Hi guys, hi from Andrea Unger, today I would like to discuss a topic that often comes up with questions and the question is: “fine, but how do I find an edge”? Edge and not age, edge as an advantage, an edge in a trading system, so how do I get the idea on how to develop a trading system?
So apart from waking up in the middle of a stormy night and I got… -you know it’s not this- simply you have to follow a procedure a method of development of systems. You have to decide what kind of system you want and that’s it once you decided the type of system then you start exploring the results obtained applying a basic model to a market.
An example: let’s say you decide you want to trade a trend-following, breakout trend-following strategy on let’s say Dax future. Well, now you decide to place breakout orders and we imagine to be willing to do this on an intraday basis. On an intraday basis, you are not starting to trade in a very beginning of the day, you normally wait for a couple of hours or even more so that the market comes down after the open and so you have to place your breakout orders after a certain time of the day, Where? At what levels?
To be effective on the concept of trend-following breakout of an important level, the levels have to be significant and significant levels can be -this is not the only way- but can be high and low of the day so far which means the high and the low of the day in the day I decided to trade, the highest high reached from the open of the market to the moment I place the trade and go short the lowest low. So we place the orders at these two levels and the other condition is to close the trade at the end of the day if this is the idea or we can go overnight with other conditions but let’s imagine we close the trade at the end of the day, we do this and we will see some results.
Based on the results if they are positive we have something to work on, we can then go on in exploring how the market reacts to our input. First of all, I said let’s wait for a couple of hours maybe two hours what if I wait more or less before placing my orders? Well, we decide to use an input for a time of day after what we decide to place the trades and we play with these inputs, what if I place trades after nine o’clock after 10 of the 11 after 12? And looking at the results I obtain I decide which time of the day best suits my expectations maybe 12 o’clock is better rather than 10, we sleep more, it’s fine.
So actually I got these results and then I add a stop-loss of course because I don’t want to be in a situation where our market completely changes its direction and kills my trade and my account, might be I want to place a take profit normally on this kind of strategies trend-following we should not use of a take profit because it would kill the concept of following because we stopped a trade but you are free to do it and then set exit on close and then I have my system, now I have a system. We decided where to start to trade where to enter and when to close the trade, at the end of the day or eventually at the take profit.
I can also decide that after a certain time of the day my entry conditions are no longer effective, perfect I use another input time of the day after this time I cancel my orders if they have not yet been filled. What time of the day is best? Again I optimized to explore the results 3 o’ clock p.m. 4 p.m. 5 p.m. 6 p.m. and then see when the results show a better outcome so that I decide: “ok after 5 p.m. there is no reason to keep my orders alive because all the orders triggered after 5 do not show a decent profit so they are not worth being considered because I pay more in commissions for example compared to the gain that I am making.
This is a system, the only decision I made really is the model I want, trend-following, I could have decided to trade a counter-trade system so instead of buying breakouts of high and low I could do the very same thing buying the low of the day and selling the high of the day, obviously depending on the market or some other conditions the results would deeply change but again I start from the concept I build the basic model and then I elaborate it.
We have now discussed about time of day, stop and profit but obviously there is all a process to go through where we also go and look into filters when to trade and when not to trade, this is an open world but following a proper procedure on how to develop trading systems believe me you can build trading systems that may be really nice and performing. Always be careful not to overfeed so it means not to put too many conditions into the system and this is again another topic that maybe we will be discussing in another video.
So no need to wake up in the middle of the night because of the thunder or some other reasons you have just to sit down and apply a proven methodology to develop systems, that’s it to get something that might work and please you in live results. That’s it for today, ciao from Andrea Unger, keep in touch.