Walk-Forward Evaluation

Every system trader wants to see a healthy set of historically backtested results that will engender a sense of confidence before they begin to consider trading a given system with real money. But the truly savvy system trader will also want to see an extensive amount of forward-tested results from the same system using previously unseen data. A trading system that passes muster in both back- and forward-test mode (also known as “in sample” and “out of sample” [OOS] modes, respectively) has a far more promising future in the real world of trading than one that simply looks good when backtested over historical data. Every serious system trader should demand that both sets of test data be made available to them before they fork over their hard-earned money for any system, no matter who the developer is.

In Figure 1 you see the forward-tested results for an emini stock index futures trading system that I developed last year. I originally tested it on six months of historical data and after fine-tuning it, I decided to run it in forward-test mode for the long haul to see if the underlying market concept of the system was truly valid.

To do so, at the close of each trading session (0930 to 1600 Eastern time, Monday through Friday) I manually entered the trades into Adaptrade’s Market System Analyzer (MSA) using the commission, slippage, contract size, and starting balance you see on the chart in Figure 1. It was been a long and grueling test, but after 229 trades in OOS mode, it appears that the system has proved itself, and despite having endured some lengthy periods of drawdown and sideways choppiness, it has gone on to make new equity highs in recent trading action.

Now, before you decide that this is the trading system that will do the job for you, ask yourself a few difficult questions with as much honesty as you can muster — because you’re only fooling yourself if you aren’t honest with yourself:

1. If you had begun trading this system on February 24, 2011 (the day after the highest value in the equity curve [$19,370] was reached — prior to the new high of June 1, 2011, that is), could you have stayed with the system through the ensuing 18.7% drawdown (one that endured for 57 trades) that lasted until May 5, 2011? The dollar amount of the drawdown was $3,630. Would you still be hot to trade a system after it’s had a long streak of any kind?
2. Source www.traders.com

Six Tips To Successful Daytrading

It’s a classic catch-22 in a recessionary job market: People looking to enter a new profession find they cannot get in without at least some relevant experience, yet they have little chance of gaining any experience because employers are eliminating or outsourcing entry-level positions. One notable exception to this is daytrading, which is the practice of buying and selling a stock within the same day. Anyone with a few thousand dollars in seed money can set up a short-term trading account and compete for profits alongside huge investment firms and seasoned, multimillionaire traders. The only credential you need is a positive account balance to make tomorrow’s first trade.

Daytrading is also inherently adversarial: The strong make a profit by taking money from the weak. Inexperienced traders can (and do) lose thousands of dollars in a matter of minutes as the stock market soars and dives. For every beginning daytrader who goes on to achieve long-term profitability, about nine others fail.

Although there are no shortcuts or sure-fire formulas for successful daytrading, some of the most common pitfalls can be avoided by following six basic tips designed to help traders develop more consistent and professional practices.

1. Prepare your mind
What you believe about yourself is the most powerful predictor of what you can achieve in daytrading. A world-class athlete does not wait until he wins that first Olympic medal to start thinking and training like a champion. Likewise, great traders start to envision themselves as being successful before they ever make their first profitable trade of the day.

When he or she loses money, a successful trader can mentally contradict that fact by picturing him- or herself achieving the next good trade. Great traders don’t allow the situation — their last losing trade — to create or reinforce a negative belief. Instead of saying, “I always get stopped out on my trades,” try rephrasing that statement in past tense: “I had a problem with setting my stops today, but I’ll do better tomorrow.”

Another technique for developing a success mindset is to think about breaking your own “Olympic record” with every trade. If your highest profit on any one trade has been 10 points, resolve to keep trading until you earn 12 points. Picture yourself reaching that goal.

More than any technical trading setup, a success-driven mindset helps traders stave off the fear that can leave them stuck in a bad trade or afraid to hold onto a good one.

 Source http://www.traders.com

Reversing MACD by Johnny Dough

Moving average convergence/divergence (MACD) created by Gerald Appel is probably one of the more popular momentum oscillators in use today. It is calculated using two exponential moving averages (EMAs) of different lengths and is the value of the shorter (fast) period MACD less the value of the longer (slow) period EMA. MACD fluctuates above and below the zero value where the moving averages cross.

In Giorgos Siligardos’ article “Reverse Engineering RSI,” he showed that the reverse-engineered relative strength index (RSI) can help determine the following time period’s closing price using the value of the oscillator. And in the article “RSI Bands,” François Bertrand showed overlaying RSI overbought/oversold levels on the price chart.

I will show the calculation of the price value of a specific MACD level and the calculation of the price value that will cause the MACD to change direction. These values in relation to price can then be shown by overlaying them on the price chart.