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The best thing you can do is create your own strategies.
- Ryan Jones |
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Today's Featured Article
You see it all the time; you are constantly bombarded with claims of profitable systems. In today's article, I am going to spend a few minutes giving you a couple of examples of why it is so critical that you either are provided additional information or you create the strategies yourself. This article dovetails with several other articles I have written about understanding that numbers are not always reflective of truth behind the strategy.
The best thing you can do as a trader is create your own trading strategy. Why? When you create your own trading strategy, you have the ability to see every detail necessary to make the decision of whether to risk your money on your strategy. You have the entire picture, all the context. When you purchase a strategy that someone else has created, you often have no ability to see the logic, rules or in-depth analysis of why it is generating the trade signals. You almost never have the full context of the strategy...most of the time, you see only what they want you to see.
One non-trading example that illustrates perfectly what I am saying comes from the news media. The political hot button these days has to do with healthcare and the town hall meetings going on in the country. At one meeting in Arizona, MSNBC showed a video of a man carrying a rifle while protesting near the meeting. They then used that video to talk about how our country is a racist country and how this man carrying the rifle was a racist who didn't like Obama because of his color. Not long after this segment on MSNBC, ABC came out with a video interviewing the same exact man. In the video created by MSNBC, they showed only close-ups of the man's rifle and pretty much nothing else. ABC
interviewed the man, who was African-American.
This stuff goes on all the time. MSNBC wanted to promote a view and they showed you only what they wanted you to see to accept that view. Had they shown you the same video that ABC created, there is NO WAY they would have been able to use this man to sell their view to you.
This was a very unfortunate illustration, but it graphically illustrates what sometimes goes on in the trading industry. There are times when you are shown only what the seller wants you to see so that he/she can more easily sell you their program.
This is why the best thing you can do is create your own trading strategy. Until now, there have been three main obstacles to overcome for individual traders to create their own trading strategy.
Obstacles:
- Learn a Programming Language
- Pay a Programmer
- Develop Potentially Profitable Trading Ideas
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Learning a Programming Language:
Many system development programs have their own programming language that you must learn in order to create trading systems. Even the simplest trading strategies take specific knowledge (not intuitive) and often take significant time to create. Once you have created the strategy, rarely is the first version the final version. Many changes are usually made before arriving at a decision of whether the strategy is worth risking your money on or not. Having created well over 1,000 systems in my career, I can tell you from experience that most ideas/strategies are not worth trading. Accordingly, you spend a great deal of effort learning how to program it, and a great deal of time pursuing a
final version...only to learn what not to trade.
Unless you are a programmer, you will no doubt run into a brick wall quickly with regard to what type of trading strategies you can and cannot create. If you want to test anything with any sophistication, you will most likely have to hire a programmer...which leads to the second obstacle.
Pay a Programmer:
This is obviously a show-stopper for many traders. Paying a programmer doesn't mean paying a small fee to create an idea and then you are done. You pay the programmer for the initial idea and as stated earlier, you will most likely have to then pay for many changes before you arrive at a final decision. The problem with paying a programmer is that more often than not, you will be paying for a strategy that you will never use. Of course, this is still better than paying for a strategy that you will use but then end up only losing more money trading it. But it is still a major obstacle for traders to overcome.
In order to lower the risk of paying a programmer for a program that is probably not worth trading, you must do a tremendous amount of research and work coming up with your idea. Again, without programming knowledge, this takes a huge amount of time as well. For some, this is a show-stopper because they are not sure how to go about coming up with ideas or doing the initial legwork in the first place. This is not hard to learn, but once learned, there are still major limitations.
Develop Potentially Profitable Trading Ideas:
A trading strategy starts with an idea. Ideas come from studying charts. This takes time and experience. Once you formulate an idea, if you don't program it or send it to a programmer yet, you must try to find the trades by sight, which is normally accompanied by numerous errors. Once you have put together a small sample of trades from this idea, you then put the idea together for a programmer.
