How to design a trading system

The structure of the trading system

The structure of the trading system needs to focus on the behavior of the market, specifically on the movement of the trend. To do this you need to first understand the components and life-cycle trend. Taking into account the previously described behavior stockbroker, and hence the movement of prices, we can assume that at any moment the markets are composed of three trends. The first trend is the longest, consisting of several months, should be used to determine the direction of the market, and to which you want to open positions. The second movement of the observed market correction could be a trend, which will consist of a few days, and which is determined by, the use of more sensitive indicators. The last movement of the market a little bit like a lateral trend, which is among the correction and the continuation of the basic trend is the short-term price movements in one or two days, used for precise input. For the exit should be used as a short-term movement, but in this case, the basic trend is not replaced by a correction, but a new trend in the opposite direction. Following such an understanding of the market, to open a position is necessary to use two or more trend indicator, signals the opening of the position and oscillator or trend indicator, and to close the position. A more detailed description of these indicators is disclosed below.

Rules for the opening position

Quite an interesting analogy hold the author of the book "Computer analysis of futures markets," Le Beau and Lucas between the entrance to the market and firing a handgun at a target: at first sight it is necessary (to find a direction). Then vzvesti trigger (ready), and then gently press the trigger (enter the market). In fact, the same two or even three-tiered process otyskivaniya happening at the moment of entering the market. In the first instance by using less sensitive indicator of trends, with a large order of the system determines the main direction of movement of the market, or the main trend. Then, after a long-term direction of the market has been defined, the next task to find the medium ¾ indicator, which gives a series of signals inside the long-term trend. These signals can occur at the end of the main trend correction. Also, a series of signals will be needed, because the first interim signal indicator medium arise before long-term indicator will allow the system to trade in that direction. It must be borne in mind a clear sequence of signals from different sensitivity of the indicators according to which the short-term signals arise first, then medium and finally, the long-term signals. By the time will determine the long-term trend, the first intermediate and short-term signals are already there and the system will be more important to get re-intermediate and short-term signals a few times within the long-term trend.

There is a relatively large set of useful intermediate indicators, which can be single or double moving averages, breakthroughs channel signals parabolic system, the regression line trends. Using the system, the importance of a separate intermediate indicator, usually suppressed in the combined system, the fact that the system is built around a combination of indicators that could in the worst case of conflict with each other. In such a situation, it is important to choose an indicator that the trader would have felt the trust and confidence which gave a series of short signals during prolonged trend.

Open positions run market activity, followed by the intermediate signal. In addition, there is the choice of launching mechanism. For example, you can place the entry point at the new peak or trough movement or select a point of entering the borders of today's peak or depression, having a warrant. Some traders are being very cautious, decided to await the entrance to a series of peaks or troughs in the desired direction, but such tactics lead to a loss of potential profit. If you trust the first signal system, the input can be selected at the first closing in the right direction, it is joining the program allows for the exchange complex MetaStock, on the basis of which the third part of the work will be carried out testing and optimization of the trading system. The important thing to remember here is that it is necessary that the price action confirmed the signals the rest of the indicators system and allowed the market to the run entering the system. Most good traders profit immediately after the start of the system, because their systems tend to behave synchronously with all three trends from the beginning.

Terms of closing the position

Once the rules were designed for the opening of the position should be identified and with the rules of entry, as defined in the view of many traders, a more awkward. The problem is that would be able to correctly identify the end of the main trend or the beginning of correction, furthermore, should be able to retain control over when they receive a small profit or loss.

It should be noted that the opening of positions on a signal system is not always profitable, since the trend indicators can make mistakes and, in this case should be determined to stop the signals that the system will close the position. Losses in the footsteps of the signals are needed to avoid catastrophic losses. Any experienced trader uses stop signals implemented protective suspension, and traders who speculate in the markets of non-stop losses, are doomed to failure, and the only thing that can change, so this is the time for which they razoryatsya. As correctly noted the authors above-mentioned book: stop loss is similar to the contributions to the insurance policy and should be viewed as a necessary fee for the business.

When trade takes place in the anticipated direction, the trader is faced with a choice between obtaining a rapid but steady income, or the continuation of trade in the hope of more gains. What a trader in such a situation? Perhaps one of the exits can be a floating suspension, while others may yield a oscillators whose ability to guess correct the trend and turning points are described below.

