Sunday, October 27, 2013

The core system that I trade - passive short term trend following

So the core system that I trade is a short term trend following system, based on detecting and following the 5 minute trend. It uses the Average true range as a factor in entering and managing the trade through a trailing stop.

1. Entering a trade  - Entering a trade here is based on the price rallying long enough to trigger a change in "trend". How a trend change is determined is something I wont go into over here. But basically, this system does not guess at tops or bottoms, but waits for price to rally long enough to trigger a change in certain parameters. This brings me to the next topic, what if one is already in a trade? How long would you wait before you exit a winning position?

2. Exiting a trade - Exiting a position is done the same way as entering a position, I trail a stop based on the average true range, so when price retraces enough to stop me out, it also simultaneously gets me into the opposite direction. So if I am long and price retraces enough, I exit the long position and switch to a short. So I ride the trend as long as it goes. Only 2 other conditions get me out of a position sooner - one is if there is a 32 tick profit, or if its the end of day. Exiting a losing trade is the same way.

3. Risk management - To manage a trade this way, with a calm mind where retraces against your position do not bother you mentally - the risk management needs to be proper. With this system, I always know the spot where I'm wrong. So that gives me confidence.

4. Position sizing - The maximum risk per trade is 2% of equity at the moment. I almost always risk less than that, but am working on tests to see how my system would perform if I always bet a constant amount. That is, the number of contracts traded could vary, but the risk stays constant, say 1-2% of my equity.

The win rate of the system is around 45-55%, but each win is approximately 2X the times of the average loser, so its easy to see how this system will do well over the long run.

Few other stats of interest -

Average winner - 14 ticks
Average loser - 9 ticks
Maximum number of consecutive losers - 13
Maximum number of consecutive winners - 8

Performance curve over the last 10 years is below




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