Trading System
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  1. #1

    Trading System

    What is the Trading System?

    The Trading System implies a number of rules, algorithms and strategies which could help to get a profit. Anything can be used as a signal whether it be planned news or indicators or japanese candlesticks charting, even if it is tick-tack-toe combination. The only limitation is your imagination, and the only criteria is profit you get. The Trading System should be formalizable. It’s necessary for trader to have a possibility of describing his actions within each specific situation. The trader must abide by established rules also to keep an algorithm, because it’s breaking can result in unstable trading.

    There are two types of trading system.
    MTS – is the Mechanical Trading System. It means the trading system, which is managed by trader manual. Lots of the most popular MTS are based on a code of practice, indicators, oscillators or even news.
    ATS –is the Automatic Trading System or Robot – in another words. It is completely programmed cycle of actions which needs monitoring and control by trader only. Lots of ATS also use indicators. There are some Robots which working process is based on Martingale system and lock trading.

    The System as itself consists of:
    1. Strategy – the main point.
    2. Set of rules for open\close deal optimization.
    3. Many-management to optimize losses and fatten the profits.

    All of pre-cited factors should be used in a successive order (as it numbered). It is needed to except Trading parameters’ re-optimization, when the System repeats algorithms and actions which have fattened the profits precedently. But it does not guarantee such efficiency hereafter.

  2. #2
    Principles of building the system.

    Trader needs to get the feel of how to build profitable trading systems for a stable and successful trading. Totally the system can be created by yourself, but it is a bit difficult for a beginner. The simplest method is to take the book, in which there is a description of systems. You can take these trading systems and test their efficiency in practice.

    There are lots of system published within the Internet, there are even ready ATS, it is enough to just start in the terminal and begin trading. Of course, it can be used, but, first of all, only on a demo account. The important thing to remember is any new strategy that you have found has to be checked on the demo version. Most of the systems that are in the public domain - non-working, but sometimes it fattens the profits, whereupon lucky beggars start blow the trumpets all over the world about this fact.

    So You should not trust ATS reviews, only your own experience deserves to be believed.

    There is a notion "Grail" - is the break-even trading system that consistently fattens the profits.

    The Internet carries on ATS, which promise millions as profit. Beginner should beware these Grail sellers. It’s enough to ask one question: If it is so profitable, why did he sell it? Do not believe to history reports of profitable trading.

    Real seller, not a crook, must not only reveal the code of the trading system fully, but also explain to the buyer, how it works, as well as come out with weaknesses and strengths of the trading system.

    Basically, none of the robot vendors do not want to do it. Therefore beginner should be careful, because the ATS purchase can yield a huge loss, not comparable to the price of the robot.

    At the beginning of building the system it is necessary to determine the time frame, it means to choose the interval for trading. Most novice traders try to trade at M1-M5. They believe there are more often signals to open a deal with small intervals and, therefore, much more often the opportunity to make a profit.

    However, trading with small intervals involves a small amount of losses / profits. Before someone could say Jack Robinson, the price went, and if you still did not put the stop, you can get such a great loss, from which then will not be so easy to get. Just trade with small timeframes means that you need to sit at the computer screen constantly, waiting for the signal appearance. Not everyone can afford it.

    Therefore it’s recommended to begin with daily interval, and then move down gradually, selecting the smaller intervals. Trading with the daily interval, trader needs to conduct analysis and place an order (or change the old ones) every day before starting a new trading session. All this takes half an hour at the most. You must admit that, it's better than sitting out all day in front of your computer not being able to absent himself even for a minute.

    The basis of the trading system can be anything: a set of indicators, support and resistance lines, models of candlesticks, -anything, even a great foundation that can be a catalyst for the movement of currency pairs. You have to understand that the market is changing constantly; therefore, there is no system which always makes a profit. If someone bleeds cash, another one earns it. The coincided vessel principle is used for market, as well as for the economy.

    A trader always searches for ideas that he could make a profit in the trade.

  3. #3
    The following example for understanding.

    Supposing, we want to create a system. Which one? First of all, let's test the trend trading system. Look at the graph, please, and try to estimate the pair. Let’s take the most popular pair EURUSD, Daily interval.

    We’ve used the simplest MA indicator (Moving Average) and parameter of the 15 per closing and scanned the history. How the currency pair has deal over the past year is shown on the scrolled back schedule. If you remember, MA (by Simple method) has a simple calculation formula. In this case, the indicator will show the average position of the price over the last 15 days.

    1st Fig.

    The First Figure shows that the pair goes well with the trend, though there are false signals. We know that the disadvantage of the trend indicators is it "lies" at the flat in its registrations. It means we need anything to filter false signals.

