Traders who trade without the use of automated trading systems are at risk of becoming victims of their emotions
The system, which I will talk about, largely avoids emotional decisions when trading.
Recently the attitude of the traders to technical analysis has changed markedly. Three years ago a fairly small number of professionals used the technical (statistical) analysis and the signals of mechanical trading systems, the last year – a significant part of market participants.
Success in trading depends primarily on three components:
– Mechanical trading system with a positive expectation;
– Application of methods of capital management;
– The strict performance of signals of trading system.
A thoroughly tested back testing (testing of mechanical trading system at a previous history of prices) is in the base of applying to the actual trading of any mechanical trading system. If a trader knows that the system gives a profit of 80% of cases, we can assume that the results will be repeated in the future. A wide range of programs of technical analysis, neural networks with genetic algorithms allows you to create and test trading systems of any complexity, define and apply to trade a variety of methods of capital management.
However, excellent results of back testing conducted on historical data over the past few years sometimes lead to disastrous results in real trading. Reasons may be several.
It may be careful adjustment of optimized parameters of trading system. It is possible to verify and optimize system operation in following way: divide the historical data at equal intervals, for example, for years, and test them separately, then compare the results.
The most important parameters that should be disregarded when assessing the results of the trading system are:
– Average winning trade x percentage of winnings> Average losing trade x percentage of losses.
– Maximum Drawdown (decrease in accounts relative to the maximum value for the preceding period). With a large Drawdown, as a rule, more than 10%, you should avoid working with the entire sum, but with a relatively small, you can use “leverage”.
– Sharpe Ratio, which is used to estimate the ratio of risk and return. The higher the index value, the higher the system performance relative to its variability, and the smoother the yield curve.
-Methods of capital management.
What are methods of money management necessary for? First of all, we list the main methods of capital management:
1. Operating by a fixed amount.
2. Operations of fixed-interest account.
3. Successive inputs.
The method of successive inputs is used to build profitable positions. With each new signal of the trading system the position is built up the position on the value n, and when there is an output signal – it is eliminated completely. Reducing risk is due to the accumulated profits from the initial inputs.
Method of operating by a fixed sum is used to limit the risks with respect to all accounts. When entering into a transaction the trader takes a fixed risk. This method is useful if your system has a long series of losing trades. After successful entrance into the deal after losing series it is used the method of successive inputs. This combination of two methods of capital management is the most suitable for conservative investors.