Today I analyzed 4 major instruments on the 4-hour and daily timeframe and compared hypothetical entries taken by a coded trading strategy with what I would have considered if I had been trading the same market on a discretionary basis.
Looking at two US indices and two forex products.
Review of Systematic entries
In the past year, my trading has focused on the 1-hour (and lower) timeframes. Lately, my testing and coding has focused on the 4-hour and higher timeframes.
Today I am looking at how one of the systematic trading strategies would have traded on several markets in the past week and a half and assessing whether I am happy with the trades that the strategy would have taken and/or whether there are additional setups that I would have liked to take pursuant to this strategy. False positives and false negatives in other words!
One of the downsides of automating a trading strategy is that it is not possible to articulate every single component of a trader’s decision making process into code. Hence there is a clear trade-off between being able to trade a larger number of markets for more hours each trading day, with a decrease in the quality of the analysis (because the coded strategy will most likely be simpler than a discretionary evaluation).
For each instrument, there is the 4-hour chart as well as the Daily chart. It is a mix of working with moving averages, support/resistance and applying the concept of market structure (see Voigt (YouTube)and Pepperstone link on this blog)
S&P 500 index (the ES futures contract):
Dow Jones Industrial Index (the YM futures contract):
Euro-USD forex rate (the EC futures contract):
The EC trade near the end of August had a stop less than 30 pips – which is rather tight on the 4H timeframe – and it would have been entered shortly prior to speeches from both Fed’s Yellen and ECB’s Draghi, and on a Friday afternoon – thus taking on weekend-carry risk. Would I have let the strategy trade like that without interfering? Good questions!
Australian Dollar, the AD futures contract:
This review has been very insightful. It brings home the message that it is not easy to code the context reading of the market – well at least it is difficult for me to do that, at this point.
Secondly, it is valid to ask whether I “would have the balls” to let the strategy trade away with the pre-designated stops regardless of upcoming news schedules and irrespective of the time of day or week (subject to the specified entry time constraints).