Robustness of Algorithmic Trading Systems (That Work)

Is there any way to do this faster? If you were a stock picker this type of measure would be fine for classifying market type. You might have 10 bad system ideas before you have one good system idea. Goals and Total Gameplans are additional things that need to be done. Van viewed the new theory as a method or way to measure the quality of a trading system so he called it the System Quality Number or SQN for short. So if you screen your stock universum look at stocks that have an SQN Score of 2.

Your trading system needs to have a positive expectancy, but it is the SQN that determines your potential effectiveness and efficiency in applying position sizing strategies to meet your specific objectives.

Technical Analysis

Rather than repeat it just go here. If you optimize your exits to maximise SQN you will have smaller drawdowns and be capable of trading your system at higher R values, up to 2.

Understand at a deep level and you can improve your systems dramatically. For optimizing the trend following system I have outlined above it is obvious I need 3 different exit. I asked this the other day, and I know the time out rule Heisenburg et al … when you have a valid setup and it goes against you, say in the first bar, then, afterwards i.

Incidentally, if you can make 5 handles a day, every day, your account will multiply itself by 17, in just trading days.

But, why is it so hard to do? It is hard to do simply because it is hard to do. Trading is among the most difficult professions on the planet to learn, every bit as hard as brain surgery. Most people fail because they try and earn money instead of increase their skill in a structured and focused way. Possible on FX with exact position sizing. Not impossible at all but certainly in the realms of expert performance.

I had 3 months last year averaging 4. I guess if he was assuming you could trade partial contracts on the e-mini. It should take at least 4 months of full time intraday trading to be able to trade your own system at acceptable levels of efficiency. Please discuss or provide link to the Trend Strength or SQN indicator you reference — thanks, would like to code it up — maybe it was discussed recently, site posts have been pretty dense of late…. Bearish Engulfing Candles on all equities yesterday http: Someone beat the tick index into submission and now its just laying there with bids slowly being walked down.

No one buying the offers today. SPX took out yesterdays low and failed to follow through even with no bulls showing up today as evidence by tick embeddign white line.

For USD pairs you can use the futures contracts to get volume data. Scott, in your discussion of stops, it looks like there is an incomplete statement: Thanks, and thanks for doing this. Seems to be a pretty strong bid at SPX … Either this is a bottom or we go lower, but either direction I think we move fast… I think we have a good inflection point here.

You have to either create a linkable chart in stockcharts or take a screengrab. For stock traders this is not possible. Ken Long does some workshops on longer term systems which I am told are very good and suitable for daily chart trading.

Suggest the market is digesting the down trend day yesterday. Entirely to be expected, low range choppy bullshit. Same situation with DOW. You guys are missing the point.

I could easily have disclosed my own systems. You seem to win every single time you trade. Even after going long first thing yesterday morning, you miraculously win and win again every time.

Your points well taken! Diversification into FX and other markets will become a must and also employment of many traders to trade the system. Actually the trader who built the system mentioned above no longer trades this system as he believes Ken Long to be a superior system designer he has a PhD in system design and effectively outsources his system design to him. Ken, like Mole and myself, is a life long martial artist and takes a focused skill building approach to trading.

His rlco system is a superb intraday system and I am told these are just as good swing trading systems http: Gonna try to re read your posts and think of something new from the ground up something simple…. Even if you have a good system, it WILL take you 6 months to be able to trade it well.

During that time your results will probably be terrible. This applies even to your own systems, I am currently trading Heisenberg at poor levels of efficiency, but getting better over time. Blowing up has taken away the capacity to trade without rules or restrictions and, like like a 5 year old who has to clean up his toys, your subconscious is sulking. Suggest you stop trading for 1 year, work on yourself and then when your psyche is detraumatised start on building your systems.

If you build systems in a place of fear frustration and anger that gets carried into the system design and you build shitty systems. Is the median number higher than our desired 2: Is that anything close to correct, for just this part of the post? What number of trades constitutes satisfactory sample size for Step1? Is there any way to do this faster?

Particularly for step 3. If it is all on excel, does anyone know of a template that is laid out for this? Clearly another step will be to test for R outcomes as above only within specific market volatility climate.

The size im trading right now tho is tiny like really small and insignifigant almost but i felt that it should still be real money but losing, especially losing 7 times in a row stil feels like shit. What Scott says about it taking months to trade even a good system well is true. There are always bugs that will have to be taken out and while this is happening you can get WTF Moments.

