes your way. These systems tend to have very small, fixed losses related to their gains which can show individual wins as high as a 40:1 risk/reward. [so why care about losing more often when 1 trade can potentially wipe out 40 losers? Your recovery factor can be phenomenal in these systems.]

 

What you're not emotionally attracted to in trading can give you the best chance of not only survival, but prosperity as well.

[cskbilly 10]

Dear tradecopy,

 

is there any recommendations on back testing program???

thanks

 

BY

[SpearPointTrader 10]

  steveh2009 said:

Trying to ensure that the winning pct is high only ensures that your avg win/loss ratio will be lower (than you want). There is an inverse relationship between the two.

 

In other words, you can kiss that dream of finding a 2:1+ win/lose ratio with a 65%+ winning pct trading system goodbye because it doesn't exist for any sustainable period of time to be a viable long-term average.

 

Your efforts will be better spent looking for 20-50% winning systems which add to positions as the trade goes your way. These systems tend to have very small, fixed losses related to their gains which can show individual wins as high as a 40:1 risk/reward. [so why care about losing more often when 1 trade can potentially wipe out 40 losers? Your recovery factor can be phenomenal in these systems.]

 

What you're not emotionally attracted to in trading can give you the best chance of not only survival, but prosperity as well.

 

I'd rather have consistent smaller wins, and be confident I WILL win 80% + of the time, then suffer through 20 losses waiting for the big one that may not come until my account has be drawn down to almost zero.

 

Adding contracts through the trend is a horrifically bad idea as well. You become dangerously over leveraged that way.

 

The weather the storm stuff, and contract multiplication seems to make sense "On Paper", but it has cost more accounts than can be counted in the long haul. This is especially so for those with less than 50K accounts.

 

Ken Roberts does not know how to trade.

 

The guys at http://www.factstrading.com have it right.

Edited October 9, 2011 by SpearPointTrader

[SpearPointTrader 10]

  tradecopy said:

certain chart patterns have certain winning rates:

 

head and shoulders: 50%-80%

double tops and bottoms: 50%-70%

rounding patterns: 70%-85%

triangle patterns: 50%-70%

 

for those rates, I'm talking about these patterns in the weekly and daily chart.

 

and also, for certain chart patterns, we have the certain method to measure the minimum profit target.

 

so, winning rates are certain, Stop loss are certain, minimum profit target are certain.

then, we set A=(minimum profit * winning rate)/ (stop loss * losing rate)

before we open a trade, we should calculate what the A is. only when A>2, we open trade. if not, give up this trade.

 

and i do believe that some experienced traders could get profits from the system you refer to. but it is not good for the newbie. when a newbie met a consecutive 40 losing trades, are you sure he still has the courage to open the 41st trades ?

 

for the newbie, the first expectation is to survive in this high risk market.

 

I disagree with your numbers. I personally have found a break out of any congestive pattern to be on average 50% to maybe 60% accurate at best. The only one I have ever seen that approaches 80% are break outs of long, tight channels. By Long, I mean 18 to 20 days at minimum.

 

I have found to approach an 80% win loss ration, you need to be looking at over laying systems. You could start with basic price moment, understanding how trendlines and support/resistance works, (including Fibonacci levels) and pattern/congestion break out systems; but to also add the 3 main moving averages and use of Bollinger bands (like the Facts Trading does), or Volume. Some people like to use momentum indicators, stochastic, or the Williams%R as well.

 

It's does not matter what your favorite indicator is, so long as you are using 2 or 3 of them on top of the basics.

 

The system I am using now is the best I have ever seen because of this layering of methods.

[tradecopy 10]

Hi Billy, thanks for asking.

 

before tack testing, you should know in which markets your system could do a better work.

the markets move in a cycle: from trend to trendless to trend again. so, it is important to know if your system is trend following or range trading.

 

then, have you ever heard of trade simulator ? use this for back testing.

 

and the most important, be objective. our goal is not to develop a system that achieves the highest returns using historical data, but to formulate a sound concept that has performed reasonably well in the past and can be expected to continue to perform reasonably well in the future.

