Define Trading System

Last modified 16:50, 2 Nov 2012

System Builder work page

To build a new Trading System, click New Trading System from the tool bar's Systems menu:

tolbutn_systemnew.gif

The System Builder work page will open with a blank System Criteria work page displayed.

On this tabbed page you can create a new Trading System.

System Criteria tabbed page

The System Criteria tabbed page has three sections:

The following graphic identifies these three areas, as well as the common System Testing function bar and page tabs:

All elements of each Trading System can be readily accessed from this page.

When the Trading System is defined, its objectives and method of construction can be noted in the About this System tabbed page.

The new Trading System can then be saved and run in a System Test.

System Criteria Definition Area

Long, Short or Both

This area is divided into Long and Short trade setup criteria definition tables. Both tables function in exactly the same manner.

Users can create a system that will exploit trade Long or Short trades, or both. Complex Trading Systems may employ both long and short settings but most equity traders will be looking for trading opportunities in only one direction, normally bullish.

In any event, each user's overall trading strategy, and the securities that will be traded, are fundamental trading decisions beyond the scope of this explanation, users are advised that various courses and publications exist for further education in this area.

Trade Setup Table

Regardless of whether the Trading System will trade Long or Short, or both, the three criteria that compose each trade setup are selected and edited from the Trade Setup Table.

The three criteria are entry and exit signals, entry and exit points and stops.

Column One

ps36tradesetuptable1stcol.gifThe Setup Table's first column identifies the row as containing the criteria definition for either Entry, Exit or Stops.

When no criteria is defined for a row, its first column field will be colored red. When a scan or stop is defined for the row, the first column field will turn to green.

Column Two

The table displays the name of the scan or stop in the second column. When none is currently defined, the default value is Not Set.

Click on an Entry or Exit scan's Not Set label to open the Select Market Scan dialog box.

Select a scan and its name will populate the field. Click on the scan's name and its Search Criteria dialog box will open for editing.

Stops work in a similar way, except the Select System Stop and Stop Criteria dialog boxes will open.

Column Three

In the third column a plain English description of the Time and Price Entry and Exit point levels is displayed.

Buttons

Click on one of the three buttons on the right to Select, Edit or Clear the Entry, Exit and Stop signals in that row.

Select will always open the he Select Market Scan dialog box for Entry or Exit scans and the Select System Stop dialog box for Stops.

Entry and Exit signals are based on scans and are defined/edited in the Search Criteria work page. Stop signals are defined in the System Testing Stop Criteria work page.

Note - If no scan or stop is currently selected (i.e. column two = Not Set), the Edit button will function the same as the Select button.

Click Clear to remove the current scan or stop. Column two will display Not Set, and column three will display N/A.

Creating New Criteria

To create new Entry, Exit or Stop criteria, click the Select button for the appropriate row.

The select button will open the List Selection dialog box for either saved scans or saved stops, depending on the row.

To create either a new scan or stop select the New button from the List Selection dialog box.

In both cases this will open the criteria definition dialog for the relevant criteria type. The scan or stop can then be defined in the normal manner. For more information, go to the System Testing Scan Definition and Stop Definition topics.

Selecting and Editing Trade Criteria

For both Entry and Exit criteria, as well as Stop criteria, the current criteria can be edited by either selecting the Edit button at the end of the table, or move the mouse cursor over the text in the Scan/Stop name text box (second column), and when the text turns blue and the cursor changes to a pointing finger, single left mouse click to open the scan Search Criteria or Stop Criteria dialog box for the named scan or stop. The scan or stop can be edited in the normal manner.

For more information, go to the System Testing Scan Definition and Stop Definition topics.

When the changes have been made, save the changes in the normal manner and they will take affect the next time the Trading System is run in a system test.

Time and Price Level Settings

Entry and Exit scans have a Signal Day, when the scan criteria is met, and an Entry Day or Exit Day, when the trade is actually made.

Both the timing of the trade and its price level relative to the time and price when the Signal was triggered, can be defined by the user.

When a scan is initially selected for a Trading System, it is automatically assigned neutral time and price level settings:

In the example above, the neutral time and price settings are displayed in plain English in the third column.

To define custom entry/exit time or value criteria, move the cursor over the settings description in the third column and single left mouse click to open the System Builder - Entry/Exit Criteria dialog box.

Go to the Setting Entry/Exit Criteria topic for a detailed explanation of the System Builder - Entry/Exit Criteria dialog box.

Note - Time and Price settings cannot be set for Stops, the third column for Stops will always read N/A, i.e. "not applicable".

System Test Scope Definition Area

The extent of the System Test can be by limited by the number of securities scanned, as well as by the timeframe of price data that is scanned.

Scope of Scan

systst_setsearchon.gifUse the Market to Test functionality to define the scope of the search.

Entire Markets can be scanned. This can take a very long time, particularly if the time frame of the test is set over a long period of time.

Another consideration is that System Testing uses off-line scans. These require all the data for the period of the test [i.e. for all symbols in the scope of the test] to be downloaded to your machine. For whole markets this can be a large amount of data. Ensure you have adequate system resources.

Quote Lists and Scan Results can also be selected for the System Test to be applied to.

Individual Symbols can be chosen. This is particularly useful if you want to confirm your test's design against the known price movements of a particular symbol.

For each type selected, different selection tools will display to the right of the type selection drop down box.

