What is a complete, mechanical trading system?

Posted on August 15th, 2008 by admin, under online forex trading.

What is a complete, mechanical trading system?

One of the problems with Katz’s early trading was that his “system” only provided entry signals, leaving the determination of exits to subjective judgment; it was not, therefore, a complete, mechanical trading system. A complete, mechanical trading system, one that can be tested and deployed in a totally objective fashion, without requiring human judgment, must provide both entries and exits. To be truly complete, a mechanical system must explicitly provide the following information:

1. When and how, and possibly at what price, to enter the market

2. When and how, and possibly at what price, to exit the market with a loss

3. When and how, and possibly at what price, to exit the market with a profit

The entry signals of a mechanical trading system can be as simple as explicit orders to buy or sell at the next day’s open. The orders might be slightly more elaborate, e.g., to enter tomorrow (or on the next bar) using either a limit or stop. Then again, very complex contingent orders, which are executed during certain periods only if specified conditions are met, may be required-for example, orders to buy or sell the market on a stop if the market gaps up or down more than so many points at the open.

A trading system’s exits may also be implemented using any of a range of orders, from the simple to the complex. Exiting a bad trade at a loss is frequently achieved using a money management stop, which terminates the trade that has gone wrong before the loss becomes seriously damaging. A money management stop, which is simply a stop order employed to prevent runaway losses, performs one of the functions that must be achieved in some manner by a Forex system’s exit strategy; the function is that of risk control. Exiting on a profit may be accomplished in any of several different ways, including by the use of pm@ targets, which are simply limit orders placed in such a way that they end the trade once the market moves a certain amount in the trader’s favours; trailing stops, which are stop orders used to exit with a profit when the market begins to reverse direction; and a wide variety of other orders or combinations of orders.

In Katz’s early trading attempts, the only signals available were of probable direction or turning points. These signals were responded to by placing buy-at-market or sell-at-market orders, orders that are often associated with poor fills and lots of slippage. Although the signals were often accurate, not every turning point was caught. Therefore, Katz could not simply reverse his position at each signal. Separate exits were necessary. The software Katz was using only served as a partially mechanical entry model; i.e., it did not provide exit signals. As such, it was not a complete mechanical trading system that provided both entries and exits. Since there were no mechanically generated exit signals, all exits had to be determined subjectively, which was one of the factors responsible for his trading problems at that time. Another factor that contributed to his lack of success was the inability to properly assess, in a rigorous and objective manner, the behaviour of the trading regime over a sufficiently long period of historical data. He had been flying blind! Without having a complete system, that is, exits as well as entries, not to mention good system-testing software, how could such things as net profitability, maximum drawdown, or the Sharpe Ratio be estimated, the historical equity curve be studied, and other important characteristics of the system (such as the likelihood of its being profitable in the future) be investigated? To do these things, it became clear-a system was needed that completed the full circle, providing complete “round-turns,” each consisting of an entry followed by an exit.

SLP Trading Group

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Alternative trading system

Posted on August 6th, 2008 by admin, under online forex trading.

Alternative trading system

Discussing different Forex trading strategies we must touch some aspects of trading systems.

Some bonds, stocks, commodities and derivatives trading systems can be dealt via computer. There are three types of such systems: conventional stock exchange system, electronic exchanges and alternative trading systems. The electronic exchange users and members can propose the orders and fulfill them without any attachment to the market makers or specialists by using the electronic network provided by ATS (Alternative Trading System). So, the market information, more current and complete, is provided for the members without any fee. ATSs has to do with internal trading systems of brokers or dealers. ECNs are one of the widest spread ATSs. There are some ECNs still being developed whether eight of them, such as Instinet, Island and Strike already work.

The ECN’s members have developed them in order to facilitate trading among themselves. Each ECN is based on certain protocols and terminals under these circumstances. ECN have their profit by taking a fee out of each transaction based on its volume.

One of the advantages of communication technologies, easy cross-border transactions, is widely used in alternative trading systems. Users can have an access to their orders and the execution of the latter domestically as well as from any foreign jurisdiction by using terminals or proprietary software through online connections.

ECNs (Electronic Communication Networks) make investors anonymous and free of high transaction prices as well as place together the best offer and bid prices by using trade-matching systems.

The Commission has requested in its proposing release on the regulation of markets of April, 1998 that all ATSs should have a choice whether to be registered as a broker-dealer or as an exchange like a separate market in order to participate in the market.

Choosing to register as a Broker-Dealer

The size of most of operating ATSs is fairly small. Their regulatory requirements do not change considerably from their current situation if they are registered as broker-dealers. They are still left under the self-regulatory organizations oversight being registered as broker-dealers. Due to the limited volume of the alternative trading system it only has to hand in the notice with the Commission containing its operating description and reports made quarterly as well as mantain an audit

SLP Trading Group

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