UNTIL NOW
The answer to all three of these problems is provided in the
Quantum Charts program
. I will take one paragraph to explain how and then show you a trading example of why it is so important for you to create your own trading strategies. Quantum Charts is completely different from any other program out there. It starts with the trading idea. Until now, traders had to come up with their own ideas by looking at charts and analyzing various aspects of the chart. However, it is difficult to conduct a thorough analysis on more than one bar at a time. Instead of you coming up with the ideas, Quantum Charts allows you to simply click on a bar and QC will then provide you with a list of true conditions. Often, this list contains conditions that you might never think about, or
see. From there, you can choose which conditions to analyze with the click of your mouse button. QC will then show you every occurrence of these conditions and provide you a market movement statistical report. You know instantly whether there could be some value in the idea. Literally, you can test out dozens of ideas in a matter of minutes without any programming knowledge. Once you see a set of market movement stats that show promise, you can create a complete trading system in seconds with a few clicks of the mouse. QC also gives you tremendous ability to look at the entire picture with the exhaustive performance report. Quantum Charts is truly a break-through of epic proportions for
all traders, including programmers.
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The following trading system example illustrates why you need to create your own trading strategies. Back in 1997, I published a report on a trading idea that traders could use to more fully develop it into a trading system. The idea was simply to detect a retracement in price through the relationship of the close and a simple moving average. It looks like the following:
Buy -- If the x-bar moving average is greater than the x-bar moving average y bars ago, and the close is less than the close y days ago, buy.
Sell -- If the x-bar moving average is less than the x-bar moving average y bars ago, and the close is greater than the close y days ago, sell.
Depending on what x is and y is will depend on exactly which trades are taken. For the example, I will use x = 25 and y = 5. The chart below shows an example where the 25 bar moving average is greater than 5 bars ago while the bar with the blue arrow shows a close less than the close 5 bars ago. In this simple illustration, the trader would buy on the open of the next bar.
 If you cannot view the example chart, go here.
The question is which numbers should a trader use for x and which ones for y? Most will simply optimize a range of combinations and then show the best performing numbers, package it up in a system and sell it without any additional information. I picked 5 and 25 randomly and applied it to the bond market on a daily basis. The stats were profitable, but nothing to write home about.
However, this is not about optimizing. The best two variables in the past are almost assuredly not going to be the best two variables in the future. Accordingly, you want to know if the LOGIC is sound, not the numbers you picked. And what is the logic? The logic is trading in the direction of the trend after a pull back. The rules given above are simply one definition that can be used for that. Sometimes accurately, sometimes not so accurately. Regardless, if I wanted to optimize this strategy and present to you a solid performance report, it would be very easy to do. But herein lies a fatal, fatal flaw.
The best performing variables were x = 70 and y = 8. The stats were as follows:
| Total Trades: | 34
| Winners:
| 20
| Losers:
| 14
| Winning %:
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59%
| | Net Profit: | $26,172 | Average Trade:
| $770 | Large Drawdown:
| ($8,500) |
This is not bad for such a simple system. If there were a greater number of trades, the performance report would certainly be marketable. Add a few markets in here, and you would have a nice performance report on a portfolio with more than enough trades. A little digging reveals a major red flag:
The worst performing variables were x = 60 and y = 8. The stats were as follows:
Total Trades:
| 30
| Winners:
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18
| | Losers: | 12
| Winning %:
| 34%
| Net Profit:
| ($28,250) | Average Trade:
| ($743)
| Large Drawdown:
| ($31,656) |
The worst performing stats lose more than the best performing stats make...and the difference in the x variable was negligible. The next time you see a performance report, you need to ask what it is you are not seeing. In the meantime, I strongly encourage you to look at Quantum Charts and begin to take matters into your own hands.
More on optimization next time...
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About the Author
| Ryan Jones
is considered one of the trading industries "most complete traders". Starting his trading career at the early age of 16, he had traded nearly every major market and strategy by the age of 21. At the age of 26, Ryan signed a book deal with John Wiley making him one of the youngest authors ever in the field of futures trading. His book, The Trading Game, Playing by the Numbers to Make Millions is still considered to be the authority on the subject of trading and money management by many leading traders. Ryan's advanced experience and knowledge across many trading fields such as Technical Analysis, Option Trading, Money Management and the S&P have lead to several
trading feats, including turning a $15,000 account into over $107,000 in less than 90-days short-term trading the S&P (real money). |
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