My finalized trading system launched yesterday, ready to trade up to five markets: the USD/SGD, EUR/JPY, e-mini S&P, 10-year T-Note, and mini crude oil contracts. I’ve also prepared an additional two markets (copper and the GBP/USD) to be added for diversification in the future if the overall system does well over time.
In this trading system, I have:
1) A trend-following system that enters on pullbacks. I wish I could elaborate more on this, but its past performance is pretty amazing for a system that has only 2 parameters. Furthermore, I’ve found 7 markets to trade with in the past 2 weeks, which was much better progress than I had with my previous systems. A simple system with few parameters that trades well over a wide variety of markets = good evidence of robustness. Will be researching to see if I can add up to 3 more markets to make an even 10 in the future, though I don’t expect to add to these basic 5 markets this year.
2) A risk management strategy comprising of trailing percentage stops for every market. This adds an additional 2 parameters (1 each for the long and short side), but ensures that I never stay in a losing trade for too long. The only cause for concern is that many of the stops are relatively tight (around 1 to 2%), so many of my trades may get stopped out because of noise. However, they help to limit my risk very well, especially for large contracts. I liked the idea of ATR trailing stops for the longest time, but they involved way too many parameters. A trailing percentage stop only has 1 parameter – again, to keep the overall system robust.
3) A Fixed Ratio Money Management (FRMM) strategy. Many people in the industry use a Fixed Fractional Money Management (FFMM) strategy, but that involves a painfully slow grow of the account at the beginning and a much faster growth at the end. A Fixed Ratio MM helps my account to grow at a much faster pace at the beginning, decreasing risk as the account grows larger. Of course, this means that I’ll be trading at the highest risk at the beginning, and I’ll probably have to tolerate a couple of months of negative equity before the account takes off. The great thing about FRMM, however, is its ability to protect profits even if the basic trading system breaks down. I ran tests over the past 9 years, and it made up to 22 times the profits the system would have made trading just 1 contract in each market. FRMM is a really fascinating system, perhaps I’ll blog about it in greater detail someday.
I ran a “paper trading” test period from June 1st to August 8th, trading on totally unseen data. (this was above and beyond my out-of-sample data that my systems were not optimized over) The results came in to show a $650 loss over two months trading 4 markets (I excluded crude oil because the system wasn’t ready at the time of testing, but it would have done well during those 2 months anyway). -A $650 loss over 2 months was well within expectations, especially with heavyweights like the T-Note and S&P contracts in the portfolio.
So there: my research over the entire summer, my hours pouring over books, Excel sheets and Neuroshell charts has finally cumulated in this trading system that I’m putting into practice. I’ve run hundreds of tests, and spent entire days on things that I’ll probably never use, but I’ve gained valuable insight on what I need to look for in designing a trading model. I’ve come to accept that this is possibly the trading model that best suits my needs, and I don’t think that I’d have been able to have the same faith in it if I’d just picked it up from some trading book. I understand that I will face risks and losses, but hopefully the rewards will more than offset them.
Let’s hope this turns out well!