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Trading, market timing and system development tips

Dear visitor,

on this web page you will find a lot of useful tips on a successful approach to market timing and systematic trading.

  • Determine why you want to trade and which trading style/approach fits your personality and time commitments. Design a corresponding trading system that fits you and your beliefs about the financial markets in order to feel 100% confident and comfortable. Your psychological makeup will have the greatest impact on your trading. Therefore system development is a psychological process. Evaluate precisely your psychological makeup and limitations. Set up a solid system of self control. ("One who knows his enemy is strong - one who knows himself is unbeatable" - Sun Tzu)
  • Be always skeptical about your own ideas, creations and results.
  • Be disciplined and remove your emotions during system design and the trading process, because the most difficult task in speculation is not prediction but self-control (especially when a trade moves against you).
  • You can not change what markets will do therefore you have to change yourself. The markets are expensive places to learn about yourself, but they are patient and consistent teachers.
  • Trading is a business and trade losses are expenses.
  • Sometimes you lose even when you have followed your system perfectly. If you have followed your system 100%, agonizing over a loss will reduce your discipline for that system. Your discipline will also be compromised if you get too excited about a profit when you did not follow your system. Therefore, celebrate every time when you follow your proven system - win or lose!
  • Do not get impulsive and either take trades that were not signaled by your system/methodology or not take trades that were signaled by your system/methodology.
  • Assess your current mental and physical condition before you begin each trading session, because one key to successful trading is knowing yourself and your stress point. Be aware of your areas of emotional weakness.
  • Try visualization techniques and use your imagination like other peak performers.
  • At the end of each trading day do a mental debriefing.
  • Your worst enemy is fear and greed. But also know your competition, because trading is a zero-sum game (exclusive trading costs).
  • Beware of large positions that can control your emotions. Don't be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
  • Keep your trading expenses (=commissions + slippage) low. Your trading expenses are a function of order size, order type, trading frequency, time of day, the traded market, broker and liquidity.
  • Use a trading plan. It will keep you focused on your goals and objectives. It should also include a measure of your discipline and consistency in applying your trading approach.
  • Understand why the system works and grasp the components of your system in order to develop the required confidence.
  • Always review your system and see if you can poke holes in your strategy.
  • Describe the system edge in simple and logical terms.
  • Use only parameters ("predictors") with a positive expectation / statistical edge.
  • Use trend following systems in order to take advantage of the "fat tails" of the price distribution. You do not know where the market is going - so you follow it.
  • Use simple trading ideas in order to yield robust, consistent and stable results.
    ("It does not matter whether the cat is white or black. As long as it can catch mice, it is a good cat." - Dang Sui Ping) - ("Try the simple things first; simple things tend to do better than the complicated ones. That's not surprising in a world that is extremely noisy and complex." - J. Doyne Farmer)
  • Use only 2-3 parameters: one parameter for trend identification, one or two variables for entries and exits in order to reduce the risk of model over training and to increase generalization. These systems will not perform exceptionally in back testing, but they are much more likely to continue to profit into the future.
  • Use proper "out of sample"-testing: Consistency and proportionality between out-of-sample and in-sample results are valid indicators that "generalization" is working well.
  • Test your system over large data samples and various market types in order to get an "all weather trading system".
  • Graph your trade distribution and measure the skewness and the tail-behavior of the trade distribution.
  • Always use sensitivity analysis on system parameters.
  • Be careful about "hidden" random entry/exits methods. Create random trading sequences and compare them to the out of sample-performance of your trading systems. Seek for trading results that are unlikely to occur just by random coin flipping.
  • Performance and risk measures should be evenly distributed through time and in relation to one another.
  • Do not use higher order polynomials, because they are notoriously bad for extrapolation.
  • Use non-correlated indicators / "predictors".
  • Use clean data, because system performance is largely a function of noise in time series.
  • Only use parameters that are settled in the center of the flattest parameter space. Seek for ROBUST trading system parameter values where a broad range of the surrounding values have similar profitability to withstand the shifts of market statistics and to handle unforeseen situations. It is very easy to design a trading system on any historical dataset that makes money. BUT the future has the nasty habit of not perfectly mirroring the past and therefore the best-performing parameter in the past will not necessarily be the most profitable in the future. So it is almost impossible to know what the optimal parameter value for the future will be.
  • Utilize a portfolio of non-correlated sub-systems. Look at their signals and compute their correlation.
  • Look for uniform trade results and avoid equity spikes.
  • Apply the same rules and guidelines no matter whether it is a bull market or a bear market, because the psychology is the same, just the reverse. Hope is what drives the market on the upside and fear drives it on the downside.
  • Fundamentals do not change rapidly - whereas perceptions do.
  • A lot of new businesses fail due to under-capitalization - many new traders fail for the same reason.
  • If your trading business plan calls for consistent annual returns on capital exceeding 20%-30% (i.e. top hedge fund peer), it is probably overly aggressive and probably also unrealistic.
  • Do not link your personal success with trading success (especially with the outcome of specific trades).
  • Simplify / un-clutter your trading. "Less is more".
  • Tend towards simpler theories ("Occam razor" principle) on financial markets with the fewest new assumptions. Assumptions always introduce possibilities for error.
  • Automate your trading.
  • Also the "little stuff" (i.e. trading fees, etc.) can "kill" you. Limit / minimize your trading expenses.

IMPORTANT: This web page is not intended to provide personal investment advice. This web page has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading or market timing strategy.
Please read our detailed risk disclaimer and disclosure statement.

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