How did you start your strategies?

Hello all,

I’m interested in hearing about how you started developing your strategies, and how you took them from concept to live market. I’m particularly interested in people who are into manual, discretionary systems (esp. those that concentrate on price action), though I’d be happy to hear any opinions.

Where did you get your strategy ideas from? Did you just read a technical analysis book and come up with some concepts that you strung together, or did you take an existing idea or set of ideas (i.e. something on a forum, trader magazine) and then test them out?

How did your testing process work? Did you back-test it extensively? How far back did you go? How long did it take you before you finally decided to go live with it? Did you take notes extensively, try different settings?

Finally, how many different strategies/systems did you develop at once?

I am trying very hard to put together some good strategies. I know that discipline and money management is the real secret, but my strategies are very lacking at the moment.

Thanks for any and all input…

This thread should help,
http://forums.babypips.com/newbie-island/32105-developing-your-trading-strategies-suggestions.html

Well I went from trying different strategies and eventually lost on all of them.

Some time ago I read an interesting strategy over on FF. I tried it out and it worked but not so well. So I went and started backtesting, adjusting SL and TP. Read up on different indicators that I may apply to my 4 hour charts but I didn’t end up using any new indicators. I just started looking at charts and candlestick patterns and applied to the 4hr strategy.

So far so good, I’m making steady pips and trading well. Always learning :slight_smile:

I know, that was my thread as well :slight_smile:

Only one person was kind enough to answer so I decided to start a new thread that urged people to share their road.

Playing this FOREX gig successful requires your own answers to a number of questions before you start thinking about a game play.

What are you dealing with when you trade FOREX?

Money. Money flow to be specific.

What do you want out of this FOREX gig?

Money.

What has to be in place without question and need to be adhered to at all times?

Discipline!

If you aren’t disciplined and can’t wire yourself into the rythm of the markets then no game plan in this world will work for you in order to pull money out of the market.

It takes time to actively observe and study the markets when they are operating in full flow and be really ready and stake your claim to some of the action complete with the necessary tools onboard to tackle the day to day swell of the market rhythm.

6, 18, 24 months exposure to this FOREX gig is just not enough for the majority of people and surely not if you approach it from a part-time angle.

Whatever game plan you choose make sure it is a simple as possible and practice your set-ups until you can put them into action even when you asleep.

You need to be absolutely certain and without any doubt that your chosen set-ups have the potential to return decent profits for the majority of trades you are going to trigger.

To gain your confidence in your set-ups you need to have developed and tested a trade management plan with all angles covered because it tells you about your very own psychological tolerance level and how much pressure you are able to stomach from the MM side of things.

That’s what demo accounts are for.

Well, some people realized after going through that drill that FOREX wasn’t the right gig for them. I am not saying that it will happen to you but at least you are prepared to take on this FOREX gig with a damned good chance of making it.

I can say with a fair amount of confidence that this is an occupation that I truly enjoy. I am committed to making it, because I truly enjoy the challenge of doing this. It requires innovation, it stimulates the mind, and the potential for being highly independent makes it a very appealing business to be in. I am willing to work hard in order to get this done. I can sit in front of the computer for hours and forget that time has passed. I can get myself up at ungodly hours of the day to do this.

There are other ways to make a lot of money, but those other ways are not as interesting to me as this.

My biggest problem is that I don’t exactly understand the process of developing strategies too well. I’ve traded with very little money, realizing the odds are against me in the beginning. I understand that my biggest problem is that I lack consistent methods for entering and exiting the market. I’m fine with adhering to my stops, but I need more structure and organization. I’ve read about technical analysis, that support becomes resistance, that a head and shoulders does this, the double top does that, the upward wedge does that, stochastics measure momentum, etc. That’s all fine and dandy. My problem is finding a systematic way to apply this to the market.

I’m not sure where Id even begin with developing discretionary strategies. I started going down the mechanical route as I have a maths, stats, programming type of background, but I failed, and inevitably ended up as a discretionary trader.