    2nd Fig.

    The flat as a result of a slight movement is shown at the Second Figure. It means we need an indicator to filter flat. Best of all we could approach the strength of the trend oscillator, or oscillator that can determine a volatility.

    It is a pleasure to recommend in any system to have a volatility oscillator for calculating the rate of the market activity.
    The Third Figure as an example.

    3nd Fig.

    Here is the ATR indicator of volatility with parameters 5 per closing. So now we have a filter. The next stage is testing.

  4. #4
    Testing and the history scanning.

    Using the trading system, the trader must know is it profitable or unprofitable. Is it able to fatten the profits or not. When is better time to open the deal and when is time to close. How long will hold the field of losses. And how long will hold the field of profits. To find answers to these burning questions, you need to test the history.

    Qualitative test administration needs high-quality historical data. The smaller the interval, the more important role will be played by the quality of data, as well as its number.
    Within small intervals, on conditions that a take profit and stop loss for orders are set, there is no ability to get a big profit. In this case, the amount of profitable due to the large number of transactions. It does not mean that there is not profitable to trade, or impossible. We just do not recommend for beginners to use such systems, while not gain enough experience.
    At the most platforms, the historical data are purely visual function. It is used for a course level recognizing in the past. For example, what EURUSD course was at the November 5, 2008, or 10 September 2011. For beginners, it is one more argument about the benefits of working with senior intervals.

    Therefore, in the example, the testing is shown on a daily chart, where the quality of quotes is not as critical and easier to understand for beginners.

    In the terminal MT4 history, though not high quality, but it would be enough to trade with a daily chart, just for visual testing. All the trader needs is to rewind it and start testing, rewinding by pressing F12 in the terminal. It flips through the chart by one bar forward.

    As we use a trend strategy, the quantity of trades will be small. It is best to take from 2007 year or even earlier. In any case, even if you have a history in the terminal before 2000 there is not point to use it, because it's completely different markets by type. You can see this yourself comparing charts of the same tools within the interval of 2000 and 2011, for example.

    This difference between the types of market will play a big part in the tests, which will be reflected on the tests’ quality.

    Flipping schedule by pressing F12, give an eye to the system behavior in different life situations. Each deal should be noted and counted, whether it is positive or negative, write down everything.

    4th Fig.

    At the forth Figure take notice of the oscillator behavior after the bullish trend. You can mark the sharp rise and then fall of the oscillator. The trend is over, but market does not also go down, despite the sharp rise of volatility.
    It means that there was a profit taking by bull market participants. So we strongly encourage to have respect to such common situation.

  5. #5
    Reoptimization, or fitting to the value play.

    Reoptimization - is adding a lot of options to the trading system. For example, graphics hording with various indicators and lines. In this case, the trader does not see the most important and obvious thing – the price.

    Fitting to the value play is a process of the system creating by the periodicity of the events that were in the value play. In such a way it helps to eliminate the possibility of losses on history.

    Most of all, these methods are used by the "Grail" sellers (people who sells "super profitable trading advisers"). They create a trading adviser, and then optimize it for the best parameters by which it shows a very large profit in value play. It is easy to be done. First of all, the code should be written in the MQL language within the MT4 program. Further this code is run by tester that picks the best settings for the adviser. It’s ready, the next "super trading adviser".

    As evidence the "Grail" sellers show the test results, but as you know, it does not guarantee the future profitable work of adviser.

  6. #6
    In Search of weaknesses.

    Value play testing is carried out to find weaknesses, as well as to recognize the behavior of the system in all types of market. To understand which points is better to wait out, but which is better to open or close position. The trader’ aim is to find the moments when he would have a decisive superiority over other market participants. It means, the system must be a sense bearing, not just guessworking to find the most profitable combination.

    For example, a trend system defines the beginning of a trend, so it is possible to open a deal. But we will suffer losses getting into a flat. So, we need to get wise to identify the points not to open a deal, to reduce the chance of getting damages. In this case it is better to use the indicator that measures strength of the trend; it helps to avoid false signals.

    In the process of system engineering, selling the flat, you should pay attention for volatility. The sharp change in volatility means that the market has changed, and possibly has new directing. As the case stands the trader needs to close the position in order to reduce the loss. Do not be afraid of losses. If you have tested the system honestly, then you know the possible rate of a loss incurred within this system. This is called "losses expected ". Means to be in arrears within reasonable.