Using a stop signal

There are five types of the most popular stop signals used by the creators of trading systems:

1. The initial stop signal (max loss stop): The signal, which the filing when the advance of the percent loss from the original account or a fixed amount of funds in the open position.

2. "Floating" stop signal (trailing stop). The position is closed if the predetermined amount of current profits is lost, that is a stop signal to the market, and when profits decreased by a certain percentage or a specific value of a closed position. Floating stop signal relates to sledyaschim suspension.

3. Removing the profit (profit target stop): This closes the position of the stop signal, when a certain amount of profits that were originally defined by the trader.

4. The level of break-even (breakeven stop). Allows the user to determine the level of current income, and when the market exceeded this level, the price of opening the position of becoming a stop signal to the exit. So the trader actually insure their investment.

5. The lack of activity ¾ stop signals in time (inactivity stop). This type of stop signal starts when the market is unable to provide a certain percentage of income towards the open position during the designated period.

In addition to choosing the type of suspension should solve the problem of the value of suspension. Stop losses in the general case are divided into two categories: those near and far. Ideal same stop should be one of those that are located far enough to just go abroad or accidental, from a technical point of view, meaningless price movements, and at the same time be close enough for comfortable control risks in trade. In fact, the ideal goal of the suspension are mutually exclusive, which forced the search to bring to a halt, which are either too close or too far. It should consider all the pros and cons of each option.

Close stops offer the obvious advantage of small losses at each position and moderate overall risk to the portfolio of open bidding. However, this process leads to a weakening of the financial and psychological discomfort experienced by many of the stops on the bid, which could be very profitable if the original position allowed to go their way. Traders can avoid this problem by simply defining a convenient method of re-entering, which will return them to the market in the original direction just in time to catch most of the remainder of potential income. But, as always, a compromise. This logical step to return to the market will inevitably lead to increased activity of the system, which significantly increases the cost of transaction costs and slippage.

The system, which uses near-stop, face a disadvantage, as expressed in the increased percentage of loss-making trades, but will receive the privilege of a lower average losses. The system was far from the stop, would have a tendency to increase the winning bid per cent in relation to the system with close stops. Remote stop is not faced with the challenge of re-entering, and keeps control of the slip and the cost of fees. This picture dovershaetsya significantly increased the average losses on trade and significantly increasing overall risk to the portfolio. It seems that there is the choice of the lesser of two evils, or an acceptable compromise between the equally unpleasant possibilities.

On the basis of technical indicators can be developed is not perfect but still acceptable procedure, which will include the basic principle of the job stops, avoiding most of the problems associated with random fluctuations in prices. As one possible approach would be to use the standard deviation of prices from moving average and then place the stop a few steps away from the standard deviation of the rolling average.

As a practical matter, and perhaps as an effective alternative to complex approach, the standard deviation could be used by the average daily price range as the minimum distance for the job stops, which will help avoid most of the small fluctuations in prices, leading to derganiyam. To do this, you can simply install the 5-day or 10-day moving average of peaks and troughs, and then locate the source stopping at a minimum distance, which will be equal to the distance between the moving averages. As long as the market moves favorably, too, can stop coordinated this distance. This technique will help to avoid what is called "random fluctuations in the course of the day" because it keeps stopping far enough to avoid the daily fluctuations. In order to stop the position will require an abnormal fluctuation during the day or a series of hostile daily price changes. Maybe this method does not provide an ideal stop, but it can be very useful in the sense of finding the minimum distance to stop, to avoid unnecessary dergany.

Other possibilities job stops that fit the definition of ideal suspensions are a point on the graph, such as levels of support and resistance, peaks and troughs of recent days, parabolic stop and possible envelopes or trendline, but such methods as the resistance levels and virtually no support to programming and thus nerealizuemy as a trading system.

The preferred exit strategy

There are some of the most popular exit strategy. One ¾ method of joining and keep the position for more revenue. This method is more like investing than in the medium-term trade and working for long periods. The method of re-entry and retention is more appropriate so as to traders who are not opposed to large losses and painful Losing periods, which would deprive of courage, and very costly in the short trends. This method is suitable for trade only their own considerable capital and requires a great deal of experience, confidence and discipline, and most suitable large pension and mutual funds. The main component of the risk of this method for high-income pursuits is that a single trader almost inevitably ends in mid-output period of severe losses. The vast majority of traders can not withstand the kind of high income, they have missed, and they are psychologically unable to withstand the inevitable loss, regardless of how well they were trained or educated. At the same time, large mutual and pension funds in accordance with their strategy may prove to be more flexible.

