Trading Strategy Refinement

                             
So far we have completed the step 8 of the whole process of design, develop and built a simple trading system and I used SMA (5) crossover SMA (10) as an example. You now actually have a simple trading and back-testing system already! All you need to do is to expand the system, continue to read more and build and test more trading strategies until you have found one that you are comfortable and have confident trading in.

If you have done the earlier exercise and completed the simple back-test system, you would have noticed that the SMA (5) crossover SMA (10) actually lose quite a lot of money on S&P 500 index futures! That is the reason why I want to use the S&P 500 as an example for our exercise. The screen shot of the bottom portion of the completed basic system is here:

Does it mean that the simple moving average crossover strategy cannot be used? One simple way you can try and find out is to change the periods in the SMA crossover that we used e.g. SMA (5) x SMA (15) and step through each time with fixed increment and see the results! I know, that means a lot of work. Some of the commercial software can do the stepping automatically and it is normally meant for the professionals. That would reinforce the concept that nothing is really free in this world as well as time is money!

Another interesting way (which is the focus of my using of S&P 500 index futures as an example) to sometimes accidentally find your trading strategy is when you back-test a strategy that you thought should work but turn out to be a loser, you can inverse it to make it a trading strategy! For example in this case we could inverse the SMA (5) crossover SMA (10) and turn it into counter-trend strategy or trend fading strategy.

Let’s try to change the rules and reverse the buy and sell. Here’s the screen shot of the in-sample.

As predicted, we now have a winner on SMA (10) crossover SMA (5) counter trend strategy on our in-sample. What do you think the strategy will fare against the out-of-sample? This is your exercise again. I will post the result on my next article. Happy trading and good luck!
          

Disclaimer: Taken from CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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WHATEVER YOU READ HERE SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS ARE YOUR OWN RESPONSIBILITY.