On a previous blog post, Shaun Overton said something that is insightful and simple, but often overlooked by people attempting to program their own trading strategy into a working expert advisor. The concept has been confirmed from years of my own manual trading. And I believe if you are to create a working automated trading strategy… this is the place to start.
This is the portion of the blog post I am referring to:
“Certain rules do work dramatically better during different market conditions. The key is to separate the conditions, then apply the strategy selectively. Most expert advisor designers try to develop a strategy that works all the time.
It doesn’t work that way. When the EA starts to hit a wall on the design, the trader responds with new additions and tweaks to force the performance to improve the general performance.
What I’m working on now is a set of rules to identify various market types. I like to think of it as “don’t compare lawn mowers when it’s raining.” There’s a time and a place for each approach and behavior. The trick isn’t so much the rules, but deciding when to apply them.
Categorizing the market helps make the strategy selection process far easier. If the market is highly volatile and ranging, then select a scaling strategy that works well in ranging markets. If the market is trending quietly, then perhaps a basic trend strategy would work perfectly well.”
The full blog post is here: Expert advisor versus manual trader
Can You Create an Expert Advisor For All Market Conditions?
Did you catch the change in approach to developing an automated robot that can increase your possibility of success?
While most expert advisor creators seek to build an automated trading robot that works well all the time… the real opportunity is developing a system to determine what type of market behavior is present, and then applying the correct trading method for the market.
- If the market is trending, apply a trending strategy.
- If the market is ranging, apply a ranging strategy.
Simple right? Maybe so simple it is often overlooked. (I’ll go into reasons I think people make these mistakes with expert advisors in future posts).
Let’s take a look at what I am talking about. Here is a snapshot of a trending market:
The photo shows the AUDJPY pair on the H1 timeframe for the period of April 3rd to April 10th. Clearly, this is a trending market. Let’s say we applied a simple strategy of BUYING the end of day candle close and closing the trade the next day. (This is just an example, so I’m not going into stop loss, take profits or anything else you would need to do with a real strategy. I just want to keep it simple).
This simple strategy would have resulted in 769 positive pips.
OK, let’s look at an example of a ranging market:
This is a snapshot of the EURUSD pair on the H1 timeframe from March 27th to April 3rd. This time, we are going to SELL at the end of day candle close when price is near the top of the range, and BUY at the end of day candle close when price is near the bottom of the range. (Again, this is very simplistic on purpose and only for sake of example).
The result of this simple strategy would have been 286 positive pips.
So, potentially 1053 pips of profit in less than two weeks of trading, on two currency pairs, taking only one trade a day on each currency pair. Pretty impressive, isn’t it?
I’m not suggesting I would be able to correctly identify the beginning and ending of the range or the beginning and ending of the trend. I don’t have a crystal ball.
What I am suggesting is once the type of market is identified, it is very simple to get nice profits from even the simplest of trading strategies.
Focus On The Right Strategy For The Right Market Condition
When people hear words like “automated” or “robot”, they think the possibilities are endless. Visions of extreme profits very quickly immediately flash into their heads. They believe, and are lead to believe by unscrupulous, commercial robots marketers, that an automated trading solution should greatly outperform their manual trading counterparts.
If a good manual trader can get 40% profits a year… a robot should be able to get 4000%.
As a result, they set out to build robots that trade well in every market condition. Plus, the robot should trade multiple times during the day, pulling out more and more profits each time. If that were possible, incredible wealth is just around the corner.
Trying to come up with an extremely complicated set of trading rules to profit in every market is a very difficult task to undertake. Usually what happens is the strategy works very well in certain markets… but gives back a lot (or all), of the profits when the markets change. When tweaks are made to keep this from happening, the robot stops being as profitable when market conditions return to favorable.
My advice is to simplify the goals you want to achieve with your automated trading.
- If you have a good strategy that works well in trending markets… create a robot to trade only in trending markets and work to develop rules to determine trending markets and their direction.
- If you have a good strategy the works well in ranging markets… create a robot to trade only in ranging markets and work to develop rules to determine the beginning and end of the range.
A automated trading robot does not have to trade all the time to be extremely profitable. It only has to trade well in the market it is created for. When thinking of automated trading, a specialist is much more desirable than a jack-of-all-trades.
I truly believe switching focus from a wonder robot that trades all the time to a specialized robot that trades only under the best conditions is the path to long term success with automated trading. I hope this post has give you some things to think about and has sparked ideas that leads to your future success.
Next Friday I want to talk about Why Forex Robot Creators Don’t Use Sensible Strategies. See you then.
The trouble I have with this is that by the time you identify if the market is trending or range bound it might have gone away…
In your trend following example getting 769 pips is only possible if you started the trend following system at the start. How about using a month of data and using a filter to show us when you would turn the trend follower on and off. Then show us the results from filter and no filter to show if it’s worth it. Then try those parameters on some out of sample data.
Shaun Overton says
My opinion is that these should be decisions that only change 1-3 times per year. I find that most traders zig zag far too often with their decisions. High level environments (ranging vs. trending) take 6-12 months to shift gears.
I agree with Patrick, it is difficult to determine whether its trending or ranging. You might ask one person, he will tell you its ranging then you ask another person and he will tell you the opposite.It always looks good in hindsight but hard to predict at current price. I think the key is to create an EA that specializes in a specific market, yet one that can stand the rough conditions without giving away too much of the profit.
Great example is the YEN crosses in the last week, how could anyone foresee that?? When do you turn on the trending/ranging strategy?? BoJ just doesn’t give up and you will get caught out one way or another.
then it is very simple indeed..ea should work with stoploss
but market conditions can change several times a day and no one can accurateky said what is next market condition .
for example trending market you enter the market change to choppy you change your strategy again market is trending …