Less popular exit strategy is a method aiming exit when traders closed, reaching pre-determined price targets. However, each strategy has its reverse side. In this case, there are some fundamental problems associated with the possibility of predicting certain levels with a certain degree of accuracy. Everyone can point out some obvious support and resistance levels, which could make the trend waver, but with the exception of the overall analysis, even doubtful that a more precise aiming in fact a real possibility. No one knows where the market is unlikely to be able to predict with any accuracy.

Trader using Sighting exits, gets the advantage in that he is not faced with the problem of monitoring large unrealized losses of revenue. On the other hand, it will definitely suffer from the frustration that many prices have not reached the predicted targets. Trader will also need to learn to withstand disturbances arising from the supervision of how received less income, while it can get more if there is a little more patience.

Another popular strategy ¾ a compromise that provides the advantage of rapid income and leave at the same time, the opportunity for more revenue. The essence lies in the fact that a trader uses a dual trading account and receive income from one position to priberezhennoy price targets, and the second position allows you to be open in the hope of getting a big win. This method requires a large capital investment, compared with a trade account, but it has obvious advantages in the event of traffic ugadannogo trend. Quick income of a single contract would always give more freedom to the second, and you can afford to be very patient. To deposit one win, one can give the position a second time to avoid the premature shutdown.

In addition to the benefits of this strategy, there are negative aspects. The apparent lack of a dual strategy is that if the position is open in the wrong direction, the losses will be at two positions instead of one, with the usual strategy. The dual strategy can be an excellent choice as an exit strategy only if the trader is a very good entry strategy, and is convinced that most of the trading to start in the right direction. But before you start using this strategy, make sure both would lead to such a strategy on historical data, especially when the entry strategy is not working properly.

Another method of entry, which could be applicable to one account, gives the very beginning of a space on the market in a broad suspension until it becomes perekuplennym or not to provide an unusually large movement in a predictable way. This is followed by a stop to narrow income in order to protect a large portion of the profits, but at the same time be able to generate revenue and further, if the market will continue to move in the right direction.

As an indicator of signaliziruyuschego perekuplennogo market can be used shestiperiodny index of the relative strength of the signal which will have to make the stop. For example, when the relative strength of the indicator rises above 75, then drops to 10 or more points, should raise the stop at the minimum price for the last three trading days and to adjust them to lift the market. Often, this process allows the market to remain strong in the throws and is very close to the top.

The use of oscillators and trend indicators

Consider a trend indicators and oscillators to guess the date of completion of the trend or the beginning of correction. As we know all the technical trend indicators are trend. Needless to build, be it moving averages, or grid system, said that they were already reacting to past trends in prices, signaling the beginning of a new trend only after it appeared, but did not predict its occurrence. They help find a new trend or to determine the nature and effect of new developments as soon as possible after its occurrence. But that is after its inception? This means that some time will be lost, and this time the trend will change and shifts in prices inappropriate direction. Therefore, the trader will lose profits, if he does not have a protective floating suspension.

Way out of this situation can serve as indicators of delay or hesitation oscillators ¾ some alternative indicators to monitor trends. Unlike last oscillators are highly effective in the absence of apparent trends, where the dynamics of the market boils down to movements within a relatively narrow corridor of horizontal price, otherwise known as "market corridor." It is a corridor of prices, as has been described in the first part of the work are changing the basic trends. This is the period when the bulls are no longer able to move the market higher and the bears have not yet felt its strength and remain inactive. In the corridor of the market price is so often changing the direction that the most difficult problem is to catch the beginning and end of short movements up or down. Under such conditions, most of the systems to monitor trends are weak or unprofitable. At the same time, the use of oscillators allows the trader successfully close the positions and withdraw from the deal.

The effectiveness of the oscillators is not limited, however, only the "market corridor. In conjunction with the analysis of price charts for the period of domination in the market of a certain trend oscillators are able to predict short-term critical periods in the dynamics of the market activity ¾ the so-called state perekuplennogo and resell the market. In addition, the oscillators can easily see a weakening trend ¾ before this is clearly reflected in the price: for example, the difference between the direction of the curve oscillator and price shows that adherence to a particular market trends coming to an end, and soon spread.

