Tag: trading system

  • Does Trading Strategy Really Work?

    Does Trading Strategy Really Work?

    Does The Trading Strategy Work?
    Your trading strategy must have a logic behind it. Without it, your strategy is useless and won’t work in any case. 

    By Guy Avtalyon

    Does the trading strategy work? How can you know that? Developing a strategy is a lot of work. You might think that creating and developing a profitable trading strategy requires a lot of work. Yes, that is the truth. But you should never stay stick to the first version of your strategy, you have to develop and improve it all the time. In other words, it is permanent work. For the trading strategy to work, every trader will continue to work on it. So, the question: Does the trading strategy work is present all the time in your mind while executing it. Even if you have had a lot of tests, adjusted it numerous times, you will always ask this simple question because the profitable trading strategy has to make you money. Does the trading strategy work, it depends on how much it is suitable for all market conditions.

    That means it is able to produce a profit. If you expect the mathematical accurate answer, forget it. To know the answer to the question: does the trading strategy work we’ll need a large sample size. 

    But, what is a sufficient size of it?

    In trading, everything is based on probabilities which will become higher with the growing number of trades executed in profit. But why should anyone need a mathematical proof to know: does the trading strategy work? In trading, practice is crucial, no matter if it is with paper or real money. 

    And here is the catch! Who can afford thousands and thousands of trades before concluding that the same strategy doesn’t work? Also, you’ll need almost the same number of trades to test your strategy after any adjustment. And, what if you find at the end that it isn’t able to produce you a profit? So, an attempt to mathematically prove that some trading strategy works requires a lot of time, a large sample size, and a lot of hard work. 

    What you really need in order to find: does the trading strategy work, is a practical approach to this topic, not a mathematical one.

    A practical way to to find the answer to the question: Does the trading strategy work

    Since it is hard to have exact and absolute results, we’ll need a practical one. Okay, you can test your strategy on numerous virtual trades but you’ll have to be a programmer for that. So, how can we know that our strategy works and test it manually? But keep in mind, nothing is perfect in trading.

    How to check if your strategy works? 

    Let’s assume you are a beginner. In such a case, just observe your trades as groups of, for example, 20. Before you start trading, write down all the rules that you will implement to all 20 trades. Okay, you are ready to enter the position. The next step is to add all your entered trades to your trading journal. After 20 trades, check your rules and find where you didn’t follow them. Based on trades where you did follow the rules, you could find does the trading strategy work. 

    First, you’ll figure out how your strategy fits the market. Did it match the market conditions during the given time frame? The crucial info you’ll need is how well did you use your strategy, was it adjusted for particular market conditions during this test?

    When you find all these answers you might have an accurate picture.

    Let’s assume that 15 from the group of 20 trades were successful, and you stayed with your rules, plan, and you recognize when the market conditions were beneficial for your strategy and when they were not. But, we’ll suppose that your 15 trades were all profitable.

    Did you compare this group of trades and their main indicators, for example, Required Rate of Return (RRR), the average return per trade, win rate, to your backtest data? Well, it’s time to do that. Are there any differences? No? Nice, go further!

    But if you find, in that comparison, some differences, you’ll have to find what was wrong. It could be that you made some errors in the trading process or you missed something in backtesting. Remember, literally anything may have a great influence on your strategy’s profitability.

    When you find what’s going wrong, just adjust your strategy based on errors you made and trade another group of 20 trades, but follow the rules you set up. Now it’s time to compare the result of the first and second groups. You will know the result of your adjustments. If the strategy is doing well, trade another group of 20. After 100 trades or more, if you like or want, you’ll figure out: does the trading strategy work. 

    Use an out sample to find: Does the trading strategy work

    We showed you how to do that above. Keep in mind that markets are changing all the time as well as our performance. So you’ll need to know how your adjustments influenced your trades. Did you want that? If your strategy still doesn’t work as you want, you have to consider why that is. 

    For example, if you lost 20% of your account, it’s time to step away and find what you are doing wrong. Maybe your stop orders are not set properly. 

    Trading means dealing with risk every day. It is very helpful if you have all data in your trading journal and the calculations of standard deviations and ratios. You can move forward based on that data. Consider that your sample size is still small, maybe you’ll need a bigger database, so try with a group of 30 or 40 trades. 

