General Strategy Best Practices

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General Strategy Best Practices

Postby moomoofx » Sat Nov 16, 2013 6:07 am

Hi guys,

Firstly, I have to say I love the work you all are doing with this, both with Lua and Trading Station. If it wasn't for the awesome tools, this site, and all the learning materials available I would have probably ended up another MetaTrader user.... yuck.

Anyway, on to the point. I have been developing my own indicators and strats for about 9 months now and I kind of keep hitting the same wall with my strategies.

Basically the process goes something along the lines of
1) Place some indicators on some charts and notice some patterns that could be used for signals
2) Manually "back test" and see if the it seems viable
3) Quickly write up a strategy in Lua that does what it is supposed to do
4) Backtest over a "short" period
5) Examine losing trades and try to figure out filters or improvements
6) Repeat steps 2-5 until I have something that works good enough
7) Optimize the Strategy over the last year or two, no doubt find a configuration that yields huge profits
8) Backtest on the last 10 years, probably find huge draw-downs or losses that will ultimately lead me to abandon the strategy.

Now there is definitely a huge learning curve when it comes to trading FX, and another learning curve when it comes to developing your own strategies. If I compare how much I know now to 4 months ago, it's actually kind of scary.

There are some concepts that I have learned that seem to be VERY important and should probably be a part of EVERY strategy, at least from my opinion. Examples would be:
- good position sizing (percentage of remaining equity)
- appropriate risk/reward ratio (Some people recommend 2, but you could use the Kelly Formula to confirm depending on your predicted win rate)

You are almost guaranteed to 'improve' the results of any strategy if you incorporate these in your strategy somehow. So, I would like to know if you guys agree, and if anyone wants to share any other strategy must-haves/best practices?

Or let's have a discussion about it - here are some potentials that I have come across in my research that I still need to look into further. These might end up qualifying as "must-haves" in every strategy, like the two above. Does anyone have an opinion about them?

- Trading during certain times: Some strategies work best during liquid times, like the London and NY session overlap.
- Trading during certain volatility: As above, one can use the ADR/ATR to measure volatility and if it is too low, ranging, then they simply do not trade - we need a moving market to win.
- Scaling: Scaling in to winning positions and out of losing positions may improve results. Though depending on the strategy (mean reversion for example), the opposite may improve results.
- Entry Orders instead of Market Orders: It is much better to have the market move to you than to move for the market. By using entry orders not only do we avoid the spread, but also our signal can be confirmed when the price moves to us. If it did not move to our entry point, then we avoid a false signal and a bad trade!
- Partial Profit and Trailing: Close half your position at break-even point and switch trailing stop for unlimited gains. This probably depends on the strategy.
- Holding over the weekend: Often there are huge gaps at market open on Monday. Investigate closing positions before the weekend, or moving to a much tighter stop or a stop that would mean profit.

Thanks very much for your time. I hope we can have some good discussions and further my learning, and your learning, together.

Cheers,
MooMooFX
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