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Very interesting concept of maximizing profitability

Has it ever occurred to you that to maximize profitability, you must be completely objective with all of your trading decisions? If you only trade occasionally or as a hobby, then it may not ever occur to you to write down or formulate your trading methods. If you are or planning to trade with real money either for yourself or professionally for someone else, achieving maximum levels of accountability and integrity to explain how the profits will be made are desired 8). Allow me to be more direct: You cannot expect to make any type of consistent profits based on on a few lucky trades.  A mechanical forex trading process allows for this.  Let's take a look in plain English at how the development of such a strategy works.

There are certain fundamental processes or functionality in any system.  By fundamental, I mean 'core', 'primary', or basic components or processes such that, if you remove or disable any one of these cores, the system will not function properly. There are also secondary or auxiliary components that are nice to have, but are not necessary for the systems intended purpose. These are usually cosmetic or preferential in nature. Take a car for example. One of its primary functions are to take you from point a to point b. If you remove the radiator system from the engine compartment, can the car still function to serve its primary purpose? With no method to cool the engine properly, it will quickly overheat and make the car inoperable. What if you removed the radio? The drive may be boring, but the primary function of the car may still be sustained.

It is important that you make this clear distinction between primary and secondary functions when designing or evaluating a trading system that is built to make profits ???. You want to ensure the primary components, working together in its designed flow, will produce the advertised or projected profits. Likewise, when one of the primary components fails, you can pinpoint the point of failure and apply the appropriate workaround. Too many traders choose to have their attention focused on secondary functionality, and many more scam system vendors exploit this. Some examples of secondary functionality may be chart/indicator color, trades 'win' %, worrying about scalping capability, and perhaps the worst lagging indicator of all time: popularity :o  Personal preference should not be a determining factor when evaluating a system's ability to be profitable.

A complete mechanical trading strategy has to have at a minimum:
1) an ability to determine satisfactory condition(s) exactly when to/not to enter the market. (collectively known as an entry signal or alert)
2) Actual entry or entries of trades into the market related to the signal generated in step 1.
3) an ability to determine satisfactory condition(s) exactly when to/not to exit the trades made in step 2. from the market. (collectively known as an exit 'signal' or alert)
4) Actual exit(s) of trades generated in step 2 from the market, based on exit signal from step 3.

Steps 1-4 above in sequence is what I call a tradecycle. A tradecycle could technically be applied to managing individual trades, each having its own independent tradecycle running simultaneously, trading the same or different instruments. I have found tradecycling is much more effective when applied to 1 or more trades of the same instrument in series (like a basket). You could still trade several different instruments in their own tradecycle, and preferably in their own account.

I have an excellent example of a mechanical system where I use a combination of trend detection with non-lagging indicator, reverse entries (counter trend) in a grid formation, and a close everything exit strategy when net profits have been reached In this way, steps 3 and 4 are combined. Although not part of the tradecycle, a new step emerges: repeat as many times as possible. When you have a mechanical system, it is desirable to maximize repetitions (not to be confused with aggression). The maximum profitability is derived by maximizing the number of tradecycles ;D. So then we start talking about advanced automation, dedicated servers, etc which is a different discussion altogether.

This is easier to understand when you can see it visually. The screenshot shows a few tradecycles with a breakdown of each step. The grid used for entries was set to 0.2 lots sizes each, 2 pips apart from the initial trade. These were actual trades done on a live demo account. Live real money accounts have traded the same way (better in a few cases) with the same settings.
[see attached image]

Now that I have explained details about the construction of algorithmic trading, in a different post I want to delve deeper as to why tradecycling is the best approach for mechanical trading, the worst case scenarios (risk management), etc. I do hope that more people are aware that trading does not have to be difficult or mystical. Buying and selling mediums may change, but the core motivations of what drives people to agree on a contract (and a price) are always the same


  • JohnLast 4283 days ago

    I am interested in the author's EA, in fact in the practical implementation. 

    I have discussed that with Jaguar and I think that the concept of trading cycle does not bring a disruptive change. Every EA needs to have a trading cycle in order to work properly. Otherwize the code simply won't work.

    I mean every EA needs to open a trade and to close a trade and repeat that trading cycle.

    But on my opinion this article is dedicated mainly to new guys who are making their first steps and explains in plain English what an algorythmic trading is.

  • fxez 4282 days ago

    A comment on grid based systems. They are all martingale systems and ultimately they all blow up. It is just a matter of time. And they lack the key ingredient - an edge. If you cannot make a single lot system profitable, grid systems will just put off the day of reckoning when the illusory advantage evaporates.

    As to the author's 4 points for a complete mechanical system, they are essentially just 2 points, the entry and the exit. The concept of satisfactory conditions is misleading. Whenever your strategy / stystem triggers an entry  or exit trade it is the satisfactory condition. It sounds as if he is describing manual trading done in a mechanical way.

    The main thing left out of the list is the edge. This is the core of all strategies and if yours is built upon an edge then there are a number of ways to implement extracting profits from the market. If your strategy lacks an edge (as all grid traders do) then it is just a matter of time before the markets present a scenario that your grid system cannot handle and the account blows up.

    Edges are efficiency based. You get paid as a trade by designing strategies that make the markets more efficient  - by identifying an inefficiency and exploiting it over and over the market is pushed towards its true value and you make a profit.

  • JohnLast 4282 days ago

    I want to give a link to a post where I translated and tried to summarize the vgc's opinion about the grid system.

    According to him it is possible to have a profitable grid system, but the expected profitability is not too much 10 % annually and the risks are to have a big looser.