But right now I feel like a kid who has just learned to drive a car. Goals and Total Gameplans are additional things that need to be done. Unfortunately there is no solution other than time and effort. If I did, I would have quit years ago. Tradestation is a bit limited by its Easy Language — I prefer more strongly typed languages.

Regarding 3 you may also experiment with taking partial profits at 1R, 2R, etc. This is something we are doing for Heisenberg and it was a bit of an epiphany for me. Entries really are secondary to campaign management. But it has to be in the context in favor of the underlying idea of your system.

An error a lot of traders make is to focus on dollar amounts. Thinking in dollar terms adds an emotional context that can derail progress. Almost all the results are relevant to System Quqlity Number, not a market trending indicator. Practically every strategy I have uses aset of volatility and MA filters to determine when to trade.

And they are effective. The reality that I see is the pullbacks are 3 to 5 weeks in red. The reality in an upward trend is bears are swimming against the tide. Alright, now that we have something to work with how are we going to use it? I will throw out what I am thinking, but it is not a final product, just a starting point. This is a very basic, unoptimized view to start with…. Watch hourly chart 2. Use multiples of ATR band 3. Buy sell if close is above below the 0.

Sell buy if price reaches 2. Initial impressions of the system: System should work well in range-bound markets System should work in trending markets, but will miss a lot of potential profit. But does this fit me? I do not want to be at the computer all day 2. I need very low draw-downs 3. I need very predictable monthly income. This is an edge which is overwhelmingly likely to be curve fitting and mediocre at best for system design.

You should back up a bit. Spend a week of your life doing the belief examination paradigm for all your beliefs. Spend another week formulating extensive goals of your system. What makes it a good idea is that you could explain it to a child. In comparison complicated theories like your harmonics one above are so much bullshit.

Some other things you might use to increase your edge, in no particular order: You could also add a daily indicator oscillator of some description and buy at the peak of daily momentum bearishness since multiple timeframes are an edge and the weekly trend overwhelming daily price action is also a demonstrable property of markets. As for your exit targets — you are way too early to start thinking about that.

Do it properly, exactly like I suggest in the post. Right now you are thinking about taking profits on the yellow line, because it looks nice on a chart. The data may suggest that is right or it may be way off, better not to precondition yourself. Based on these 3 examples the sample size is too small you need at least a 30 pip stop. Work out what that is in multiples of ATR and see if it holds constant with the gold low volatility bull I posted below, or other low volatility bull markets.

As long as you are thinking like this you are a chicken scratching in the dust trying to see portents of the future. Implicit in this statement is that you are still seeking to derive the future from the past. This is a fundamentally unworkable notion. The future and the past are entirely separate and the future is based on roughly a million different variables all colliding in strange ways. A more proper way to condition yourself is that the odds of upside continuation are no longer favorable on a risk reward basis.

Until you do the necessary internal work to rid yourself of this thinking you will be incapable of trading even a good system. This is why I suggested things in the following order. Jumping straight to number 5 is how most of us blew up our accounts when we first started trading.

I agree that it is a statistically significant sample size and find that there is much to be gained from watching the futures volume while trading spot fx. I find specifically that 5 min large volume candles standing by themselves at least 3 times the average volume are often short term turning points.

Ivan finds interesting intermarket relationships when futures makes a higher high not confirmed by spot, and vice versa. That is not trading what you started with in any way shape or form. It is just taking an inverse risk — small reward massive risk, and eventually simple maths got in your way.

I strongly suggest you stop trading immediately and make a commitment to spend months starting from beginner mind, working on your psychology, trading plan and business plan, and then come back to it. There is about This link is the most relevant. The volatilty part of this is not difficult. The SQN part is as Mole says well above my pay grade and thus nothing I can easily create or use — certainly not without hours and hours of work. This link provides better detail, maybe there is something I can use here… http: My gut says, find a neutral strategy based on either a beginning turn, or a simple ramp-camp for the next month.

On a chart reading basis you are almost certainly right. Examine the evidence — we have many superb chart readers at evilspec and very few if any profitable traders there might be a few fund and bank traders who are profitable, but that is a different thing. By definition this problem as to feeling and emotions is psychological. There is no chart based solution to it. Suggest you follow the program I outlined which has worked for me and others to solve the same issues you have.

OK Rats its been a fun week, but its over. You now have everything you need to build and optimize high quality systems which are suited to you. Thanks for you efforts Scott, and thank you Mole for providing a most excellent and continually useful site. I have a lot to think upon. Realized Versus Implied Volatility.

