Making Automated Trading Systems – 6 Tips for Successful System Design

One of the questions I get asked the most is how I come up with and design all my mechanical trading strategies. Several people have wondered how I device my simple criteria for systems and how such simple logic can indeed be successful under today’s ever-changing market conditions. However, what fellow traders often don’t realize is that my system design is based on some very simple principles anyone could follow to achieve success in automated trading. On today’s post I want to give you – fellow traders and system designers – some tips about system design so that you too can benefit from my experience around this area of successful strategy production.

Within the next few paragraphs you will find some very practical tips to help you with you design successful automated trading systems. I am absolutely sure that these tips will help you overcome some of the most prominent obstacles in automated trading, avoiding the mistakes that condemn most people who embark on this journey to failure and frustration. So how can you improve your system design and come up with better and more likely successful strategies the next time you design an expert advisor ? Keep reading to find out !

1. Understand what your system will attempt to do. Most people who attempt system creation often don’t understand what their system will be doing. It is not a matter of saying “it will be making money” or “it will follow an MA cross”, it is a matter of understanding what the system will attempt to capture and why it has a fundamental reason to work. Having an idea of how the market works and how your strategy exploits an inefficiency of the market is vital for success.

2. Everything must make sense. I cannot tell you how many times I have come up with people who want me to help them program systems that have a ton of indicators they don’t even understand. In order to be successful, absolutely every single thing you add must have a reason and the reasons must not be shallow, like “because it filters ranging markets”, they have to be clear and mathematically precise. Something like “this indicators helps me detect when price has moved in X direction because the indicator’s mathematical meaning shows Y about price…” is more like it.

3. Analyze and analyze deeply. Often traders will attempt to design a system based on a few weeks of forward or live testing or even on just a few months of “visual” backtesting. I can never stress enough that analyzing and testing systems on a statistically significant period is vital for success. I always analyze systems for at least 2-5 years of historical data before I even consider the coding of strategies. Not only does this analysis provide me with information about the system but it also helps me understand the underlying reasons why it does or doesn’t work.

4. Do a mathematical expectancy analysis of the entry logic. When you are making a new trading system you always need to know if your expert has potential and what time frame and type of trade your system will be capturing. Doing a mathematical expectancy analysis is vital to get this information. This allows you to know for sure which time frame your system works best on and it gives you a good amount of information regarding the probable successful of your trading strategy.

5. Have simulation reliability in mind. When you are designing your trading system you need to do so with simulation reliability in mind. Being able to carry out reliable backtests is very important when evaluating trading strategies and taking into account this factor when you are programming your system is vital for success. If you program your system with simulation reliability as a main concern chances are that the results you will get will be much more reliable and consistent with live trading results.

6. Have adaptability in mind. Many traders decide to code their strategies with fixed exit target values (like fixed pip values of a TP and a SL) something which is bound to bring your systems to failure as different market conditions start to develop. Considering adaptability from the beginning and including adaptability within your mathematical expectancy analysis is important to guarantee the long term success and profitability of any trading system. If you look at systems that have been historically successful, most – if not all of them – use some for of adaptive exit.

I hope that the above tips help those of you interested in system design achieve better success in your quest towards the development of a useful trading strategy. Obviously there may be other aspects worth considering but this – in my experience – are the most important to know if you want to develop a successful trading strategy. Do you have any other useful tips or information you would like to leave ? Perhaps some personal experience ? Just leave a comment and we’ll discuss it together :o)

If you would like to learn more about automated trading system development and how you too can create likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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One Response to “Making Automated Trading Systems – 6 Tips for Successful System Design”

  1. dr_ceran says:

    Hi Daniel,

    could you elaborate further about point nr. 4?
    You also mentioned that in at least one other post, and I was wondering how exactly to this expectancy analysis BEFORE I start coding?? somehow I don’t get it =)


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