I dont know what to suggest other than screen time, and you’ll probably need a couple of years full time.

These days, Im back to trading purely mechanical strategies. The development methodology that I use, is actually my edge so its not something Id want to disclose. However if your interested in this route, Van Tharps stuff isnt a bad introduction. His designing winning systems course is OK, its not fantastic, and it lacks practical examples, and its definately short on details, but its a start. He also proposes a simple methodology in his appallingly titled book “trade your way to financial freedom”. As the book and the course are available at torrent sites etc it might be worth taking a look to see if they suit you.

It always helps to see a couple of examples of how people go about this process. There’s a 2 part series at trade 2 win of the development of a break out strategy (its a crap system, but the design process that they follow is OK), there’s also a nice article at elite trader where some guy develops a trend following system based on trade station thats pretty good. I dont have the links, but if your struggling to find them I could probably dig them out. The booklet on the original turtles system is OK in that it considers most of the main elements that make up the design of system, market selection, entry set ups and triggers, exit, position sizing, trade management etc.

If you can get hold of a copy of John Murphys book Technical Analysis of the Financial Markets there’s an appendix in the back by a guy named Fred Schutzman who does a pretty good job of describing a basic development methodology.

There are a few decent PhD thesis knocking about where development methodology is discussed, a good starting point is a thesis by a guy named Bruce Vanstone who used to post at the wealthlabs forum. The thesis concerns the development of a system based on ANN, and most of the references pertain to an artificial intelligence approach, but there are one or two gems hidden within.

There are no shortcuts, its watching charts in real time, or its stepping through charts by by bar and its more work than you can possibly imagine. Believe me, there are far easier ways of getting rich, but if you find this stuff fun, go for it.

On a positive note, in my opinion you’ve identified exactly what you need to do, and that improves your chances of success enormously. Deciding that you’ll take responsibility to design and impliment your own method is a giant leap forward and one that I’m sure you wont regret.

I don’t know. Is trading enjoyable?

I mean I spend half my time sitting around & waiting for price to move into my marked up areas of my chosen pairs, another 25% of my time doing the same repetitive work on my charts day in day out & the rest of the time managing my trades under strict rules.

I don’t find that stimulating and exiting.

My biggest problem is that I don’t exactly understand the process of developing strategies too well.

That’s what I said.
Understanding what you are actually buying and selling in FOREX is very important.
If you don’t understand it you will not get in sync with money flow.
The last few hours was a prime example.
Money flow moved the market.
How can you develop a game plan for something you don’t understand?

I’ve traded with very little money, realizing the odds are against me in the beginning.

It depends on your MM and psychological tolerance level.
To find out about it and get to know your own threshold you need to test it out on demo.

I understand that my biggest problem is that I lack consistent methods for entering and exiting the market.

That’s because you are not in sync with the market.
Take a [U]clean chart[/U] above 4h of your chosen pair & watch what price does paying attention to time and price.
Price is a creature of habit.
It likes repetitive behaviour.
Once you recognize those repetitive behaviour patterns think about consistent ways to exploit it for profit.

I’m fine with adhering to my stops, but I need more structure and organization.

I don’t know.
That’s something you have to sort out with yourself.
It comes down to your very own discipline again.
If you are not disciplined you can forget this FOREX gig.

Three days ago a trader I know has blown his profits from the past 18 month plus 60% of his capital base because of one lapse of self-discipline.
He didn’t set a stop for two AUDUSD trades because he was damned sure that the AUD would rise after the interest rate announcement.
Well. it didn’t.
It went south and took a five figure sum of his account with it.
Last time I saw him he was drowning his sorrows in some high percentage liquid.

I’ve read about technical analysis, that support becomes resistance, that a head and shoulders does this, the double top does that, the upward wedge does that, stochastics measure momentum, etc. That’s all fine and dandy. My problem is finding a systematic way to apply this to the market.

I don’t know.
Do you need all that stuff?

I’m not sure how it worked out for me really. I think it boils down to finding methodologies that you are comfortable with. Some people find comfort in technical indicators, because it gives them explicit signals. Others, however, enjoy reading the market like an unfolding story.

