Kevin J. Davey [Kevin J. Davey] - Building Algorithmic Trading Systems: A Trader’s Journey From Data Mining to Monte Carlo Simulation to Live Trading, + Website

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Weve now reached the end of my trading journey. Twenty-some odd years in the making, youve seen some extreme downs, some extreme highs, and a lot of time spent in between both floundering around. First and foremost, I hope this book serves as a warning to all the new traders out there. Learn from my experience:

• Trading is tough. Exceedingly tough. Part-time folks trading from their home are up against professionals. The professionals are really great at taking your money.
• There is no Holy Grail out thereno magic trading strategy that you can buy for $100, $1,000, or even $10,000. There are decent ones for sale, but none is perfect.
• Where there is potential reward, there is potential risk. The results equity curve might only show the reward side of the equation, but remember that risk is always thereit just may be hidden.
• The best road to profits is to find your own trading strategy, one that meets all your goals and objectives. Just dont expect the process to be easy.

I learned all of these lessons, and many more, before I really understood how to trade. Even today, I still struggle. No trading strategy lasts forever, and I find myself constantly reinventing my trading, and creating new strategies, in an attempt to stay ahead of the pack. If I relax for a while, I inevitably find my performance suffers.

The majority of this book has focused on developing trading strategies. While I certainly value the contribution of trading psychology and position sizing and money management, I view them as icing on the cake, with the trading strategy as the cake. I look at trading this way for two reasons:

• All the positive trading psychology in the world will not make you profitable if your strategy is a loser. Positive thinking, detailed journaling, breathing exercises to calm your mind, and all other mental-type activities are great, but they still do not take the place of a solid strategy. Many people, and many trading psychology coaches out there, seem to think that having the proper mind-set ensures profits. It is just not true.
• Proper position sizing and money management are important if you have a winning strategy, but conversely if you have a losing strategy, no position sizing or money management method will ever make you profitable. It might help you burn through your account more slowly, but a losing strategy is a losing strategy, no matter how you dress it up. Just think of trading like casino gamblingthe house wins because it has an edge, and gamblers lose because they dont have an edge. Changing bet sizes doesnt alter the irrefutable fact: without an edge, eventually you will lose.

For long-term success, you really need to find a winning strategy. This entails a lot of grunt workfinding ideas, testing them, refining them, and hopefully eventually trading them. A few years ago, I kept track of my trading strategy development. I found out that I had to test about 100 to 200 trading ideas before I found something worth trading with my own money. Most people would likely abandon trading long before testing 100 ideas. Others would say, Yes, it takes Kevin 100 ideas, but he is a dullard. I am much smarter, so it will only take me less than 10 ideas. Those same people, unfortunately, usually take shortcuts or cheat to get what appears to be an acceptable trading system. Shortcut takers, in the long run, usually lose.

In the last sections of this book, I put everything together, and walked you through the development of two trading strategies for the euro currency futures. As of this writing, I am trading these with my own money, but I keep a close eye on their performance. In the long term, they hopefully will succeed, and as they do, Ill increase my position size accordingly. If they do not succeed, then Ill eventually swap them out with other strategies. Although I hope that every strategy I create does well, I also know that is not always the case. Surely, the performance of these two euro strategies so far bears that out. They are currently making money but underperforming, and maybe they will continue to do so, or maybe they will return to their long-term averages. One never knows, so I usually prepare for the worst, and hope for the best. Many times, the end result is somewhere in between.

In closing, Ill leave you with one thought: if you put your mind to becoming a good trader and follow that up with proper effort, you can be successful. I am living proof of that, although hopefully your journey will not take as long as mine did. But, to succeed long term, plan on dedicating a lot of time, effort, and money to the cause. Trading is like anything else good in life; if it is good, it is worth working for. Dont be tempted by those offering shortcuts, easy fixes, magic formulas, or Holy Grail systems. Those folks will only sidetrack and derail your effort. Put the time in, follow an approach that other successful traders use, and youll be much better off. I wished I had taken that approach back in the late 1980s, when I first learned about futures trading from the Cowboy Trader.

Good luck, and happy trading!

APPENDIX A
Monkey Trading Example, TradeStation Easy Language Code

Strategy 1: Baseline Strategy (No Randomness)

input: nContracts(1);var:ssl1(1);var:ssl(2000); if date >= 1070316 and date < 1080314 then begin ssl1 = 0.75 ; end ; if date >= 1080314 and date < 1090311 then begin ssl1 = 0.75 ; end ; if date >= 1090311 and date < 1100310 then begin ssl1 = 0.75 ; end ; if date >= 1100310 and date < 1110309 then begin ssl1 = 0.5 ; end ; if date >= 1110309 and date < 1120310 then begin ssl1 = 0.5 ; end ; if date >= 1120310 and date < 1130308 then begin ssl1 = 1.25 ; end ; if date >= 1130308 and date < 1140308 then begin ssl1 = .75 ; end ; if date >= 1070316 then begin if closeclose[1] and close[1]>close[2] then beginSellShort ncontracts Contracts next bar at market;End; SetStopContract; setstoploss(minlist(ssl1*BigPointValue*avgtruerange(14),ssl)); end;

Strategy 2: Random Entry, Baseline Exit Strategy

input:iter(1),percentlong(.400),holdbars(2.5),exitclose(0),oddstradetoday(.47),begindate(1070319);var:posstradetoday(0); //entry is random input: nContracts(1);var:ssl1(1);var:ssl(2000); if date >= 1070316 and date < 1080314 then begin ssl1 = 0.75 ; end ; if date >= 1080314 and date < 1090311 then begin ssl1 = 0.75 ; end ; if date >= 1090311 and date < 1100310 then begin ssl1 = 0.75 ; end ; if date >= 1100310 and date < 1110309 then begin ssl1 = 0.5 ; end ; if date >= 1110309 and date < 1120310 then begin ssl1 = 0.5 ; end ; if date >= 1120310 and date < 1130308 then begin ssl1 = 1.25 ; end ; if date >= 1130308 and date < 1130501 then begin ssl1 = .75 ; end ; if date >= 1070316 then begin if closeclose[1] and close[1]>close[2] then beginbuytocover ncontracts Contracts next bar at market;End; SetStopContract; setstoploss(minlist(ssl1*BigPointValue*avgtruerange(14),ssl)); end; posstradetoday=random(1); //random number for todays trade If date>begindate then begin If posstradetoday<=oddstradetoday then begin //trade will occur today //enter trade If random(1)