Strong main trend at the expense of the dramatic changes in price oscillator drive high up in the zone perekuplennosti. In the area perekuplennosti oscillator is until the power of the trend, as measured by the ability of prices to rise as fast, not waning. Then comes the period of short-term side-trend, consisting of two or three days. During this period, prices have not changed ¾ there is a short-term weakening of the main trend. It was on the short lateral trend curve oscillator out of the zone perekuplennosti, as evidenced by the reduction of the rate of growth of prices. This signal is an oscillator can serve as a signal output, followed by a change in trend is the opposite, or will be corrected. After the correction system will be necessary to re-enter, which was written in the next paragraph of this part of the work.

Re-entry

As already stated, the ideal stop losses could be developed if the attempt to place the stop just outside the border of random price jumps. But even an ideal stop can make mistakes when entering the market for big players trying to utyanut market to correct. In this case, if one of those stops work at a time when the trend is still a movement would require a method of re-entering, which will return back to the trader's market, at a time when short-term trend will resume its march towards a long-term trend. The method of re-entering will help avoid disruptions due to omissions of any significant price movements.

The previous section examined some of the closing of positions, which depended on the correct operating system. A good way distinguishes winning trade of losing, and perhaps this is the single most important element of any system. Unfortunately, traders often obscure position earlier than the main trend that can still significantly increase the profit system. In cases where the trend continues, there must be a way of re-entering the market. Strong trends are rare and too valuable to lose them, so that closing the positions the trader must be confident that he can return to the market, if the previous stop was premature.

The mechanism of income for the re-occurrences of signals can be quite different from the main entries, because the market is in the middle of a strong, well-expressed by the trend, where the fluctuations in prices are significantly higher than at the beginning of the trend. Being in the middle of the trend, the trader would no longer be needed signals trend indicators, but only signals oscillators with small orders for greater sensitivity.

Oscillators that define the area perekuplennosti or pereprodannosti may very well work in determining the re-occurrences. Assume that the system was stopped floating stop signal on profitable long position in the correct price, which was stronger than one would think. You can observe the behavior of the relative strength index, or stochastic oscillators in such a situation to get a signal at the end of this deviation. One technique is to wait until the Stochastic Oscillator falls below a certain level and then turn back. The fall of a stochastic oscillator to any value below 40, followed by a recovery, should initiate a workable re-entry. Typically, trade on the purchase, if not the market trend is caused by the collapse of a stochastic oscillator is below 20 or 30 and the subsequent turn. However, as a trader was on a clear upward trend, it is unlikely that the stochastic oscillator will reach a very low marks in 20 or 30 .. The stronger the trend, the higher the potential to turn a stochastic oscillator. If the Stochastic Oscillator falls only to 50 or 60 and then spread, perhaps, the system does not receive a signal to exit, closing the original position and should not be thinking about re-entry. When you start a new trade on the purchase, you can put a stop loss under the level of depression correction, and then raise it to a lack of damages will be made when a new peak. These trends are dying slow and difficult, so the chance to get a good trade, with re-entry is quite high, especially if you can enter after the fall, without waiting for the next peak.

The secret of the success of re-entering was to wait until the end of the time and start quickly purchased as soon as the system to find the direction of the main trend. Waiting until the market will make a new peak is too long wait, but must make sure enough evidence to show that the correction is indeed over. Here you can talk about a very subtle point that requires careful reflection, along with the availability of sensitive and reliable indicator.

As an example of how sensitive can be an indicator of re-entering, you should give the method is very short-term oscillator, such as a three-day relative strength index (RSI) as a starting signal of re-entering. Typically, a three-day RSI so often jumps, that he is a little bit as an indicator. Because this is a very sensitive indicator, any correction, strong enough to stop the system and close the original position, because of the relative three-day fall in a very low level. When the RSI turn back for the 50 mark, it will be possible to conclude that the correction is over. Hence, the need to buy the next day, when the market goes from the peak of the day, rising to the RSI value of 50.

Technology RSI has two mark the continuation of the trend (the value of +50, and confirmation), and at the same time, it quickly enough to return to the trader at the market well before reaching a new peak. Kontrtrendovye Other indicators, such as the stochastic oscillator,% K and the index of commercial channels, may also be used in this way. % K-this is a sensitive indicator, which will work nearly as well as a three-day RSI. The idea is to use one of these indicators to provide a signal about the end of correction. To do this, set the indicator more sensitive than usual, because in this case it is needed to measure short-term correction rather than a trend.