My Blog

Tradesignal: Strategy and Optimization screen displayed

I have started looking into developing a mechanical trading system and as with all things I try, I am going at it with a passion akin to that of Al Pacino in Scarface.
The task seems slightly in-surmountable because I have tried and failed to develop something successful in the past. In retrospect, I feel that I may have taken the wrong approach.

During my previous attempts, I was unaware of software such as Tradesignal. Tools such as this one allow anyone to develop custom trading algorithms with ease.
My approach was more of a do-it-yourself methodology and I was trying to re-invent the wheel.
I had once programed Bolliginer bands and moving averages into excel files using end of day data that I downloaded from  Yahoo Finance, only to realize that my plan of programing individual indicators then searching for trends then coming up with profitable combinations of them is a task with no end.
I tried to re-invent the wheel but my wheel turned out square.

This time, I will be successful. I am not going to waste time programming the math behind indicators. I will however, learn their use and research how others have succeed in using them in the past.
A program like Tradestation does the hard work for you. The indicators are pre-programmed, the back-testing algorithms are pre-programmed, the graphs look good, the interface is nice, etc etc etc. All in all, it is really a good program.

Your role in developing your mechanical trading system is simply to pick the indicators you want, use the Tradestation optimizer to select appropriate parameters for those indicators and test it.

Now that I have made it sound as easy as taking candy from a baby, here is the honest truth, it is hard. How hard? Very hard. Ok, maybe not that hard – but it’s not easy.
There are hundreds of indicators to choose from, millions of combinations to create and if you don’t really know what you’re doing, you may as well go back to programming indicators in excel.

Here is the approach that I am taking:

1. Learn a few common technical indicators and how they work
2. Backtest the use of those indicators
3. Learn a few complex indicators
4. Think up logical combinations of the indicators I know and test them in Tradesignal
5. Read about others who have had success in mechanical trading
6. Repeat 3 – 5

I am currently at step 2 and I am hoping to be ready to test some of my “strategies” in the next few months.
I will post my results on this blog so stay tuned.

Leave a comment if you have dabbled in mechincal trading and have any tips.

HIG today

A few interesting things happened today.

I have recently switched to thinkorswim.ca for my investing needs, mostly because they have free software and $5 trades.

They have been called Interactive Brokers’ little brother. Something to note here is that IB (Interactive Brokers) requires $10,000 to open an account and thinkorswm.ca doesn’t have that kind of requirement.

If you are thinkong of joining please email me because they have a $50 bonus for refferals

So anyway, in my stocks to watch portfolio on Google Finance I hold some of the market’s biggest and most volatile stocks. These allow me to quickly gauge the big players to see which sectors might be up or down that day.

I saw the Prudential (PRU) was up 17% within minutes of the open on very little news with the rest of the market slumping so I shorted the stock and bought back a little bit lower as I saw the volume and price gyrations start to decrease. It wasn’t an indicator that told me to leave, it was more of a feeling that I got when the bid sizes (avail on yahoo finance for free) seemed to drop. I am glad I got out of that when I did because by the end of the day the stock was up 35%.

My only other trade, and this is the one I learnt something from, was Hartford (HIG). On the Google Finance homepage, this stock made the biggest price movers list mid day and I decided to look at it.

The move was fundamental because HIG had a great guidance for 2008 EPS. The stock was already up massive, like 70% or so, but with news like that in this bear market I knew that this would be a rally lasting longer than a day.

I am a firm believer that people with money are busy throughout the day making that money and only hear about good news at the end of the day. The weekend is also a good time for them to catch up on the news. This group of investors contacts their broker over the weekend or in the evening and asks for them to follow through on this good news and on the following morning (or Monday morning) the stocks that were in the news favorably are rallied with their money.

Because of that belief, I bough HIG and decided to hold onto it (with a stop loss order in place of course).

What I didn’t expect though was that big players that were trading this stock along side of me would pull out at the end of the day. Perhaps it is because it’s a Friday, or perhaps they do that at the end of every day to lock in their gains, but I saw a very linear devaluing of the stock from3:40 – 4:00PM. The peaks of this decline were very systematic and the trendline connecting them was very smooth. It triggered my trailing stop loss.

I was disappointed at this seemingly programmatic sell-off because I had a good entry point and if my theory stated above holds up, this stock could stand to open much higher on Monday morning.

Perhaps I had too tight of a limit on that trade or maybe I was expecting too much. All I know is that I will avoid the last 30 minutes of the day for all honest, non-programmed trading from now on – at least until Jim Cramer becomes the SEC Chairman and restores order!