For example, when Individual Symbol is selected you can enter the symbol, market, or search for the symbol:

Selecting Scan Results and Quote Lists will open their respective List Selection dialog boxes.

Time-frame of Scan

Use the text entry boxes, or calendar selection tools. to define the time-frame of the System Test.

Define the time frame of the System Test by setting a Start Date and an End Date.

Users can either directly enter the date into the text box using the dd/mm/yyyy format, or use the standard calendar selector. This is a shared utility common to many features.

The dates selected can affect the results which are displayed in the monthly/yearly columns in the Performance Summary table of the System Test work page.

If you want to compare full years/months with all other full years months you must specify first days of years/months in the Start Date text box, and last days of years/months in the End Date text box.

Trading Account Definition Area

Establishing a hypothetical trade account, and limiting trading on the basis of the running balance, allows the System Test to function in a much more realistic environment than if it were to merely identify trades which satisfy a variety of criteria.

The hypothetical trading account enables hypothetical profit and loss, and other trading performance metrics, to be generated for later analysis.

Trading Account Balance

Type in an amount of money for the Opening Account Balance. This is the hypothetical gross amount of money available for trading when the System Test is run.

The Minimum Account Balance allows the user to enter a dollar amount below which the running account will not be allowed to fall. If a transaction meeting all other criteria would result in the balance falling below the amount set in this text box, then the transaction will not be entered into.

The System Test will continue and when a trade is exited and the proceeds result insufficient funds becoming available, the next successive transaction for which sufficient funds exist will be entered into.

Amount of Each Trade

To maintain realism, each System Test scenario is limited by the amount specified in the Opening Account Balance. Once this is specified, the amount to be allocated for each trade must be specified or else the entire account will be applied to the first trade and not be available again until the trade is exited.

To allow for many trades, the amount available for each trade is expressed as a percentage of the trading funds, and that amount can be calculated as either the gross amount (Opening Account Balance) or that amount less monies that have already been used in current trades, i.e. available account balance.

Individual Trade Size

Use the Trade Sizing function restricts the amount applied to each new trade to a percentage of the opening balance, or a percentage of funds available.

% of Opening Account Balance

The simplest calculation of this percentage is that of a percentage of the opening balance account.

For example:

5% of Opening Balance (say $100,000.00) = $5,000.00

This means that 20 trades can initially be entered into (each trade $5,000 x 20 = limit of $100,000), and additional trades can be entered into whenever any of the original 20 trades are exited (assuming a profit).

% of Available Account Balance

Available funds are calculated first:

Opening Balance – Funds currently applied to active trades = Available Account Balance

and then the percentage is applied only to the available balance (assume 3 open trades):

 

Opening Balance

$100,000.00

 

 

1st Trade (5% of AB)

-$  5,000.00

 

5% of

2nd Trade (5% of AB)

-$  4,750.00

= $4,286.88

 

3rd Trade (%5 of AB)

-$  4,512.50

 

 

Available Balance

$85,737.50

 

Also remember that as trades are exited, those funds (plus or minus profits or losses and less brokerage) are returned to the available account balance.

This setting will always allow some funds to be available for each trading opportunity identified during the test, albeit at constantly changing individual amounts:- at first each trade will be of a diminishing amount, but if a succession of profitable trades are exited and the original investment plus profits are returned to the available account balance, the amounts available for each new trade could rise.

Brokerage per Trade

To add extra realism to the System Test, brokerage in and out of trades can be added to the calculation.

By toggling this setting on and off and running the System Test in both settings, you can see the affect that your brokerage fees have on your overall trading. Likewise by setting the fee level at different levels you can see the effect of different brokerage fee arrangements.

The total amount spent on Brokerage will appear in the Total Costs statistic on the Performance Summary table.

Minimum Trade Value

The Trade Sizing function could result in many small transactions being entered in to, each attracting normal brokerage. To avoid this a Minimum Trade Value can be specified. The Trading System will first check if sufficient funds are available before entering a trade.

Simultaneous Trading

Trading Systems can be set so that the trades do not put “too many eggs are put in one basket”.

In other words the trading in individual symbols can be restricted to one active trade at a time. That is, when a trade for a symbol has been entered, that trade must be exited before a new trade in that symbol is initiated, even though the criteria for entry is met.

When Allow simultaneous trades in the same direction for a single symbol is enabled (the check box is selected), simultaneous trades in the same direction are permitted. This may have the effect of including additional trades that were precluded by the default rule against simultaneous trades for the same symbol.

Trade with Insufficient Funds

The selection Allow transactions where cash account is insufficient turns off the Minimum Account Balance restriction, and trades occur without reference to the running balance.

Save Changes

Save in Current Trading System

Click on the Save button butn_save.gif to save the changes made to the current Trading System.

Clone New Trading System

Alternatively, the original system can be retained and a new trading system created in which incremental changes can be made.

Use the Action menu's Clone Trading System command:

A dialog box will prompt the user to give the copy of the current Trading System a new name. Type in a meaningful name and click OK.

The new trading system can now be altered and tested.

About this System tabbed page

Use this tabbed page to describe what it is that the Trading System is designed to identify or exploit.

Include details of the criteria settings used, and reasons why they were chosen.

You can also include suggested variables for the criteria.

Notes on performance can also be added and saved, for instance if it worked particularly well in a certain market sector, time of the year, etc.

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