Friday, October 5, 2012

Playing against the trend - assumptions for the transaction system

In the early texts appearing on this blog, I started providing basic assumptions of transactional systems, starting from a simple trend following strategy. The simplicity and triviality of these approaches is justified by the plan to use them as basic building blocks to design more advanced systems. And all this will be implemented through an adaptive selection of parameters which control the operation of these systems. Selection on the basis of the results of auxiliary systems, which operate in a hierarchical structure.

So much for the reminder of basic aims of my descriptions that I put here. Today I present the assumptions of the second elementary component of my design - simple contrarian system.

The concept of the system is virtually a mirror image of the trend follower system, which I described here. Thus, below I put them in a similar order as before.

  1. system is a trend contrarian – significant move up constitutes a signal for taking short position and down – long,
  2. the trader is constantly present in the market, taking alternating long and short positions of constant size; 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 TakeProfit order together with BuyLimit/SellLimit 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; we ignore costs/profits of position rollover; also there is no effect of slippage, since there are only limit orders, there are no StopLoss orders.

Of course, the very idea of anti-trend strategy raises a lot of controversy - probably I don't need to justify this in detail. There are traders commandments such as: "Don't fight the trend" or popular saying, "The trend is your friend". Moreover, the idea of ​​playing without StopLoss orders causes many players definitely negative reactions and is seen as a simple way to bankruptcy - a kind of "slippery slope".

Without prejudice to the meaning of all wisdom I remind here that the given examples of strategies are used only to illustrate the basic ideas of systems in order to further development and synthesis of more complex structures. A risk control is obviously necessary and, though it may seem paradoxical, possible to implement even in systems without a StopLoss orders. But more about that some other time.

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