 

Hope helpful

 

  cskbilly said:

Dear tradecopy,

 

is there any recommendations on back testing program???

thanks

 

BY

[tradecopy 10]

I must clear that I'm a long term trader. the chart patterns I talked about are all on daily and weekly charts.

 

to get the real winning rates, there are two things you must pay attentions to:

1. the larger the pattern, the greater the potential. when we use the term "larger", we are referring to the height and the width of the price pattern. the height measures the volatility of the pattern. virtually all of the measuring techniques are based on the height of the pattern. and the width is the amount of time required to build and complete the pattern. and in my chart, to be a good pattern, it would take at least 1 months or more to build a potential chart pattern. the more, the better.

 

2. live in this market as much as you can to get the real winning rates. please notice that, I mean the REAL winning rates. then, what is the REAL winning rates ? let's take the coin toss as an example. everybody knows that there is a 50% rate to win in a coin toss, right ? then, let's play this game for 4 times. with 50% winning rate, could you always have 2 win and 2 loss ? of course not. but if we play this game for 10000 times, then, the winning rate would be very close to 50%. is this clear ?

so, for the winning rates in my last post, 50% is the bottom line. but the question is, can you live long enough to get the REAL winning rates ? that's what I will talk about in next post, about Risk control and Money Management.

 

Hope helpful

 

Best wishes

 

  SpearPointTrader said:

I disagree with your numbers. I personally have found a break out of any congestive pattern to be on average 50% to maybe 60% accurate at best. The only one I have ever seen that approaches 80% are break outs of long, tight channels. By Long, I mean 18 to 20 days at minimum.

 

I have found to approach an 80% win loss ration, you need to be looking at over laying systems. You could start with basic price moment, understanding how trendlines and support/resistance works, (including Fibonacci levels) and pattern/congestion break out systems; but to also add the 3 main moving averages and use of Bollinger bands (like the Facts Trading does), or Volume. Some people like to use momentum indicators, stochastic, or the Williams%R as well.

 

It's does not matter what your favorite indicator is, so long as you are using 2 or 3 of them on top of the basics.

 

The system I am using now is the best I have ever seen because of this layering of methods.

Edited October 9, 2011 by tradecopy

[tlkasti 10]

  tradecopy said:

Everyone knows that trading is high risk.

 

Imagine yourself to be a soldier, who is your best friend to make you survive in the battlefield ? right, Weapon.

then, do you get your weapon ? if you do, just stick to it. but if not, how to get your own weapon ? or, how to build your own weapon ?

 

there are some steps you need to do:

 

1. Start with a concept

 

This step is the most important in this plan. Because the concept will be the core of your trading system. Develop your own concepts of how markets work. You could read about trading systems and study what others have done, there is a great deal of useful information out there. But most importantly, think for yourself.

In general, you should know what you would use to win in this market, chart pattern ? Elliot wave ? or something else.

2.Turn your idea into a set of objective rules.

 

After you have your concept, you should determine what your system is supposed to do and how it will do it. it is with this step that you produce the details needed to accomplish the programming task. You need to take the overall problem and break it down into more and more detail until we finalize all the details.

 

Let’s see an example:

A trader trades with chart pattern break-out. Following are the question he should answer:

a. Which patterns he would use ?

b. In which timeframe ?

c. How to confirm the break-out ?

d. What about the markets actions after the break-out ? how to add-positions according to those actions ?

e. How to measure the duration of the trend after the break-out ? how to track the trend and take profits ?

f. How to choose the best chart pattern when there are two or more patterns during a certain time ?

g. How to decide the positions according to the quality of the chart pattern ?

h. How to monitor himself ?

 

3. Historical test on the charts.

 

Following the rules you just determined in step 2, let’s check the trading signals that arer produced on the charts. We want to see whether our idea has been stated properly, and also, we want some proof that the idea is a potentially profitable one.

