Building A Winning Trading System. Howard Friend C.M.T

Transcription

1 Building A Winning Trading System Howard Friend C.M.T

2 What should the trading system do? - Provide a clear set of rules which dictate market entry and exit - Income from winning trades will be much greater than losses from losing trades (net P & L) - Losses should be kept to a minimum (small dips in equity curve) - System should be compatible with the trader s personality/psychology - Must be 100% executable, fitting in with the trader s time schedule

3 Profitable Trading Opportunities (PTOs) What kind of movement should the system capture? - 10 pips, 50 pips or over 100 pips on each trade? How long should a position be held for? - a few seconds, minutes, hours or several days/weeks? The larger the required price move the longer the time taken (usually)

4 Full time or part-time trader? - Can the trader devote all of the trading day to trading? - ALL system trades must be taken (e.g. orders placed, cancelled, amended etc.). - Cannot pick and choose which trades to take; nobody knows which ones will win/lose! - Trading during the day is very time consuming and requires sharp focus and discipline - If a system trader cannot take all system s trades, may need a lower frequency system (end of day)

5 Trend trader or swing trader?

6 Swing trader Buy or sell holding for 2 to 5 days Almost unlimited number of trading setups to test: - Wait for a pullback against the trend before entering in direction of trend - Determine an overbought/oversold market before entering - Enter on an expansion in volatility as this may determine start of trend - Pattern recognition, e.g. candlestick/bar chart combinations - Seasonal tendencies, e.g. day of week or month of year bias

7 The ideal price move Make notes on specifics of an ideal move; What did happen, what didn t happen. E.g. could take note of the following: - Distance from swing low to swing high in pips or percent - How many consecutive closes in both directions? - How many consecutive highs/lows in both directions? Summarize the ideal price move and identify several on the charts

8 Identifying PTOs Go through examples of ideal price swing and make notes on price patterns/indicator readings/seasonal tendencies just before inception - Was market overbought/oversold? - Was market in a bull/bear trend? - Did yesterday close up or down? - Did yesterday close in the upper/lower half of the last n day range? - Was yesterday an inside day, outside day, large range, small range? - System should be based on a sound methodology let s consider SWING TRADING

9 Some definitions - Swing high (H): the end of a move from a market low to a market high - Swing Low (L): the end of a move from a market high to a market low - An uptrend is defined as a series of higher swing highs and swing lows - A downtrend is defined as a series of lower swing highs and swing lows

10 A good methodology: swing trading

11 Objective of the swing trader - To buy a) as close to a swing low as possible or b) to buy on the break of a swing high - Once long, to exit as close to the swing high as possible - To sell short a) as close to a swing high as possible or b) on the break of a swing low - Once short, to exit as close to the swing low as possible - We will build a swing high break/swing low break system (b)

12 Classification of swing highs/lows - The minimum number of bars to the left and right of the swing high is called its strength - The more bars to the left and the right of a swing high/low, the more significant the level - The higher the strength of a swing high/low, the larger swing one can expect to follow a break

13 Example of swing highs/lows with strength 3

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16 Build a EUR/USD daily swing high/low system - Let s try going for the large multiday swings lasting days - Looking at the chart, buying/selling 8/8 strength swing highs/lows looks good - Put down some initial trading rules

17 System building first steps EUR/USD 1 lot 8/8 swing high/low system, no stop, 10 bar exit. LONG entry rule Buy 1 pip above the last swing high (8/8 strength). LONG exit rules Hold the long position for 10 bars then exit on the close SHORT entry rule Sell short 1 pip below the last swing low (8/8 strength). SHORT exit rules Hold the short position for 10 bars then exit on the close

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24 What about exiting after several Thrust patterns?

25 Thrust patterns as part of a trend

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27 Having defined some good exit rules, let s re-test the entry - Optimisation of swing high/low strength variables from 2 to 20

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31 Howard Friend C.M.T. WEBSITE: