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Development of systems in trading

Julian Molina Co-founder of Superalgos. Laying out a rational framework for developing your trading system by dissecting trading logic, step by step. Indeed, following a specific, well thought out and logical scheme is instrumental to avoid falling in the trap of making rushed emotional decisions in the middle of the heat, which most times leads to disastrous results. A solid system also allows traders to be methodical, which is a prerequisite for learning through repetition.

Following a method allows internalizing the thought process, making certain aspects of trading second nature. This frees up traders' mental capacity, which can be devoted to creative processes instead.

With practice comes mastery.

Trading System Development – The Right Way

With mastery comes knowledge. With knowledge comes strength.

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Automating random, creative processes is rather challenging, while automating logical, methodical processes is straightforward. So, what does such a system look like? What kind of wizardry or black magic is in order? There is no magic. I will take you through a step by step analysis that you should be able to follow and understand. It relies on simple logic instead. I will lay out a framework, starting with the basics. I will then dissect the logic behind trading strategies, discuss how to build them and propose how to use them.

Neil Rosenthal August 31, PM The continuing evolution of technical analysis software has simplified the creation of computer-automated trading systems. Some systems just generate the signals for the trader to follow, while others place the trades into the market on behalf of the trader.

You can think of this framework as a structure that can be further optimized by producing additional analysis on top. In fact, what I will cover in this article is Level One — the basics. If you are a bit lost with strategies, Technical Analysis or are still trying to crawl your way up the learning curve, understanding this framework will put you in the right mind space and will provide you with a solid foundation for your trading education.

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The purpose of this framework is to provide you with an understanding of how to develop your trading system, on earnings via the Internet with investment you can keep building as you advance in your trading career.

The Basics In terms of structure, you can think of a trading system as a hierarchical arrangement organizing the actionable aspects of your investment plan. The structure would be quite large and complex if you were an Investment Bank but can be rather simple for traders just starting.

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The framework I will discuss allows for building more complexity at a later moment, as your trading experience develops and you get ready to implement more comprehensive processes. I will occasionally mention and touch on aspects that have to do with your Investment Plan. However, you will notice I will systematically avoid discussing the plan itself, as the scope of this article is the actual framework for your trading system.

Dozens of development of systems in trading have been written on each of the topics that I will choose to skip, so please accept the narrow focus of the article from the get-go. Capital The first order of things is determining how much money you will be working with.

This is your initial capital. Those kinds of concerns are out of the scope of this piece, as I wish to focus on the framework itself. So, it is up to you to determine what capital you will use for trading. The point to take home here is that there is a finite amount of capital.

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You will need to manage this capital. You will need to preserve it. And you will aim to increase it. Again, there are many reasons why you may prefer a market over others.

Liquidity, volatility, the likability of the underlying project… you name it. Base Asset The third order of things is deciding what your base asset is. That is, what asset you wish to stand on when you are out of the trade, with no open positions. You are also a crypto-believer and are long-term bullish on bitcoin. Chances are you may want to accumulate bitcoin. That is, your base asset is bitcoin. Needless to say, you may have a valid argument for picking any other or any number of base assets.

Your Investment Plan As you may have noticed, these three elements — capital, market and base asset — are an integral part of your investment plan. The plan is yours development of systems in trading it needs to respond to your needs. Your plan needs to serve your purpose and only you know what your purpose is.

Your plan may have any number of goals e.

Developing Your Own Trading System: A Step by Step Logical Guide | Hacker Noon

This leads us to the concept of strategies. Binary options setups A methodical framework would define a strategy as a set of actions occurring in stages, designed to achieve a specific goal within a broader plan, via executing trades. The actions occur in stages because certain actions may be grouped, and each group of actions may be played in a specific sequence.

This concept is fundamental to the methodical aspect of the system, as it provides a framework to run every strategy with the same logic, which certainly contributes to developing a scalable system that may grow to any number of strategies. One specific goal. If you attempt to achieve two different goals with a single strategy, you may run into problems. What if the two goals were antagonistic? You could argue solutions may still be found, but the strategy would certainly be more complex.

In any case, the logical thing to do is to analyze each goal separately so that you can design at least one clear, straightforward strategy for each goal. Now, can you have more than one strategy to achieve a single goal? There are many roads to Rome!

In fact, the norm is to work with several strategies at the same time, effective way to make money this usually leads to identifying more trading opportunities. The set of rules and formulas comprising the strategy can be anything. They may be based on Technical Analysis, incorporate fundamentals or sentiment data or anything else you may think of.

Suffice to say that your strategies will be somehow related to the market that you chose to trade in and that they will have several characteristics which Development of systems in trading will discuss as I move on with this analysis.

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A trade is a process that exchanges the base asset for a second asset and that — after some time — exchanges back the second asset for the base asset. The first and foremost rule of a trade is to preserve capital and its main goal is to increase it. This means you will have rules that indicate when to sell your base asset and when to buy your base asset back. Preserving capital is one of the key rules of becoming a successful trader, as you will probably have as many good trades as bad ones.

The trick is that your good trades should end up accumulating more development of systems in trading than the losses you accumulate with your bad trades. In terms of its goal, a trade is engaged for the prospect of increasing the quantity of a given base asset. In other words, you trade in the hope that — during the trade — the second asset will revalue against the base asset so that by the time development of systems in trading second asset is exchanged back for the base asset, the resulting quantity of base asset is bigger than the original.

When do you start trading? How do you know which strategy to use? Triggering Strategies I call this particular set of rules a situation, in the sense that you are trying to determine what is going on with the market and if the situation is right to use a certain strategy.

Put in other words, you define situations in which you wish to use a certain strategy development of systems in trading each situation is described as a set of conditions that need to be met for you to consider starting to use the said strategy.

When the conditions for any of the situations that would trigger a strategy are met, I call this a trigger on event, meaning the event activates the strategy. Now, what does that mean?

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A trigger on event signals an ideal time to activate the strategy and look for the opportunity of taking a position. To take a position, you will too define situations. In this case, when the conditions that define a situation are met, this marks the take position event, that is, the moment to enter the trade.

Are you starting to see the pattern? Your strategy is guided by predefined conditions that — when met — define situations that determine that a certain event will take place.

Now, what happens if the take position conditions are not met? This leads us to understand that, just like you had a set of rules to determine when a situation seems appropriate, thus triggering on a specific strategy, you should also be able to analyze when the market has shifted out of those conditions — therefore cancelling the potential for taking a position — so that the strategy can eventually be triggered off.

Why is it important to trigger off development of systems in trading strategy? It was established that while a strategy is on, you need to pay close attention to it and constantly evaluate the conditions for entering a trade.

Triggering off the strategy allows freeing up those resources your attention and going back to doing something else. It was established that — overall — you have a certain amount of capital to trade with and that you will need to manage.

It was also established that you are most likely going to work with several strategies. This is when you start managing your capital. Because you are working with several strategies, you need to decide how to allocate portions of that capital to each strategy. And — again — this is an integral part of the investment planning decisions that you will need to make and that are out of the scope of this article.

Suffice to say that capital allocation is part of your overall capital management and diversification plan, and a subject worthy of its a full level in the framework which may be covered in a follow-up piece later on.

This is because each of those concepts is completely independent of each other at a conceptual level, and because in larger organizations, different people may take responsibility for each of them or co-participate in the process.

Take Position I explained situations with their set of conditions when discussing trigger on and trigger off events that activate and deactivate strategies. The same concept of situations with conditions apply when you are looking to take a position.

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When setting up your strategy, you will describe situations, each defined by a set of rules or conditions that — when met — indicate that the moment is ripe for taking a position. I call this the take position event. Taking a position refers to the act of entering a trade, that is, placing the orders at the exchange.

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These actions are taken in the next stage, during execution. Quick Recap Stage 1 is about monitoring the market and identifying when the conditions that define certain situations are met, triggering on one of your strategies.

You may see this as an early signal that tells you an opportunity may emerge soon. The conditions that define the situation for actually taking a position may be seen as the final confirmation: simple binary options trading strategies signal that determines that the time for entering a trade is as good as it gets.

Your base asset is BTC, thus, you come up with a trend-following strategy based on the Bollinger bands indicator. Your goal is to accumulate bitcoin selling BTC as the price starts dropping and re-buying BTC at a lower price when the price stabilizes.

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One of the situations you wish to identify to trigger on the strategy is, for instance, when you detect what you may call an Incipient down-trend or to be clear, a situation where a down-trend is developing.

How would you describe the Incipient down-trend situation with a specific set of conditions? Well… you may come up with something like this: Condition 1: The percentage bandwidth moving average of the Bollinger bands is going down… Condition 2: The percentage bandwidth is smaller than the previous for two consecutive periods 2 candles … Condition 3: The minimum candle value is less than the previous minimum for two consecutive periods… The framework dictates that when those three conditions are met at any moment in time, the strategy is triggered on.

So you keep looking and waiting for the final confirmation to take a position that is also defined by a situation embodied by its own set of conditions. You will probably want to give the situation a significant name, such as Down-trend entry signal. The conditions are met and you are finally ready to take the position. However, to complete the trade — that is, to buy back the base asset — you also development of systems in trading to define the rules to exit the position, or what I call the take profit and stop formulas.

In that sense, the next step is defining two separate rule-sets for exiting the position: take profit and stop. These formulas will allow us to do just that: take the profit when the trade hits a target or stop and exit the position in case things are not going as expected. These rule-sets are most likely expressed as mathematical formulas. The simplest approach is fixing a constant value as a percentage of the price at the time of the take position event.

Developing Your Own Trading System: A Step by Step Logical Guide

That would be a constant value for your take profit. There certainly are many considerations as of how to set these two formulas, and several variables like market volatility, your risk profile, quality of the signal, long-term development of systems in trading and so on will be part of the criterion you will want to consider.

However, such considerations are beyond the scope of this article. That said, it is important to note that setting constant values for take profit and stop is certainly a simplistic approach and that a lot more efficiency can be obtained with more dynamic formulas.

Such formulas may take into consideration the actual price movement, momentum, and as many indicators as you may wish to factor in the analysis.


Why would you want to think of this as a two-stage process? Well… it may or may not be. For starters, there are further decisions to be made: are you placing a market order or a limit order? Moreover, the complexity of the execution depends on several factors, the most relevant being the size of the trade and the liquidity of the market.

Imagine placing a limit order to buy 1, BTC in a second-tier exchange… The order would probably take some time to fill, get partially filled or not get filled at all, right?

By Michael Griffis, Lita Epstein Conceptually, you can use the back of an envelope to develop your trading-system ideas. However, most traders want some way of confirming that their newly designed systems can perform profitably before they commit real trading capital. That means you need a way to test your system, by simulating trades using historical data. The computer equipment required to run a proprietary trading platform, including products such as TradeStation or MetaStock, is usually enough for system development and testing.

Also, placing such a big order in the book may affect the market and substantially affect the price, which is undesirable. Large orders need to be fragmented, sometimes even across different exchanges. Also, the position may be taken at different prices, or along a certain period. The aforementioned tactics are the subject of a higher level of the framework which I may cover in future articles. As you may now see, there are considerations to be made at the time of execution, and the task itself is quite different from monitoring the market, hence the view of the two as belonging to separate stages.

As you may have noticed, a trading system corresponds to a lower level logic concerning the strategic aspects of trading. The system serves to structure the processes and methods that you will use to implement your trading strategies.

When I first started trading several years ago, this engineering background gave me transferable skills to backtest and validate trading strategies. For example, it was a shallow learning curve to program and backtest strategies using tools like NinjaTrader and Amibroker. However, it has also taken years to learn about and find a balance with important higher-level concerns, such as market dynamics, supply and demand, and trading psychology.

What follows are considerations that aim to increase the efficiency of your system. In Stages 1 and 2, I described the fundamental components of the take position, take profit and stop events of a trade. I already discussed how setting the take profit and stop with dynamic formulas that take into consideration several relevant parameters such as current price or other indicators is preferred over the simplistic approach of setting a constant value considering the price at the take position event only.

The concept of managing a trade goes even further. It means that the formulas to determine the take profit and stop may change as the trade develops. The key point to take home is that there is a development or evolution attached to a trade.

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A trade is not an instantaneous event. It matures over time. Then, how do you manage the trade?