Making a Holy Grail out of a Common Trading System
After testing and trading innumerable trading systems, I conclude that there is no system which is Holy Grail in itself. Having said that it is possible to make a system which works in varied conditions by selecting any common mechanical trading system. Many members especially seniors who have a fancy of writing trend following systems have given us some mechanical systems. On backtesting of buy/sell signals with a fixed lot most of them perform very pathetically and give negative expectancy of returns.
Now the question is how to make a trading system work profitably for us. Turtles traded very simple trend following system profitably by incorporating good money management techniques. These techniques included effective adds (scaling in) and exits. They used ATR of 1.5 to add to their existing positions and trailing stop of same or higher ATR.
My quest for searching a workable system which is quite understandable to common trader is ended when I found that any common system can be made profitable by using MM techniques used by Turtles.
I have carried out random tests using trend following systems ie Kama System, ATR Volatility systems on 30 min intraday data using MM techniques.
Even 315 strategy is using effective Adds to net profits.
Let us get on job, how to effectively use these techniques.
1. When Buy/sell signal is generated. Buy/sell into the scrip in the ratio 4:2:2:1:1:1:1. To elaborate, Initial buy = 4 lots, subsequent Adds 2 lots, then 2 lots, then 1 lot, then 1 lot etc.
2. How to add to positions. We add only to winning positions and at no time, we will try to average the trade.
3. 1st ADD is at 2 ATR+initial position price. Second Add is at 1.5 ATR+1st ADD price. Third Add is at 1.5 ATR+2nd Add price. and so on. and we continue adding to positions until an exit triggers.
4. How to set exit. Stop Loss for initial position is Initial Entry Price minus 2 ATR in case of Buy. Stop Loss is Initial Entry Price plus 2 ATR in case Sell signals. After entering the trade, if the price hits stop loss, simply exit the trade and book losses on initial lot size of 4.
5. When Add1 is triggered and entered, move the stop to entry price. When Add2 is triggered (assuming the trade is not exited on hit of entry price), move the Stop to Add1 point. When Add3 gets triggered (assuming the trade is not exited on hit of Add1. and so and on.
6. How to handle gaps. If the trade is in profit at the end of day, exit 50% of holding lots at EOD and carry remaining positions to next day. If next day,
gap is in favour of our trade, keep the stop at opening price minus 1.5 ATR. Keep adding positions in the same ratio, as we are holding full positions.
If Gap against our position, keep stop at opening price minus 1.5 ATR. If the stop is hit, exit full position else keep moving stop at every favourable move of 1.5 ATR.
7. Booking Profits. Gap in favour of trade by 2 ATRs. Exit 50% of lots at opening price in order to take partial profits off the table. First bar or any bar moved in favour by 2 ATRs. Exit 50% of lots so as to lock in some profits. If Sell signal is generated before hitting stop loss, exit whole of positions and initiate reverse trade with initial quantity.
8. In a nutsell, it is mechanical by rules without any emotions involved in it. Buy signal is generated. Simply buy 4 lots. Then place Stop Loss and Add1 entries in the system. If stop is hit, exit the trade. If Add is triggered, move the stop to initial position.
Hope I made rules simple to understand and apply.
Let us study an historical chart of BankNifty using this method. The chart is deliberately choosen in such a way that Banknifty exhibited sideways movement most of the time. If this system works well during such sideways movement, it would do wonders during trending times.
Backtest revealed a profit of Rs.48,650 (including brokerage+slippage) during the month of testing. 6 winning trades and 10 loosing trades out of a total of 16 trades. Consequitive wins are 2 and consequitive losses are 5. Largest looser is Rs.21,200. Largest winner is Rs.51,350. The drawdown is Rs.26850
on an account of Rs.5 lac. Maximum position holding is 10 lots.
I welcome critical view of the system and any suggestions for its improvement
With warm regards,
veluri
