Sometimes, articulating my concepts in simple terms can give me some great ideas. I was trying to explain my research last night over the phone to the girlfriend when I realized that I had unexpectedly come up with a focus of what I was looking for. I quickly typed out the following brainstorming points:
1) At any given time, markets move in 3 directions: upwards, downwards or sideways.
2) A successful system is one which is robust, meaning that it works across time and across markets.
3) That means that a successful system adapts to changing market conditions: If markets trend up or down, the system needs to employ a trend-following mechanism. If markets move sideways, the system needs to either trade minimally (or not at all), or to employ a band-trading/countertrend mechanism.
4) The key to making a system adaptive is to come up with an indicator to determine what condition the market is going through at the present moment. I have only read of some indicators assessing the “efficiency” of the market, though there might be more out there that fit this criteria.
5) If the indicator shows that the market is trending, then trend-following entry points need to kick in. These should should be combined with wide stops (to ensure that one does not get stopped out of a trend), as well as profit-taking exits that determine that the trend is over.
6) If the indicator shows that the market is moving sideways, then the system should either a) stay out of the market, or b) employ some band-trading/countertrend techniques with tight stops. Or perhaps a short-term market predictor might work as well.
7) Even though the system should work across different markets, it might be possible for the system to have different parameters across different markets. This is because different markets have different characteristics in transitioning from trending to non-trending phases.
Finally, a focus!