    Remember, evaluate your most recent group of trades as an out sample and don’t add it in the overall evaluation. Even if your most recent trade was a failure, don’t panic, stay calm, and calculate everything you can. If you find something strange, change it, if not, just move further.

    How to optimize your strategy?

    Basically, you have to estimate if your strategy is suitable for the particular market condition during the given time frame you are observing. Further, are you following your own trading rules or you are flexible about it. If you follow your rules, you’ll have to check out how your rules correspond to the market. Maybe you’ll need some adjustments if your strategy doesn’t work well. You have to figure out how your most recent group of trades matches to the trades executed before that. And if there is any exceptions you have to reveal why, so you have to stop trading until you find out why that happened.

    Markets are changing and your strategy should be evolving according to them.

    Optimizing a trading strategy means making small adjustments, small changes in strategy to increase the final result of its performance. Hence, optimizing a trading strategy is crucial for your overall success as a trader. Don’t forget that optimizing a strategy means to go over the whole process of testing, otherwise, you’ll not reduce the risk of unforeseen impacts. So, you’ll need to try and check, again and again all over the process. That’s the only method. You have to make small changes, to change the value of variables for a bit, and check and check. Try out various combinations in order to find the right one.

    Trading is hard work. You’ll need to put in hours and efforts to become successful in trading. It isn’t a ticket to easy money! 

    Moreover, you’ll be faced with serious struggles. Trading will require your capital, your abilities, your trading method, technology, your knowledge, risk management, and many other things. More skills you have, more chances of success.

    Does the perfect strategy exist? 

    Forget about finding the perfect trading strategy. Such a thing doesn’t exist. But remember that your strategy could be a good servant but a bad master. It depends on you and how often you adjust it to work for you. A trading strategy should regulate and route your trading activities. It has to work for you, not you for it. Keep this in mind when creating your trading strategy and make it robust enough. 

    Also, your strategy should be easy, clear, and simple. Review it often to assess how well it is doing, does it provide you the returns, how big, etc. If your trading strategy doesn’t work for you, don’t be ashamed to change it.

    John Maynard Keynes said: “When the facts change, I change my mind.” Does the trading strategy work? Only you can know that.

  • Automatic Trading – What Is It

    Automatic Trading – What Is It

    3 min read

    Automatic trading - what is it
    Automatic trading, also known as Algo/Algorithm trading is a somehow new field in the financial markets. 

    It’s there since the 90′, but it started to get much more popular in the past few years, for 2 main reasons:

    1.       The technologies are way better to handle that kind of challenges – Dealing with a lot of data:
    2.        Save it (it’s millions of giga-bytes so you need special server farms around the world, and that’s something that only available in the past few years)
    3.      Analyze it – Create an algorithm to go over that amount of data and also issue insights out of the data. This can take millions of years.
    4.       Find a way to keep adjusting the algorithm. In the financial markets – what happened yesterday IS NOT a guarantee that it will act the same today. So, we need to know what happened yesterday, but also find a way to give it the appropriate weight in our calculations
    5.       Many non-legit bodies got into the industry to try and take money from innocent customers, claiming they succeeded to figure it out.

    Our aim, here in Traders Paradise, is to help you, our visitor, in understanding the risks in automatic trading.

    Important to know (and I’m full of hope you’ve learned it by far in life): There’s no profit without the risk.

    We will talk about how automatic trading systems work, under what circumstances you change / diverse strategies, what’s available in the market and why you probably won’t have access to the automatic trading platforms that truly works.

    Let’s start from the beginning – Why is it so difficult to create an automatic trading software.

    The short version of the answer is – the financial markets keep changing on a minute basis.

    What I mean-

    1    In an asset (like stocks) level:

    Say we’re talking on Apple, and they issued an announcement that iPhone sales are going higher than predictions – The price will rise. Now, studies show that in a matter of a few seconds the price will already include the latest news.

    From this point there are 2 options – Either the price keeps going up or it will drop lower. If it’s rising anymore – we definitely know that some people will sell their holdings, as it reached their strategy profit point of exit. So if they’re more than the ones who want to but – price will drop. So it’s kind of a gamble.

    Ways to avoid this – invest in two companies that are competitors, so that when one is dropping the other is rising. This called hedging the investment. 