People who jump into discretionary trading while having the wrong type of personality will find themselves second-guessing their decisions and falling into paralysis-by-analysis.

There is no right or wrong answer, really. Indicator-based systems DO work, regardless of what some (well, one) people say in this thread. Mad Scalper and MMTT come to mind. Ultimately, you need to decide whether you want to autopilot the entire entry/exit process by focusing on signals generated by indies or if you want to focus your energy on interpreting the market, one candle at a time.

Thank you so much simbafx, that was a very helpful post. The problem I realized I have is that I just mix and match too much, I don’t have a clearly defined, methodical approach. Without that, consistency is simply not possible.

I mean, price goes toward a trendline, will it bounce or not? Why should I bet yes or no? Trendline didn’t bounce, should I chase (as in price action confirms) or just pass? Head and shoulders is forming, short at the neckline or fade? Short only if there’s a bearish cross on the 4 hour? Should I even bother checking the stochastics? Make too many rules and you’ll never trade, make too few rules and you’re not much better than a coin toss. The whole theory of “random reinforcement” is the scariest aspect of it all - you may discover something that is only an accidental performer for a short term, and is not robust.

As for myself, I’m not really a quant/stats type of guy. Math is not one of my strengths, I’m much more the creative type. That’s why to me coming up with something that relies purely on mathematical ratios and formulae is probably not the best option.

So far right now I outlined that I need a trending strategy, a ranging strategy, and a momentum/news breakout strategy. I started by working on an intraday trending strategy. The idea is to buy on the dips (I like the “get in cheap” idea).

I found a futures strategy with Keltner bands, buying a pullback to the 21 pd EMA, but I looked at a few currency charts and that just doesn’t hold water. I saw another neat strategy where you look for a downtrend and short if the CCI goes above +100. But in most downtrends, the CCI NEVER goes above +100, lol. Then there are the fab fibo’s. They’re great, problem is that they don’t really mean anything unless there’s confluence. So these are the frustrating experiences I’m having.

I just checked out the Cowabunga system and I think its really neat, even though it relies on a bunch of indicators. I decided I’d keep following that, just to get a feel for trading something that has a track record.

Lol, I guess until I know exactly what makes me money, and what I’m best in tune with, I won’t know for sure…

Thats a frequent problem I think that many people have when beginning to trade. There’s just so much information out there. There are hundreds of books out there, and as many ways to trade. If you just take a look at the menu of indicators that come with Metatrader (and I’m talking about the default package, not the add ons), that shows you how many ways there are to skin the cat.

I have the following goals for whatever methodology I develop:

  1. Have a technique that gives you at least 3 solid setups across all the pairs in the currency markets per day, for intraday trading. I’d like to be out of each position within 2-4 hours.
  2. Trade NY London only. I think I should spend no more than 6 hrs/day on trading, and I believe it pays to trade the most liquid market, which offers good fills.
  3. Target 20-50 pips a day, 2% maximum risk, target 1:2 risk reward.
  4. Perform to get a consistent 10% return a month on my account equity.
  5. Once I get good enough at currencies, tackle the ES and Dow mini futures to allow for greater diversity.

Differentiating between genuine performance, and random chance is definately one of the major obstacles you’ll face. Statistics can help. Evidence Based Technical Analysis by David Aronson covers some of the techniques that might be useful.

The problem is created by the random distribution of gains and losses that systems tend to produce, and of course, that distribution can and does change over time.

At least your aware that the problem exists, most people simply will not accept its an issue, and the consequenses are not pleasant :wink:

In the end my system was developed manually with lots of real life testing (am not a fan of back-testing too much) and tons and tons of reading.

