Question Concerning Trading System Development

Hey guys I have a few questions concerning trading system development and I’m hoping someone here can help me out or give direction at least.

Okay so on to the questions:

Q1: When developing a trading system, should a trader have multiple strategies readily available to apply to different market conditions? For example, should a trader use a MAC (Moving Average Crossover) strategy for identifying new trends but then also have a completely separate strategy (different rules, and written down so it can be followed) for something like say breakouts where the trader could use triangles and channels?

Q2: If a trader should have multiple strategies ready for use, how many is reasonable, I personally am thinking 3-5, please let me know if this is too many or too few.

Q3: Lastly, this really isn’t a question but rather an open ended discussion topic I am curious about. I have read up on fixed fractional money management and kelly’s formula, I am personally considering using these two to achieve my desired results. Has anyone had experience trying to combine these two money management techniques, and if so what was your experience, any pitfalls that I should look out for?

Welcome to the forum.

I’ll try some answers.

That would be “trading system[B]s[/B]”, perhaps, rather than “[B]a[/B] trading system”? But it’s a slightly semantic point, and depends how you look at it, I suppose.

That depends on acquiring experience and expertise , and on how often one’s “initial system” presents trading opportunities, anyway?

This thread from earlier in the week addresses your question above.

It’s one way of identifying new trends.

Not the best way, at all, in my opinion, but certainly one possible way.

That kind of method, of course, would be a “[B]bias[/B] indicator” rather than an “[B]entry[/B] indicator”, [I]I hope and trust[/I]? In other words, you’d use the crossover of the determined moving averages to indicate that “it’s time to identify price-based entry-opportunities in the specified direction” rather than actually using the crossovers themselves [B][U]as[/U][/B] an indication to enter a trade.

You seem to be looking at everything you’re asking about in terms of indicators, which makes it hard to answer, but one could do that, yes.

Of course, it would entail more education, research, testing and proof, but in the long run that should all lead to more profits, too, so it can be a worthwhile expenditure of time, effort and energy.

The answer to this one depends on a [B]big[/B] range of variables to do with the individual trader, his available time, objectives, account-size, skill-set and a few other things, too, so it really isn’t answerable in abstract, without knowing a lot more about you. (I’d suggest that you should take [I][U]real[/U][/I] care in interpreting the response of anyone who [I]does[/I] try to answer it in abstract!)

There are two [B]main[/B] pitfalls (and some other smaller ones) with Kelly staking, in regard to forex trading.

First, calculating appropriate position-sizing according to Kelly’s criteria depends on having a [I]very accurate and reliable[/I] knowledge of the size of one’s statistical edge, and the overwhelming majority of people trying to use it simply [B]don’t[/B] have that, and it’s [I][U]much[/U][/I] easier to be caught out than you expect. Not everyone is an obsessional statistician/backtester.

Secondly, Kelly staking, literally applied to a forex-trading system, will eventually wipe out most or all of the account anyway, because it grossly overstakes the perceived higher-edge opportunities, and if using it at all, one should in practice use a [I][U]small[/U][/I] fraction ([B][U]not[/U][/B] half, as some people wildly suggest!!) of what Kelly’s formula suggests.

Position-sizing is a [I]very[/I] counterintuitive (but also very important) subject, in forex trading.

[U]Before[/U] trading with real money, I [I]strongly[/I] recommend reading a “proper textbook”, something like Ralph Vince’s [I]The Mathematics of Money Management: Risk Analysis Techniques for Traders[/I] by Ralph Vince. And on a simpler level, regarding working out things like position-sizing (which is what you’re directly asking about, really), even beginners’ books such as [I]Profitability & Systematic Trading[/I] by Michael Harris and [I]Trade Your Way to Financial Freedom [/I](especially the second half of the book) by Van K. Tharp can really help a great deal.

And good luck!

Hey! I don’t agree with multiple strategies at the same time for the reason that you can identify which strategy suits better to you. You can change it after a while if you see that it doesn’t work anymore you can build another one.

And if the one that suits you best is (for example) an opening-range breakout strategy which arises a maximum of once a day, and you also have another 5-6 hours per day of trading-time available …

If you want to trade only genuinely high-probability trades (which, surely, we almost all do?), the reality is that their set-ups arise infrequently, and for this reason it’s essential either to have some other strategies available or otherwise to spend an awfully long time playing backgammon or painting your toenails … :33: