Strategy Design

Designing a trading strategy could be the focus of whole encyclopedia, what we discuss here will simply be a quick overview. In it’s simplest from a trading strategy is simply  a set of predefined rules for executing trading decisions. By using an automated trading strategy emotional bias is removed. There are several different types of trading strategies that have been used over the years and usually fall into one of the following categories: 

• Fundamental Analysis based systems.
• Technical Analysis Based systems.
• Volatility based systems
• Mean reversion based systems.
• Trend Following systems.

Building a Trend Following Based System

We will be building a Trend Following system, this will be a very basic system and will help highlight the development process. When developing a trading system it is very tempting to try and re-invent the wheel, however we will start with a tried and tested system that is publically available. The trading system we will be implementing is the original Turtle Trading System and you will need to download a copy of the rules in order to continue with the tutorial.

Learning to Write Pseudo Code

Before reading any more make sure you have printed out and read through the original Turtle Trading System Rules document. This step is very important as the only way to learn this materiel is by taking action and carrying out the steps outlined.

STOP!

Now we can get on with our discussion of pseudo code. When it comes to writing computer programs or in this case automated trading systems translating English into programming code can be fraught with danger. Pseudo Code on the other hand refers to a more structured English for describing a process or program. It is important that you learn to write quality pseudo code as it will make a big difference when you come to coding your system your self or hiring a programmer.

There are many benefits in writing your algorithms or trading logic in pseudo code these include:

• You will gain a detailed understanding of the program or algorithm you are developing.
• Errors in logic picked up early.
• Not constrained by a single programming language.

Below is a brief example of pseudo code:

IF movingAverage1 == movingAverage2 THEN
    SEND buyOrder
END IF

Structured Pseudo Code

In order for us to write quality code we have to take a step back and think about what it is we are actually trying to achieve. Rather then using a trading example we will use an example that everyone is familiar with. Think about the process of going to the shop and buying 1 item let’s say it is milk. What I will ask you to do is sit down and write a step by step process that you could give to a an alien that describes the process in as much detail as possible.

STOP!

Do not move on until you have done this.  Below is the first iteration of solving the get milk problem:

Get into the car –> Start the car –> Drive to the closest shop that sells milk –> Get Out of Car –> Lock Car

Enter shop –> Locate milk –> Determine quantity –> Pay for milk –> Locate car –> Unlock Car –> Drive home.

As you can see if you think about the steps required to carry out this task it is much more complex then first thought. Let’s try and make this a bit more detailed iteration two:

DEFINE approxMilkCost

DEFINE moneyInWallet

 

IF moneyInWallet < approxMilkCost THEN

           CALL enterCar WITH keys

           CALL driveTo WITH bank

           CALL leaveCar

           CALL getMoneyFromBank WITH accountDetails

           CALL driveTo WITH shop

           CALL leaveCar

ELSE

          CALL enterCar WITH keys

          CALL driveTo WITH shop

          CALL leaveCar

ENDIF

 

enter shop

CALL locateItem WITH milk

CALL payForItem WITH money

leave shop

CALL enterCar WITH keys

CALL driveTo WITH home

CALL leaveCar

You can quickly see that by using a more formal language it breaks down complex tasks into simple steps. If we wanted to write a program to solve this problem we would probably go through several more iterations of pseudo code before actually starting coding. I have created a PDF file and have uploaded it so you can fully understand the pseudo code presented and can practice writing some pseudo code for yourself.  In the next article we will be looking at writing our trend following system out in pseudo code so make sure you review everything presented here.

What do I need from a computer

1. Large Screen.
2. Needs to run all trading applications.
3. Needs to be fast. (Not ultra fast).
4. Ability to develop for multiple devices.
5. Decent amount of RAM.
6. Large hard drive.
7. Simple.
8. Good Value for money.

With all these requirements in mind I decided to go with the new 27 Inch iMac model. You can read about the full specifications of this machine 27” iMac, below is a quick rundown:

• 3.06 Intel Core 2 Duo
• 4 gig of RAM.
• 1 terabyte hard drive
• 27 inch backlight LED screen (love the resolution of this machine)

Running my Trading Software

Here is where things get a little more complicated if you want to run most trading software you will need to run Windows. Essentially you have three options for running Windows based software:

1. You can use a virtual machine.
2. You can use Crossover Office or Darwine (note: .NET not supported).
3. Use boot camp and dual boot with OS X.

Each option has it’s strengths and weaknesses, however after weighing all the options I have decided to go with Parallels Desktop version 5. Parallels has excellent integration within OS X and coherence mode allows me to run my Windows applications and OS X applications side by side.  Below is a screenshot:

So far in my limited testing I have not come across an issue running my applications in a virtualized environment. The applications run fast enough for my needs and I can export my virtual machine and run my trading system from multiple locations. It will be interesting to see how this virtualized environment performs with some statistical arbitrage systems. I am also looking forward to getting 64 bit version of Matlab up and running under OS X.

MetaTrader 4

The current version that is most widely used and supported is MetaTrader 4 however beta versions of MetaTrader 5 are currently in testing. In order to build an automated trading system using MetaTrader 4 we will need to write a program that will run inside MetaTrader. There are three types of programs that run inside MetaTrader, these are Custom Indicators, Expert Advisors and Scripts. The screen shot on the right shows the built in indicators that ship with MetaTrader.

MetaTrader- MetaQuotes Language

Custom Indicators, Expert Advisors and scripts are all written in a programming language called MetaQuotes Language, often abbreviated MQL.  Although all three application types are written in MQL there are slight differences between program types.

MetaTrader- Indicators and Custom Indicators

Custom indicators are written in MQL the client terminal will execute the indicator every time a tick is received. The main use of indicators is to graphically display some user defined or built in data relationship. The most common use for indicators is for Technical Analysis. Below are some screenshots which show a built-in indicator being applied to the daily AUD/USD currency chart.

1. With AUD/USD chart open double click on desired indicator.
2. Enter parameter settings and execute.

MetaTrader- Expert Advisors

An Expert Advisor or EA for short share similar properties to Indicators. Expert Advisors or EA’s are written in MQL and are executed on tick data. Expert Advisors or EA’s have trade logic written into them. Basically an EA does everything an indicator can do, however an EA will also open, close and modify trades programmatically. To attach an EA to a currency pair the process is exactly the same as it is for an indicator. There are two sample EA’s that ship with MetaTrader 4 these are the MACD Sample and Moving Average.

MetaTrader- Scripts

Scripts are the final type of application that are available in MetaTrader. A script is designed to be executed only once. Scripts are usually used to automate client side non-trading actions, like modifying data. They can however be used to perform simple trade logic tasks.

MetaTrader – MetaEditor

All the code we write for our automated trading system will be done MetaTrader’s Integrated Development Environment called MetaEditor. MetaEditor allows you to store and manage source code for all projects in an easy to use way. If you are used to Visual Studio or X-Code IDE’s then you will be disappointed with the functionality of MetaEditor. MedEditor does offer syntax highlighting and code completion which is very handy. There is also a built in on-line library that covers most topics. Below is a screenshot of the IDE:

To open MetaEditor from MetaTrader simply press F4 or from the menu bar:

Tools –> MetaQuotes Language Editor

Home Work

Before next article make sure you understand the three different program types that are used in MetaTrader. Also try attaching and using some of the built in indicators in MetaTrader. Before moving on I would also recommend downloading the MQL4 book from MetaQuotes. This is a free book that covers the basics of programming in MQL and in later articles I will assume you are up to speed with the concepts presented in the book.

In the next article we will discuss designing a simple trading strategy and pseudo code.

Before you start

Before we start designing the automated trading system I will assume you are familiar with some basic FOREX or currency market concepts. If you are new to the finance world you may like to read the following articles.

• What’s all this talk about money?
• The FOREX market, the exchange rate and bid and ask spreads.
• Pip’s, Lot’s and a little bit of math.
• Understanding the lingo: Spot market, traded currencies and other FOREX terms.
• The big three in FOREX: Leverage, margin and equity.

To get you quickly up to speed with MetaTrader you can download the software from MetaQuotes. You may also benefit from reading the following basic articles.

• An introduction to MetaTrader Part One.
• An introduction to MetaTrader Part Two.
• An introduction to MetaTrader Part Three.

So now you have a basic understanding of the FOREX or currency market and have MetaTrader installed on your computer we are ready to get started. Below is a roadmap for next few articles.

• What is an automated Trading System and how can we build one in MetaTrader?
• Expert Advisors and Indicators in MetaTrader.
• Designing a simple strategy and pseudo code.
• From pseudo code to a basic trading system.
• Garbage in garbage out: improving modeling quality.
• Testing, Testing, Optimization and more testing.
• Forward testing and performance evaluation.
• Automated Trading System version 2.0.
• So you are ready to go live: Choosing a broker.
• So you are ready to go live: Setting up a Virtual Private Server.

As you can see there is a lot of content that needs to be covered and I am sure as this series progresses there will be content added or removed depending on your input. If there is any materiel you want covered please send me an email or comment below.

Economic Calenders

When it comes to economic calendars you will find an assortment of them on-line. There are only two online calendars that I use on daily basis. They are the Forex Calendar @ Forex Factory and Bloomberg Calendar the screenshots of these calendars shown below:

Out of these two calendars my favourite would have to be the Forex Calendar it has more features and has a much easier workflow then Bloomberg. 

Forex Calendar Features

The first thing you will want to do with both these calendars is adjust your time zone. After I have done this I like to get out my trading notebook and I enter  the announcements that will be relevant to me on that given day. To get more detail about a specific announcement simply click on the detail button. The detail window gives you the following information:

• Source
• Measures
• Usual Effect
• Frequency
• Next Release
• FF Notes
• Why Traders care
• Derived via
• Acro Expand
• History
• Related items

The screenshot below shows the Forex Calendar detail feature in action:

The other unique feature the Forex calendar has is the ability to chart historical release data. Like the detail feature you simply click on the chart icon and an interactive chart will be generated within the same window.  The image below shows the chart feature in action:

Software Tools

I use the free tool FF Calendar to news software as it provides an easy way for me to build a database of future and historic news events on my local computer. This is very handy for some system design work I do. The screenshot below shows my news events history database:

Once my database is populated I can then run a script that overlays each of the economic events on the appropriate chart. This allows for me to graphically view the impact if any on the underlying markets. The screenshot below shows the auto generated chart content on the EUR/USD 1 minute spot chart:

In my next post I will talk about the classic reference book that I often refer to surrounding news releases The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities.

eSignal OnDemand Software

After signing up at eSignal OnDemand you will then be able to download and install the software. After installation the first screen most of you will see is this:

Under Windows 7 it is simply a matter of allowing the eSignal data manger access through the firewall and you will be downloading historical data in no time. I really like the integrated browser within eSignal and the extensive getting started guide. The screenshot below shows the browser running in eSignal:

eSignals extensive documentation makes learning eSignal a less daunting process. I strongly recommend anyone starting out in eSignal to not skip this documentation.

eSignal onDemand Symbol Search

One of the first things you will want to do is find a stock, index, future or option contracts symbol. This is easily achieved using eSignal OnDemand symbol search window. The symbol search tool is very powerful and you will often need to narrow your search criteria. Once again eSignal OnDemand makes this an easy process through the use of drop down lists.  The search feature allows you to quickly add the symbol to the quote board, open up a chart or perform other analysis tasks with the click of a button. Below are some screenshots of eSignal OnDemand symbol search in action.

eSignal OnDemand Quote Window

The quote window allows you to gain a quick snapshot of how a financial instrument is performing. From the quote window you can quickly open charts and analysis tools by right clicking the instrument. You can also take a snapshot of the current quote window and save it as an image file locally or on a ftp server. The image below shows a brief snapshot of my current eSignal OnDemand quote window:

eSignal OnDemand Quote Board

The Quote Board is very similar to the quote window however it provides a little more data on individual financial instruments. You can very quickly visually track how a stock or financial instrument is travelling at a given point in time. The Quote Board is colour coded and shows the open, high, low, close and percent change of a given instrument. An example of my Quote Board is shown below:

eSignal OnDemand Advanced Chart

This is the area that eSignal OnDemand really advances in their charting. The charting features are so extensive it would take two maybe three post just to do them justice. Instead I will go over a quick run down of the features.

Chart Types

1. Bar Chart
2. Candle Stick Chart
3. Line Chart
4. Area Chart
5. PNF Chart
6. PB Chart
7. Renko Chart
8. Kagi Chart

Some of these Chart types shown below (Click to Enlarge):

Chart Drawing tools and Indicators

eSignal OnDemand has an extensive array of drawing tools and built-in chart studies, rather then go through them all the screenshots below show some of the available options.

eSignal OnDemand Page Layout

Using the page layout feature it is very easy to create a specific screen setup for a given workflow and then switch between layouts quickly. This allows for increased productivity and allows you to quickly change perspectives. The layout below is a simple one I created for quickly looking at stocks.

Other Excellent features include:

• The ability to export data to csv or html format.
• The ability to replay bars of a given security.
• The ability to back test trading strategies. (I will cover this in a future post as the features are so extensive).
• Price filtering of bars.
• Portfolio tools.
• Extensive keyboard customisation settings.

Bottom Line

I am very impressed with the range of features and data coverage at such a low monthly cost. I have found the software to be stable and after the initial learning curve fairly easy to use. The charting features and data coverage make this a truly fantastic package for a retail trader who only makes a few trades in a week or month. It is also a good starting point for someone who wishes to get into trading but might be at work during market hours. The bar replay feature allows for you to get a feel for some market dynamics.

In an upcoming post I will detail what eSignal OnDemand has to offer for the quant or algorithmic trader. Overall eSignal OnDemand allows you to start analysing the market at a low cost and when you are ready to move to a real time service you will be able to transfer skills learned. eSignal will also integrate with most brokers so you can make trades directly from eSignal.

A Final Note

eSignal OnDemand will not offer to much to the high frequency trader or day trader. For these practises real time data is essential. eSignal OnDemand does not have free market scanners and some advanced features are sold as an add on service.

The Install Process

As with any operating system install, I backup all my data and get a list of programs and application that will need to be installed. I always choose to do a clean install and reformat all my hard drives as I find this can increase performance. The install process is pretty much a one click affair just grab a cup of coffee and the install for most people will be done in about 30 min. below are a few grainy shots (taken with my phone cam) of some installer screens:

After a few restarts you will be presented with a login screen.

Getting Started in Windows 7

The first thing you will notice in Windows 7 is the graphics text appears sharper windows are vibrant and overall there is a brighter feel to the GUI.  One of the big changes in Windows 7 is the taskbar. If you are familiar with any Windows operating system from Windows XP onwards the switch to Windows 7 will not cause to many headaches.

Windows 7 Taskbar and Start Menu

The taskbar has increased functionality allowing you to quickly launch programs from it, switch between applications and individual application windows with ease. Taskbar shown below:

The application tray area as also had an overhaul allowing for increased customization. It is now possible to hide notification and icons from the tray area. One of the standout features of the new taskbar is the ability to preview open tabs and application windows by simply mousing over the application as shown in the image below:

Another very useful feature is the quick show desktop function located at the end of the taskbar. This allows you to quickly see all of your desktop widgets without leaving the application you are currently in. The start menu is very similar to Windows Vista with a few minor tweaks and no ability to restore the classic start menu .The image below shows the standard Windows 7 Start menu.

Appearance and Themes

Windows 7 allows for easy customization of desktop backgrounds sounds and window colours through the use of themes. You can create a customised theme yourself or download one from the net. The screenshot below shows how straightforward appearance customisation is in Windows 7:

You will also notice Calculator, Word pad and paint have gotten a makeover in this windows 7 release. Screenshots shown below:

Calculator and Paint

Windows media player has also been overhauled and supports many more file formats out of the box, however most people use VLC anyway. To read more about the new features in Windows Media player head over to Gizmodo.