My final system (which I am still tweaking and learning) came from a post here (BB), a chapter in a book I read (MA), the ‘feel’ I get for the PA, my personal experiences with my clients in business (trend) (i.e. their attitudes which are very pessimistic at the moment) and what I know from my economics degree about statistics (volumes and BB (specifically standard deviation analysis)

I think trading is a bit like personality everyone is different and even if you find someone who is very similar to you they aren’t exactly the same and neither will be there trading style. :smiley:

The best advice I got early on from this website was to focus on ONE pair to start with and get comfortable with it. One trader will rave about Stochs and another says all you need is trend but to be honest you need to develop your own style to suit you. I think that’s why the percentage is higher for people losing on trading - because they make one mistake and lose their account and then just give up instead of using it as motivation to better next time. Systems don’t happen overnight they need time to develop. If you lose all of your account focus on just breaking even for a while and then focus on making small profits and then larger down the path - i.e. baby steps… :wink:

Nothing in life will be successful without hard work, determination and commitment.

My 2 pips. Good luck!

Thank you all for the helpful replies…

I just took a careful look at the past month’s intraday price data for the Euro. It seems with such a small trading window (from 8 am to 1 pm), I don’t see how I can work with a true trend strategy the way I envisioned it, unless I tried to trade off 5 minute candles, which I think is hell. There are just so many fundamental events that shake the market, that its hard to make sense out of it. I’ve noticed that the big reversals usually come in at either 8:30 (news), 9:30 (market open), or 10:30 (news). Those news candles just throw everything into total disarray. I gather the momentum strategy is probably the best for intraday, because it takes a relatively calm market to have a nice and quiet trend.

That’s your most important job you have to do.
Finding out for yourself what makes you money consistenly.
High probability and low risk trades excecuted like clockwork without a grain of doubt & all angles covered are very likely to earn you a stash of cash month after month & year after year.
If you keep it simple you are going to avoid stupid mistakes because your mind is free and you can focus on precise excecution of your set-ups and trade management.

Thats a frequent problem I think that many people have when beginning to trade. There’s just so much information out there. There are hundreds of books out there, and as many ways to trade. If you just take a look at the menu of indicators that come with Metatrader (and I’m talking about the default package, not the add ons), that shows you how many ways there are to skin the cat.

People new to trading are in overload.
They put so much stuff in their head that they don’t know how to think clearly and pay attention to the important details of a chart.

Have you ever wondered why every chart package comes with a crosshair and the function to expand the distance between each pip more than an inch regardless of TF you look at?

There is a reason for that.
But the spread bandits called brokers would not want you know.
They rather want you to put all sorts of funny lines on your charts so you don’t see anything and don’t figure out what’s really important in order to make money.
Meanwhile they laugh themselves all the way to the bank.

The other thing is if you do what everybody else is doing you will receive what everybody else is receiving in profits.
Run of the mill stuff.
Everybody thinks the same way and everybody trades the same way.
All what’s different is the name of the stuff they have filled their heads with.

You would be surprised if you knew how incredible simple game plays some very successful traders use.
You wouldn’t believe it.
What those traders have in common that they don’t think like everybody else is thinking.

  1. Have a technique that gives you at least 3 solid setups across all the pairs in the currency markets per day, for intraday trading. I’d like to be out of each position within 2-4 hours.

I don’t know.
FOREX is a 24h market.
You never know when money flow whips up the market.
A few hours ago Asia gave the EURUSD pair a good whip.
It dropped 80 pips in less than twenty minutes.
That’s good milage in little time.

  1. Trade NY London only. I think I should spend no more than 6 hrs/day on trading, and I believe it pays to trade the most liquid market, which offers good fills.

I don’t know.
As I mentioned before.
Most of my time I spend sitting around and waiting for my price areas of interest coming onto my radar.
The time I acually spend on trading is very little.
Trade excecution takes a couple of seconds.
After that it’s monitoring my live trades and that’s more or less sitting around again. Unless a trade needs babysitting because of some disturbances.
That what happens if you don’t chase trades & let the trades come to you.
That’s an important difference.

