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Wednesday, March 13, 2013

Useful resources for learning about mechanical trading systems

When you get started in the journey of currency trading (specifically the spot Forex markets) you read about all the "benefits" of Forex over any other trading vehicle. Over time, you get to realize that these supposed "benefits" are really a pain in the ass, and that they don't offer any particular edge.

One of the blessings most frequently mentioned is: "the Forex market is open 24 hours a day!". To me, this is more a nightmare than a blessing. For many different reasons, (As a mere mortal, I need to sleep everyday and can't follow the market every second). That's why I've tried to approach Forex using a mechanical aproach. Trying to learn about algorithmic systems design and be able to implement my own 100% mechanical system.

The journey has been a tough one. Lots of hard work and patience. But finally it seems to be paying off with the design of two mechanical strategies (one of them introduced here) with a mathematically proven statistical edge; solid 12 year backtestings and clearly defined worst case scenarios and "stop trading conditions". But part of the reason why the journey has been so long and difficult is because there is an excessive amount of garbage out there.

The goal of this article is to share the resources which I think are the shortest way to understanding algorithmic trading systems design.

There are thousands of Forex websites out there that go from selling systems, to EAs, to websites that describe strategies, to hundres of Forums with users debating this or that other system, tweaking it and re-tweaking it over and over again. Unfortunately, the majority of these systems/strategies miserably fail when it comes to delivering actual results. There is a total lack of understanding and therefore a total lack of systems with Solid results based on solid statistical principles and with good likelihood of producing positive returns in the future. The existence of so many useless websites makes it extremely difficult to find the true gems and really get an understanding on how to approach Forex trading systems design.

In order to become a systems designer, in my opinion, you need to understand the following concepts:

  • What a historical statistical edge means and how to quantify it.
  • What curve fitting is and how to avoid it.
  • How to implement rock solid risk managent in Forex by using dynamic stop loss distances according to the current volatility of a curency pair and consequently reduce position size or increase it depending on the stop loss distance.
  • Understand and perform advanced studies such as Walk Forward Analysis and Rank Analysis for parameters selection with greater likelihood of positive performance in the future.
  • Understand worse possible draw downs of your system in terms of percentage as well as days by using advance tools such as Monte Carlo simulations. (Ultimately, this ability is the one that will help you stick to the system during the inevitable bad times, because you'll know what to expect and you'll know when there is enough evidence to assume that the edge exploited by the system has dissapeared).

Almost nobody talks about any of these things when discussing specific strategies. And that's sad.

These are, in my opinion the best resources to learn about trading systems design: - A website with plenty of very interesting articles about ways to find an edge in the markets. With the addition of statistical studies for idea generation when designing trading strategies. By reading all the articles of this guy I think you will save hundreds of hours of life. Totally free. - This is a website about algorithmic trading in Forex. The guy has been blogging since 2007 and his articles right now are certainly very advanced, usually about neural networks design. But if you go to past blog posts you will find excellent articles about almost anything related to forex strategies design. This website doesn't describe particular strategies but general useful concepts related to systems design. Totally free. - The webmaster of this site is Daniel Fernandez, the same person who writes on Mechanical Forex. Asirikuy is a community for Forex systems design with some pretty well defined standards to even start considering the automation of a new idea. The community has developed really powerful tools for evaluation and design of strategies. Asirikuy has been going for about 4 years now, with more than 10 trading systems designed and trading real money. The strategies are totally disclosed here. No black boxes. Tons of information in form of videos and pdfs as well as a Forum to discuss different topics from idea generation for new systems to support etc. I purchased a subscription in March 2012 and I can safely say it is the best money I have ever spent on any trading related service I've used.

Currency Trader Magazine - One of the most prestigious magazines about currency trading in the world. There is a new issue early every month. The Current month issue is always free. Past issues are not. But if you go there every month, you will start accumulating a good collection little by little. I specifically pay attention to the "Trading Strategies" section. In fact that's the only thing I look at. Unfortunately, this section is not always present.

Finally, I would like to add two books. Which I think are really a most for somebody interested in trading systems design:

- Trade your way to financial freedom
- The Way of the Turtle

I am in no way affiliated with any of the sites mentioned here. I don't receive any benefit from mentioning them, or by you visiting the sites from here. None. I simply believe these are excellent resources that will hopefully help somebody out there. For the purpose of design of trading systems, I think you don't need anymore than what I've mentioned here. Again, I've been trying to design long term mechanical trading systems for the last 3 years, and I can tell you, 99.5% of what you find out there will simply be a waste of time, money and effort. But these, are undoubtedly true gems.


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