Looking for profit targets Maximum Favourable Excursion MFE
John Sweeney's concept of MFE is complementary to MAE. MFE is defined as the most positive price movement for your position. It therefore corresponds to the highest open equity within the lifespan of a trade. Whereas MAE was useful to investigate your trades' drawdowns and to set a good stop loss, MFE reveals their run-ups and helps to find useful profit targets Figure 3.16 . Figure 3.16 The MFE graph shows the realised profit loss vs. run-ups of all trades. Green winning trades, red losing...
Finding the best entry time
We now perform system tests in the following way. We take our LUXOR entry but we restrict the entry times to a short 4-hour time window every day. We will shift the starting time of the window in steps of 30 minutes throughout the day in order to find the best window. For the Easy Language Programmers you have to add some lines into the LUXOR-code as shown above, Text 3.1, point 2, Time Window Filter. 3 Time investigations are valuable for many other markets. Some of you might have read our...
Drawdown
A broad definition of drawdown could be the largest loss or the largest losing streak of a trading system, whichever is the biggest 4 . In a more graphical way we can depict drawdown as the dip in the equity line between a highest high point and the successive lower point before a new high is made. In other words total equity drawdown is the open trade profits and losses plus the already closed out equity on your account. But drawdown has more subtle meanings according to whether we consider...
A Bollinger Band system with logic and code
We will stay with the pound dollar FOREX market from 2002-2008 Datafeed TradeStation 8 to test the system. We take a Bollinger Band system Figure 5.4 and optimise all its main six input parameters for the entry and exit points on daily data within the training period between 30 04 2002 and 1 3 2006 Figure 5.3 . Please note that this Bollinger Band system allows a different optimisation of its input parameters concerning the long and the short side. For the upper and the lower Bollinger Band the...
Inserting a risk stop loss
In the MAE diagram you can see how all trades behaved and if there are any special points to consider when looking for a good place to set a proper risk stop loss. The MAE diagram can give you a hint that the optimal stop value is somewhere between 0.2 and 1 . However MAE does not tell you directly what the optimal value is to set this stop. For this reason we now look at the task from a different side by performing system tests in the following way. We add a risk stop loss into our trading...
Dependency of main system figures on the two moving averages
From theory back to reality. Let's check how our trading system LUXOR behaves when changing its two input parameters, including trading costs of 30 slippage and commissions per round turn. We want to see how the results of our trend-following system change when the lengths of the fast and slow moving averages are varied. We change the two averages in a wide range, the fast moving average length from 1 bar to 20 bars in steps of 1, the slow moving average length from 21 bars to 80 bars, also in...
LUXOR tested on different bar compressions
It is fascinating to check how a trading strategy changes on different timescales regarding its important system figures and equity lines. Let's do such a timescale analysis for the LUXOR trading system. As you remember LUXOR was developed on 30 minute data of the British pound US dollar FOREX market. Let's have a look at the equity lines on different timescales Figure 4.2 . You see from these curves that our developed system logic gains steady profits on all the different timescales, starting...
Walk forward analysis
In conclusion we can state that optimisation is something variable in terms of data window since systems need to be kept in synchronisation with the market. Before computer power became so cheap and easy to employ for the majority of market players, an out-of-sample period was always recommended after optimisation by all the trading systems' developers. The out-of-sample period is a data window usually 10 to 20 of the whole optimisation data window we keep outside the optimisation process and...
The free LUXOR system code
The programmers who want to implement this logic can find the code of the trading system in TradeStation's Easy Language below. Other readers can skip this paragraph and continue on to the description of the trading system. We added some comments into the code so that you know what is done and so that you can change the code easily according to your needs. Text 3.1 Easy Language Code of the LUXOR trading system. Bold letters Code for the entries. Normal letters added time filter. In comment...
Acknowledgments
A special thank you to the publisher of Traders magazine, Lothar Albert, who allowed us to contribute to his valuable publication without him we could not have understood that we too we have something important to say about trading systems' development. From those articles in Traders magazine and from the contacts with fellow traders that ensued we received an unparalleled intellectual enrichment. Another warm thank you to Peter M ller and Bruno Stenger, publishers of TerminTrader.com. They...