What Would Socrates Do? Living Inside a Broken Clock. Snorefest Wednesday Rub Down. The End Is Near! Building Trading Systems — part 4 — Entry and Exit techniques and system optimization. Edge A Trading a Donchian Channel breakout on a 60 min chart? Edge B Trading a Donchian Channel breakout on a 60 minute chart only in the direction of the higher timeframe trend where the minute, daily and weekly charts were trending AND where volatilty, measured as bollinger bandwidth has painted the lowest low in bars in the previous 10 bars?

You might have 10 bad system ideas before you have one good system idea. Advanced Technique Ivan Krastins — Entering on the Break of a Candle which is confirming your view This is a powerful and useful technique for entering a trade and filtering many bad trades.

Chuck Lebeau Concept for preliminary testing of Entry Techniques This is not a technique which I use personally, but other system designers I know use this to quickly test and filter whether a given entry technique is useless or has validity. You have big decisions to make How wide is your initial stop? How soon do you move your stop to breakeven or close to breakeven to protect profits?

When do you bank partial profits, if at all, and why? How loose do you trail a stop? Do you take profits on a target or a trail?

Here is how I personally answer those questions 1 How wide is your initial stop? You want to measure 3 things Maximum Favorable Excursion of winning trades defined as trades which make over 1R Maximum Retracement as a percentage Maximum Retracement in R using common sense Add them to a spreadsheet, then sort them and plot as a histogram.

One other thing to note: We can see that the median the middle of the range of winning trades is approximately 2. Our normal winning trade is 2. This is extremely important. On Surviving Retracements The maximum retracement you can stand bearing has to be closely matched to your personality and the level of psychological trauma you have previously suffered in your trading life.

Based on this histogram — where do you think I should bank some profits? Pay Attention — This is the KEY to designing effective exit algorithms No one type of stop is going to give you anything like decent performance overall. If you get long on a breakout you do NOT want to see a strong down bar within a few bars of entry. Modified Spike Low Stop inside MA Only count spike lows which are deep enough to pierce a Moving Average or linear regression you like Trend Reversal Exit — If you have a favorite technique for indicating a new trend is starting in the opposite direction, you can use this as a signal to exit a trade.

This is particularly powerful if you are in, for example a daily chart trade and you have a 4hr signal in the opposite direction. It is KEY to building systems. No one stop will meet all your needs.

You need at least 4 different stops and potentially many more run in tandem Note: Another appropriate relaxation might be to place your stop behind closeby support whatever support fits your beliefs for extra protection General Exit Principles Most people place their stops too tight at the start and middle of the trade, and too loose at the end.

What am I optimizing for, anyway? My opinion is that the following statistics tell me everything I need to know.

Rather than repeat it just go here If you optimize your exits to maximise SQN you will have smaller drawdowns and be capable of trading your system at higher R values, up to 2. Conclusion For optimizing the trend following system I have outlined above it is obvious I need 3 different exit.

The SQN Indicator will show you if the trend ist high quality. What says the SQN Score: So if you screen your stock universum look at stocks that have an SQN Score of 2. This Indicator would be an great filter to finding stocks trending.

You can change the period you looking for. The Minimum Period should be For more Infos you can read Van Thaprs Books. To use this indicator on a chart, simply type: Trading Indicator Object ID: Reviews You must log in first Join now and get instant access for free to the trading software, the Sharing server and the Social network website. Click here to Login. Email Password Remember me. Offers you the tools that will help you become a profitable trader Allows you to implement any trading ideas Exchange items and ideas with other QuantShare users Our support team is very responsive and will answer any of your questions We will implement any features you suggest Very low price and much more features than the majority of other trading software.

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System Quality Number Indicator

We would go from having 11 out of 18 winners (61%) to having 7 out of 18 winners at 38%. As a general proposition win rate is the least important part of a trading system, but a system with 62% losers is going to have to endure huge series of losses and dramatic drawdowns, meaning that it is going to be unsuitable for trading with R values over.5%. The SQN of this system is: SQN = root() * / – 10 * / = (which is excellent) However if you would make only 25 trades per year with this same system the SQN would drop down to Barely tradable due to lack of opportunity. The Benefits of High SQN Scoring Trading Systems When you use trading system with a high SQN score, you have more flexibility using position sizing strategies to help you meet your objectives. How and why this is so will be covered in depth.