    2    In an industry (such as technology) level:

    In this level, it’s more tricky, because if an entire industry is dropping (regardless of a specific company) then it can affect our whole portfolio. Several things can trigger it, such as a big player comes with an announcement that affects the whole industry. Like, if IBM (that creates chips for most of the big companies in the world) will announce that we reached a “no way to overcome” scenario. Then all the industry can lose some points. Until someone else will come with some better news.
    Ways to avoid – Diverse your portfolio with serval industries like motor, pharma, and technology.

    3    In a market level:

    This can happen when an announcement or new policy comes out of the main bank or the government, or when a global incident is occurring – The whole financial markets can drop, and then ALL portfolios will lose (except the ones who bought ‘short’ position).
     

    Ways to avoid – VERY DIFFICULT. It happens in surprise and there’s no way to predict it. But you can still avoid some if you add short positions to your portfolio.

    So, those are, in general, the major points we need to look on when creating a portfolio.

    This created an environment that is impossible for short-term predictions.

    Next question is – How do we choose our assets? Or how we create a good portfolio?

    Let’s think about it for a second:

    If I read on the finance news about an asset that is going high. I must think – yes, this is the asset I was waiting to buy. Right?
    Wrong.

    Because there are many other people who read the same news like me.

    Automatic trading - what is it 1
    And if we all buy now, at the top, we’ll all be the “stupid top”, just like the people who bought bitcoin at a price of $15,000 and saw it drops to $5,000. Someone made money in these actions, but some lost a lot! (Never forget the simple rule of – when someone is buying it means there’s someone who’s selling)

    So,

    Do we need to go short on that asset?

    Nope. Short is a VERY dangerous position. Why? Because only in short you can lose MORE than you initially invested

    How’s that possible: When going long – it means you believe that price will rise,

    For the easy example, we say there’s an asset cost $1 per share, and we decide to buy only 1, so it costs us $1.

    Now, this company had been acquired by another company and overnight the asset is now worth $20. Pretty nice huh?

    And if overnight the company bankrupted – then we’d lose that $1.

    Now let’s say we went short on that asset –

    If it bankrupted we doubled our money, but in case the price jumped to $20 – we, then, lost $19 on a $1 investment.

    That’s brutal!

    So, shorts are something we try as hard as we can to avoid, but sometimes it’s the best strategy. We’ll talk about it later in another article.

    Back to the asset we just read is exploding and rising up. What are we doing?

    NOTHING!

    If it’s already on the news – we missed the train.

    So what’s the asset we should buy? It doesn’t matter. Why you probably wondering… And that brings me to the next question:

    So what is automatic trading software trying to do?

    Most people think the purpose is to find either an asset is before or during an explosion and recommend that asset to the user, right?

    But wait…

    I got into a position. When do I get out?!?

    That is the real question.

    See, a good asset position is built on 3 things:

    1.       When to get in
    2.       When to get out
    3.       Which direction we choose (long/short)

    That’s it.

    But, when we start to break it, we see that there’s one of them that is the most important.

    Yes, I know you already know which one it is!

    It’s “When to get out”.

    This is the most important thing in every single trade you will ever do, and what sucks about it is that you’d know if you got it right only on in retrospective look. Never at the same time of action.

    THIS is what good automatic trading algorithm supposed to do, and this is what our algo trade software does. It doesn’t matter which asset you choose nor when you get into a position or which direction you go – It’s ALL a question of when you got out!

    If you were wrong about the direction – you need to get out ASAP, but with a minor loss as you can.

    If you got the direction right – you want to optimize the profit you can, before price bounces back. 

    That’s the whole idea, and that’s what we created.

    How is Automatic trading even work?

    Well, it’s kind of a secret… But we’ll tell you what we can and we’ll let you use it to see for yourself (for free of course).

    But basically how it works is we have many supercomputers that work together on sets of data, to create the most optimized exit strategies for every asset we choose.

    It’s working according to historical data, but it gives the right weight to every piece of data.

    In other words, we, as people, could never understand why the software does what it does.

    We know how the math was created, but this algorithm is an unsupervised algorithm (read more in the previous article)

    It had only one rule to follow: “The more profit you gain, the better this strategy”.

    That’s it. Like when you plant seeds in your backyard, water it, and then you wait for the fruits? Same thing, but way better fruits…

    Want to get access to our software once it’s ready for outside users? Subscribe to our newsletter and we’ll let you know when it’s ready. Also, you’ll get more interesting articles on how we solved this almost-impossible technology and math problem. You can ALWAYS unsubscribe.

    Risk Disclosure (read carefully!)