The bottom line

This is by no means a complete review as there are just to many features and new components to discuss. Really Windows 7 is everything Windows Vista should have been. I have noticed increased stability, simplified networking settings and my overall workflow is faster. My PostgreSQL databases are running much quicker. The User Access Controls are much less permissive and as far as compatibility goes I have not had an issue. If you are still in the dark ages and have put off upgrading Windows XP now is definitely the time to do it.

Moving from Vista to Windows 7

This is a much harder proposition to quantify.Vista is now a mature offering, most issues have been ironed out with the last service pack release. Coming from Windows Vista Business edition myself I have found Windows 7 to be quicker, easier to use and I have not had an issue with my wireless networking like I did in Vista. For me the choice was simple to go with Windows 7 as I like to run the latest software. 

If you were disappointed with Vista or are looking to upgrade from Windows XP then Windows 7 might just be the operating system for you. Or if you are like me and like running the latest version of any software look out for this October 22 release. In the coming weeks I will post more about my Windows 7  experiences.

Possible Failures

Note: We will ignore server or broker side failures.

Power failure

Loss of power supply would render computer, router and some telecommunication system unusable.

Hardware Failure

• Multiple components could fail leaving computer unusable.
• Router or modem could fail.

Telecommunication Failure

• Phone line fail
• Internet Service provider fail

This is offcourse a very simplified list of possible failures, however it encompasses the most probable failures you will encounter.

The Solution

Laptop + Wireless Internet Plan

The solution is very simple you need to ensure you have a backup computer that has an independent power supply and a wireless Internet connection with a second Internet service provider and communication line.

Well that is pretty obvious I here you saying. The reason I am writing this post is it is relatively cheap and easy to include this redundancy in your general trading strategy, however few do.

How much does this cost ?

For approximately AU$1000 you can purchase a laptop and wireless USB Internet plan. This is in Australia I am sure options would be available to my overseas readers. 

The Laptop

A cheap Dell Inspiron 15 should be sufficient for our needs features include:

• 2.16 Ghz Celeron processor (not fast but sufficient)
• 2 gig RAM
• 160 GB hard drive
• Windows Vista Home Basic

In Australia 3 offers very affordable prepaid wireless broadband I am sure similar offers are available overseas. 

Keeping  your Backup Computer in Sync

The easiest way to keep both computers synchronised is with the use of SyncToy.  This tool allows you to mirror your working environment on two computers. This can be achieved either over a network or by using an external hard drive.

Download and install SyncToy on both computers.

Setup the folders you wish to synchronise, making sure on the second computer you reverse the right and left folders.

Choose the settings for the  folder pair.

After running SyncToy on both computers you should see a screen similar to the one above.

You may have to play with SyncToy and the folders you choose to synchronise for optimal results.

int handlFile;
handlFile = FileOpen(”symbol.csv”, FILE_CSV | FILE_WRITE | FILE_READ, ‘,’);
FileSeek(handlFile, 0, SEEK_END);
FileWrite(handlFile, Bid, Ask, Close[1], Volume[1]);
FileClose(handlFile);

Note: This code above is intended as a very rough solution. Time permitting I will write a proper EA with error checking and better features. This code however should be sufficient for basic tasks. For more information on EA coding I strongly recommend you download the getting started book:

MQL Tutorial

The Non EA Export Option

Can’t be bothered with that coding garbage? Never fear there is a very simple option. Go to the Tools Menu then History Centre a dialog box similar to the one shown below will appear simply chose the currency you wish to export and select a file name and your done. This process is shown below:

MetaTrader really is an excellent platform for learning the basics of trading and trading systems. I would recommend to anyone starting out in currency trading that they download MetaTrader and start exploring. If you want to learn more about Forex Trading I suggest you visit the Forex section of this website.

• PennyStocking – Part Deux
• ShortStocking
• Tim Raw

So stay tuned 2009 is going to be a big year for global financial markets and a big year for TraineeTrader.