Sunday, July 31, 2005

Do your homework

Sorry, but what homework?

I’m a futurestrader! I don’t need to look for trading vehicles, I know what I trade and I choose daytrading, so I need not to worry about open overnight positions.


But I thought so as well!

Do you question your signals? Do you try to second guess them, getting a better entry? Did you find yourself unable to press the button and then see the Euro, ER2, anything, explode without you? Leaving you behind, trying to chase it the moment the rocket cools down and everyone on board is glad there is such a fool as you are one to take the contracts off their hands.



You need to be confident in the system you are supposed to trade.

You need to know at the end of the day, how much your system would have made you, had you taken each and every signal.

An empty copy of the above spreadsheet has been placed on my server for you to download. Be aware that the spreadsheet is used for trading currencies, so you will need to adjust Cells C47, C48 and C49, if you trade index futures, as the spreadsheet currently assumes that 1 tick is 0.0001 = 12.50$.

  • You enter the direction of the trade (L)ong / (S)hort
  • the signal
  • the time the trade was opened
  • the entry price (use the close of the bar)
  • the recent swing High (on Shorts) or Low (on Longs)
  • the exit Signal
  • the exit price (again use one you could reasonably expect to get)
  • MAE (Maximum Averse Excursion) or what was the worst price the trade went against you. You need this to determine if you use sufficient stops.
  • Max. The maximum price the trade went to, before you covered the trade

What will you get:

  • Pt: Points the trade made.
  • The colums labelled 10/12/15/20/25/30: You might use targets instead of exit signals in your trading and these colums will tell you, if you use reasonable targets, if these will get you more points than trading with exit signals. Change the label to test your system with different targets.
  • MAE-PT: How many ticks the trade went against you
  • Max-Pt: After how many ticks did the trade make its maximum. Used to question your exit  signals, if what you get is a lot less than what you could have gotten
  • In addition you get the Totals for the day, the Win/Loss% ratio and the Win$/Loss$ and the total amount you could have made trading 1 contract assuming 12.50$/tick
  • You also get the amount you made/lost on average on your winning/losing trades
  • Last you get the percentage of the points you made compared to what was available

But doing this homework is taking the second step before you took the first:

First you have to define clear entry rules for your trades. No second guessing, no other timeframes, no other markets. You take 1 timeframe, you define, what you look for and every time these conditions are present, you put a marker on your chart.

If you are able to build trade alerts in your chartprogram, even better. Define your rules, translate them in the language your chartprogram understands and let these arrows be placed automatically on the chart.

EG: You want to trade CCI zero crosses with price near the 34ema. For shorts below, for longs above.
So the Trade Alert Long has to trigger, when the CCI crosses the zeroline and price trades above the 34ema but below the 30ema and the 30ema is above the 34ema. (Alternatively you could check, that the close of the bar is within 2 ticks of the 34ema)
Last you need to decide, if you take signals only at the close of the bar or intrabar as well.

I strongly suggest you take signals at the close of the bar only, as intrabar signals can and do (often/sometimes) vanish at the close of the bar and it is nearly impossible to backtest systems, which take intrabar signals, as you will not see these signals after the close of the bar on the chart. So the results you get will be better than the results you get in real trading, because the good signals stay, while all the intrabar signals giving you a loss will not be visible after the close of the bar.

The most important thing the database will tell you is, whether your system has an edge or not.
If you have more losers than winners, if your system shows you a loss day after day, it means: Back to the drawing board. Trading your system with real money is just a waste of time, the money would be better spent on a real great vacation.
But, if on the other hand you see a 4:1 ratio of Win$ : Loss$ with a 70% : 30% Win% : Loss%, you know you have a good system with a real edge.

Maybe you are not yet getting these results in your real trading, but if you just followed your signals, you would get these results. That’s why I recommend using automatic trade signals. They don’t lie, they are present or not and they stay once they have triggered. So your backtesting results are the same as your real time results will be, unless the market changes considerably, making your system invalid. Something which happens over time but usually not from one day to the other.

Now doing your homework, seeing every day, what your system would have made, had you just followed all the signals, will enforce takeing these signals once they trigger in real trading.

It’s not about every trade being a winner, but it’s about having an edge, knowing that in the long run your system will make you money. Don’t try to avoid the losing trades, instead find rules, which allow you to distinguish between a losing and a winning trade real fast.

The database will also inform you which of your tradesignals have a better probability of success compared to others. It might also tell you, that you can finetune your entry rules. Eg, if you see all/most of your winning trades go 8 ticks against you during the trade before it starts going in your direction, you could look for an entry 5 ticks better after the signal triggers.

But most important, you get a lot more screentime doing your homework.