    Losses expected are determined by tests on the value play: the rate of possible drawdown and profitability will be shown as a result (DD is a deposit in the red). Yield is determined by the profit factor (PF briefly).
    It is calculated as: Total profit divided by total loss.
    It is useful also to divide the lucrative transaction number by the number of red ink operation, it helps to determine the ratio of profitable to unprofitable deals.

    As an example, take a look at 5th Figure.
    It shows the trading system, which consists of an indicator and oscillator ATR
    There is the specific example of the trading system, which consists of an MA indicator and ATR oscillator. But it also has weaknesses.
    It’s easy-to-see there is no volatility, but there is the trend, though it is weak and with frequent correction. This is normal, as your system should not cover all types of markets and work in all cases. You should find strong points of market situation and exploit it to get a profit.

    The main point of the system is to prompt when you have a decisive superiority over other market participants, and you’re able to make a scoop. That is why the next step is writing the rules for the system.

    5th Fig.

  7. #7
    Writing the rules for TS.

    Lots of points are autodetected in the process of testing. For example, the system is settled in 99 cases out of a 100 at Friday, when the NonFarmPayrolls activities are published.
    Hence, one more rule, which keeps us out of trading by this system on the first Friday of each month, should be added.

    Yet one must be marked is the signal on Monday morning. In the first case, the system has a steady loss, since it works on the TA basis, and news published on Friday can be both red and gain for the system. In the second case, the Gap through the weekend makes the signal wrong.

    There are many nuances, you should to deconstruct each transactions statistic within the value play separately, to note when and why profit is more / less at certain times. But any case, try to do not choose the most profitable times. Because it will be a reoptimization of parameters.

    Trader has to mark the deal frequency and periodicity, after which TS should be shift of trading. Every time you need to understand what has changed and why, how it can be displayed on the trading results. Do not wait for the system is wimped out.

    In our example, with the trading system, we set as a limit rule, not to enter the market when the signal is weak. Just put a restriction for the deal opening after a long trend. So, after all these manipulations, you just have to wait for strong signals and use it.

  8. #8
    Error correction and performance measurement.

    It is recommended for traders to do an error correction periodically. Ideally, it should be done once a week. But if you have one or two deals for a week, error correction can be executed once a month. During your work, keep attentions on the market changing. Be sure to keep a diary, everything must be registered. It should not be more a personal diary, access to which has nobody else, than a public log. Periodically, once every six months, pick in it to compare how you have traded in the past and in the present.

    Always note your mistakes, as well as things you do not understand. In the future, with increasing your knowledge and gain experience, you will have the answers to these questions. As well, the diary will help you to assess your personal professional growth as trader.

    In the case of indicator systems, newcomers are often guided by signals, regardless of the price. This is not right, you should pay attention to the price also. The more especially as the indicator can be attached to the candlestick closing. In that case, it would be "lying", so you should not fix to the final values, until the candlestick closing.

    Another problem is psychology. It has an effect on the beginners who are not used to losing money. As well as uncertainty, whether you trade system as effective as it needs. To answer all these questions it is used in test execution.

  9. #9
    Brief description of test methods.

    There are many ways to test and a lot of programs for testing. Most of them are paid. But there are free also: MT4 and MT5 - more recent development. But you need to know a programming language and be able to write the code for the program to test it. Paid programs are Metastock, Amibroker, TradeStation.

    Some people use Matlab, Statistica and Excel for testing. Even in 1C tests are executed. Namely, everyone uses what he likes most and what he knows best.

    There is no perfect program that will do everything for the trader and will give the best result. The dominant requirement for testing is quotes. Qualitative value play and clearly described strategies are earnest of high-effective tests as well as successful trading.
    The most popular is the tester of MT4. Its advantage is that it's free. And also by that code can be written such ATS, which could trade instead of the trader. Whatever called for trader is to keep watch over the trading and to interfere in the ATS activity as few as possible.

  10. #10

    After reading this article, you might think that we are against the ATS at all, but this is not entirely true. We are against the crooks who burgle green traders, pressing their goods on and promising fabulous profits.

    In the 21st century, in all markets robots are leading by terms of volume and number of deals, people mostly just monitor and correct any errors. Present and future are wholly owned by automatic trading systems.

    Creating and testing of trading systems is one of the most important trader scope. Learning to create and test a profitable trading system, the trader will be able to save a lot of time and money not triggering a backflash.

    We are not going to point out the efficiency of the trading system, given as an example. That is what you have to find out for yourself and to see whether you can use it to earn money or not.
    The purpose of this material is to provide insight into trading system creating for beginners, as well as to instruct how to identify and exploit its weaknesses and strong points.

    We wish you all
    Good luck.

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