  1. Target 20-50 pips a day, 2% maximum risk, target 1:2 risk reward.

What’s that?
Targets?
You have no control over targets.
The market decides what you get.
So why bother?
Insead I would cover my back and made sure I don’t get mugged.
The way you do that is through trade management and active stop management moving your stops into low risk price areas where there is a high probability of not getting stopped out.
Whatever mechanism you chose to employ is dependent on the situation your trade finds itself in and your pre-determined decision making process you have chosen to employ to lock in floating positive P/L.

  1. Perform to get a consistent 10% return a month on my account equity

Yeah.
That’s the most important part.
Positive P/L.
How much?
That’s up to the markets.

I liked what used said, especially about ditching the targets and protecting yourself in lock-step with the market movement. The key to winning is to protect your capital, be cheap as hell! Now don’t confuse that with being a coward :wink:

What I want to add is that I think I understand the style of trading you are after. The first thing you have to understand is that price isn’t attached to some random number generator bouncing around like a ping pong ball in a washing machine, there are REAL PEOPLE moving those prices! If you want the profits you are going to have to OUTSMART those real people!

Generally traders have some method of getting a bias for long/short positions, and then start attacking to take advantage of that bias. The smart traders will wait for low risk entries and protect their positions from negative moves. And to bring in the tricky part, there are TWO CAMPS simultaneously attempting to do this, the Longs and the Shorts. Get inside the head of the longs, get inside the head of the shorts, and figure out who is winning (sometimes it’s nobody) and jump on at a low-risk point. You’re a retail trader, you do not move the price, you are a follower, never forget that either.

Well there’s more where that came from, I’ll see how you digest that first though haha

Of course, but thinking like a proper contrarian requires you to understand how the other guys think first. To do that, I guess you have to be one of the “other guys” for a while…

My impression from everything I see is that the bias should probably come from the higher timeframe, i.e. the 4 hour chart. That would give a general feeling for which position to favor. I read an article in a trading magazine about having the previous day’s close as the “health meter” to determine whether to go long or short for a given session (if price is above the close, favor long positions, if below, favor short). Problem is that in FX there are no real “closes”, its artificial. That makes it much harder to determine any such point for finding a long or short bias. I mean, you can do a crossover filter on a daily and 4 hour, but what happens if the daily and 4 hour contradict? Switch markets?

Of course, the big question also is “what is a low risk entry” :slight_smile: I would gather a favorable risk/reward ratio, doesn’t chase price, and one that doesn’t fade strong price moves?

Yeah, I think a higher TF is a great place to find long/short biases. I also use the Commitments of Traders reports, to see what the net position being taken is on speculative positions. That’s a weekly report though, so not as useful on lower timeframes. Have you considered trading higher TF’s? They can be a lot more forgiving than day trading you know. If you lack patience, that is fault on your DISCIPLINE, don’t try to mask it as a trading choice!! Patience is required all across the board, from 5min to daily charts.

And for the big question, it’s of course what separates the winning players from the losers. It takes experience in front of the charts, watching price action, there is no “answer”. But if you want something simple to start on, trying watching support and resistance levels being formed in real time. Then watch as price reacts to them later, and you can see how effective they can be. Entries around these points (especially in the direction of a prevailing trend) are generally considered low-risk entries, provided you have a stop behind the level in case it doesn’t hold up.

edit:
oh the closes are artificial?? I think the market is pretty damn closed from friday afternoon to sunday afternoon :smiley:

I agree, my problem - on top of the personality issue - is that I think that the longer term you are, the more at a disadvantage you are with the big institutions because of their access to fundamental information. They have staffs of MBA’s peeling apart statistical data, they hire PI firms to check stuff out, you name it. Have you ever noticed that just before the announcers on CNBC read off the numbers, the market is already moving? I guess someone knows something, lol.

Of course, the big buys also have access to order flow, but we all have similar charts in the end.

Besides, its awfully frustrating if you’re in a trade for several days and then in the end its a scratch. Much easier to live with that for two hours than two weeks, lol. You get really involved if something lasts so long. Plus there’s also the issue of negative carry that can eat away some pips over time. Anyway, legitimate reasons or not, that is where my bias originates from.