 

There are some standards to check:

a. During periods of winning, profits are larger than 40%, Drawdown is less than 10%

b. During periods of losing, losses are less than 20%

c. Winning rates are larger than 65%

 

so, after the 3 steps, we know exactly how we are trading. yes, we get the weapons. but, does it mean that we are ready to hunt money in the market ?

Not exactly ! the weapon is only part of the trading system.

 

(to be continue.....)

 

PS: sorry for my poor english. I'm not sure if you could understand what I post. if not, please let me know.

 

Best wishes

 

Thank you for your so much useful tips. Actually i am beginner in gold & silver trading.if you have any more tips for future trading of gold & silver.pls send me tips @ (gkasti@yahoo.com).

thanks again..........

[tradecopy 10]

not good. I delete this post. will rewrite it

Edited October 11, 2011 by tradecopy

[tradecopy 10]

before a new trader start to learn trading skills, there is something much more important he need to know.

 

that is: Money Management.

 

for a new trader, what is his first expectation in this market ? double the account or find a good system ? no, no, no.

 

the answer is: to survive in this market.

 

everyone knows that trading is high risk, 90% traders are loser. but it is strange that everyone believes that trading can make him be rich very quickly . but the fact is that new traders always lose his first account very quickly.

 

 

first, let's see a example, still take the coin toss as a example:

 

for this game, obverse side, I win $10, and reverse side, I lose $2.

 

let's play 10000 times.

 

so, what's the result ?

 

as we know, for this game, the winning rate is 50%. so, I would have 5000 times win and 5000 times lose. then the profit should be 5000*10-5000*2= 40000, right ?

 

so, what makes me win in this game ?

 

1. enough trades to get the real winning rate.

in this game, I have 5000 times lose. so, just think about that, what would happen if I meet the 5000 times loss in consecutive ? this is possible. 5000 consecutive loss, and then 5000 consecutive win, the winning rate is still 50%.

so, you must control your loss for each trade to make sure that you can survive from the 5000 consecutive loss.

2. control the frequency of your trading

as a new trader, you'd better do only 1 trade every week, and no more than 7 trades every month before you know how the markets move and get your own weapon.

 

for new trader, you need be patience to spend much more time on learning. the first step for you is to survive in this market and learn how the markets move. the more time you live in this market, the more experiences you get, the more chance you could win.

 

 

 

 

 

 

  tradecopy said:

not good. I delete this post. will rewrite it

[tradecopy 10]

I think before you start to trade, you should read this book first:

 

Technical Analysis of the Financial Markets by John J. Murphy

 

you will get useful information to start your trading life.

 

hope helpful

 

 

  tlkasti said:

Thank you for your so much useful tips. Actually i am beginner in gold & silver trading.if you have any more tips for future trading of gold & silver.pls send me tips @ (gkasti@yahoo.com).

thanks again..........

[tradecopy 10]

last post, we talked about Money Management, so, we all know how to survive in this market for longer time now.

 

now, we will get to learn how to get some profits from the market.

 

we often hear such familiar expressions as 'always trade in the direction of the trend," "never buck the trend," or "the trend is your friend."

 

right, the concept of trend is absolutely essential to the technical approach to market analysis. all of the tools used by the chartist---support and resistance levels, price patterns, moving averages, trendlines, etc.--- have the sole purpose of helping to measure the trend of the market for the purpose of participating in that trend.

 

Most people tend to think of markets as being always in either an uptrend or a downtrend. the fact of the matter is that markets actually move in three directions- up, down, and sideways. it is important to be aware of this distinction because for at least a third of the time, prices move in a flat, horizontal pattern that is referred to as a trading range.

 

so, in fact, markets move in a cycle: from trend (up or down) to trendless to trend (up or down) again.

 

Again, the trend I talk about is at least in Daily Chart.

 

so, the problem now is that: how can we know if the markets are in trend or trendless ?

 

we will talk about this problem in next post.

 

Best wishes

[illcrx 10]

There are a few things that should be added to any/this system, IMO.

 

1) What stocks are you trading? Make sure that your not trading any old stock, MSFT is not going to give you that breakout that your looking for. You need to limit your focus stock list with whatever system you have to pick winners, I like IBD personally they do a lot of the work for you and it works! If you dont care for IBD at least check the new highs list each day for winners. The ones that breakout first are more likely the ones that will have institutional sponsorship.

