Systematic Trading Part 2

Strategy Testing:

It's been a week since the last post! Thanks to all the peoples who responded to this and has shared their strategies with me and after compilation most of the respondents can actually be categorized into two groups, trend following and breakout trader.

For trend following, where trader follow the rally of the trend once they believe strength accumulated is strong enough. The most common used technique will be crossover on moving average, and everyone could have their own "secret" like using exponential moving averages of 10 cross above 40, 20 cross above 30 and much more, each of the unique parameter will have yield different results in different underlying products (shares, fx, derivatives), in different time frame (1, 5, 15, 30, 60 minutes), different time of moving averages (adaptive, hull, weighted, exponential, volume weighted).

And we are talking about entry signal only, in each successful trading, entry do play an important part to enable traders have edge during entry, however exit will determine 80% on trading success, so when I ask most of the traders what exit order you see, numerous strategies came out such as percentage of capital, points, cross over exit, trailing loss, indicator exit (stochastic, MACD, RSI etc).

Stay with me! Now let's take a look on trend following on Nasdaq underlying securities with details below:

Test period                          :1st January 2000 - 1st January 2010

Securities                            :Components stock of Nasdaq 100

Interval                                :Daily

Methods                              :Trend Following (Exponential moving average [EMA] crossover)

Long/Buy to cover short       :10 EMA Cross above 30EMA

Short/Buy to cover Long      :10 EMA Cross below 30EMA

Contracts trade                    :100 contracts per trade 

Commissions                       :USD10 per trade

As you can see, the trading system is not doing well for reasons below:

1. Losing money! Back to the root of the trading perspective, you want to make money, is fine if during short term period and you suffer some drawdown (No one can make 100% winning trade), but 10 years and still losing money? No way

2. Inappropriate risk to return ratio, it is normal that trend following trades will have more losing trade to winning trade (with ratio 3:1), however the return of winning to losing must above 3:1 to make profit and ensure you ride the correct trend

So in my next email, I will share breakout strategy testing result, for those who want to discuss further, or want to test their strategy feel free to drop me an email à ryantongyc@gmail.com

Systematic Trading Part 1

Systematic trading Lesson 1

How to save yourself from paying tuition fees to market:

Over the years, we have been hearing friends around, strangers sitting at next table of Starbucks had claimed they are trading (shares, forex, derivatives), so the question from me to them is always “how do you trade?” I can assure you there are 99% of the respondent said they do follow a strategy; no matter is a strategy that they learned during some seminars with ($5000), strategy that they developed after reading few books (or webpage), strategy that they combine and sounded very complicated and “canggih”.

But hold on!Are you sure that they are following the strategy or they thought they had one and they think it might work? After a few questions and clarification on their “strategy”, most of the traders has confessed that they don’t know how they trade eventually, they are actually using their “feel”, a subjective view where gamblers using in casino (I myself has to plead guilty to that)

Subsequently, this is where the tuition fees came along, while people test the trading strategy in real market and paying the market “tuition fees” until they learn to make it profitable, or there are a portion of traders who have been losing money since years ago until today.

Why is that so hard to make money in the market while others seems mastering it easily, I would say the general response first: “Market always go against me”. Sounds familiar? While markets do not go against you, instead of that, you are going against the market my friend! I have seen experienced trader who can flip a coin to decide long or short and then develop strategy accordingly and he made a fortune out of it, amazing right?

So in my next sharing, I will give few examples on backtesting and hopefully those who would like to test their strategy, drop me an email to discuss further with details on what are you trading (shares, futures, options, forex), what strategy are your using (trend, counter trend, breakout, oscillator) at ryantongyc@gmail.com