Friday, September 14, 2012

Elementary trend following trading system

I want to go as soon as possible to the specific methods and algorithms, which is why today I present the basic concept of the base system. With such systems, like building blocks, I'll build more complex structures. Among other things, through the use of hierarchical stacking one on the other systems. But more on that later, for now I want to describe the basics of my methodology.

The system is simple, almost trivial, so it is certainly not intended to be a real game, but that's not the purpose of his presentation. It has to explain the idea of ​​the design and development of systems - from elementary to the most complex. Here are the assumptions:

  1. system is a trend following – significant move up constitutes a signal for taking long position and down – short,
  2. the trader is constantly present in the market, taking alternating long and short positions of constant size, for example, 1 lot; the initial position should be neutral,
  3. decisions are made solely on the basis of the OHLC quotations within fixed intervals,
  4. reversal of position is carried out by simultaneously and appropriately StopLoss order together with BuyStop/SellStop at the same level,
  5. reversal level is set at the beginning of the interval at a fixed distance up/down from the Open quotation and is valid until the end of the interval,
  6. minimum step of quotation is 0.0001, as the standard tick for major crosses; spread is fixed and slippage in the implementation of the order is 2 points; we ignore costs/profits of position rollover.

As you might notice, a description of the system allows almost unambiguous determination of the position occupied by the player, as well as the profit and loss on his/her account. Why "almost"? Well, because you need to specify the distance which determines the level of reversal described in point 5th This distance is therefore a parameter of the strategy, and what we get here is not one but a whole family of trading systems.

Study properties and behavior of such strategies depending on the parameters is one of my main goals. Therefore, in the next posts I will focus on formulas allow to calculate the numerical evaluation of this type of strategy.

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