 

2) Market Direction, from #1 you can see that I like IBD well they are 100% right when they say that you are going to fight a very difficult battle if you do not know what the market is doing which is why you need to put that into your equation.

 

3) The chart patterns are VERY viable, though the percentage of reliability is up to discussion, because it depends on the 2 factors above, if your looking for the viability of a triangle pattern and the market is CRAP and the stock is CRAP you going to get CRAP results! :crap:

 

4) Volume! This is important, if you dont think so then thats another debate. This should be part of any strategy, yes you can make money in a low volume rise however you'll have a harder time verifying the move especially if your going to write a trading algorythm, which is what your doing.

[tradecopy 10]

Hi illcrx, thanks for your reply.

 

this system is not only used in stock market, but also any other financial market.

 

Volume is very important in stock. but in forex trading, people can not get any information about volume. I will talk about this later.

 

this is for the new trader, so, let's make the things step by step.

 

Thanks again.

 

Best wishes

 

 

  illcrx said:

There are a few things that should be added to any/this system, IMO.

 

1) What stocks are you trading? Make sure that your not trading any old stock, MSFT is not going to give you that breakout that your looking for. You need to limit your focus stock list with whatever system you have to pick winners, I like IBD personally they do a lot of the work for you and it works! If you dont care for IBD at least check the new highs list each day for winners. The ones that breakout first are more likely the ones that will have institutional sponsorship.

 

2) Market Direction, from #1 you can see that I like IBD well they are 100% right when they say that you are going to fight a very difficult battle if you do not know what the market is doing which is why you need to put that into your equation.

 

3) The chart patterns are VERY viable, though the percentage of reliability is up to discussion, because it depends on the 2 factors above, if your looking for the viability of a triangle pattern and the market is CRAP and the stock is CRAP you going to get CRAP results! :crap:

 

4) Volume! This is important, if you dont think so then thats another debate. This should be part of any strategy, yes you can make money in a low volume rise however you'll have a harder time verifying the move especially if your going to write a trading algorythm, which is what your doing.

[tradecopy 10]

in last post, we talked about the market actions. we know that markets move in three directions:Up, Down or Sideways.

Most of the time, most changes in trend are not very abrupt affairs, the fact is that important changes in trend usually require a period of transition. it is these periods of transition that will be talked in next posts.

 

we all know that after a particular market move, prices retrace a portion of the previous trend before resuming the move in the original direction. the best known application of the phenomenon is the 50% retracement.

 

so, that means, during the trading range, prices would move in the range of 50% of previous trend.

 

 

and now, the question is , how can we identify the changes of the trend at the beginning of the transition ?

there are some tools we need: height of the range, duration, volatility, moving averages, trend lines, Fibonacci Ratio, reversal day, reversal week, hammer candlestick, range, critical break-out.

Edited October 13, 2011 by tradecopy

[tradecopy 10]

Height of the Trading Range:

 

Usually, we use the height of the range to measure the minimum price objective.

 

[tradecopy 10]

Duration:

 

Usually, the time the prices needed to move to the minimum objective is 1/5 of the duration of the trading range.

 

[tradecopy 10]

Volatility:

At the end of the trend, Daily volatility would be larger than that of break day. Especially when the candlestick with high volatility is against the trend.

 

 

[tradecopy 10]

Moving averages, trendlines, Fibonacci Ratio:

 

the warning signal from trend to transition: break MA 14, break trend, hit the 23.6% of previous trend.

 

 

[tradecopy 10]

Daily Reversal, Weekly Reversal, Hammer candle

 

another warning signal: the candlestick pattern

 

 

 

[tradecopy 10]

Range:

 

if prices moves in a range for more than a month, this is also a signal

 

[tradecopy 10]

Critical break-out:

 

When prices moves through 38.2%-50% of previous trend very quickly, it means the changes of the trend. No transition any more, but from one trend to another trend.