Mastering the Developmental Process

How Contrary Thinker masters the developmental process and makes it standard.

You can take a good recipe like one for "Beef Wellington," give it to ten different people and you can count on the results to be different in each case. In other words, the end result is a function of the process, the method. If you think back to your school days, you will recall how science developed testing methods with the foreknowledge that the process affected the outcome.

I have pointed out in technical briefs and videos how my method does not use money stops in the early stage of the developmental process. My goal is to have a strategy that is as close to 100% priced based as possible. Only when I have reached a high enough criteria (e.g., pf>2.1) do I bring in money considerations, if and only if needed.

Alternatively, you can preset your risk reward based on money first to develop the priced based strategy around the limited and money target and stop money envelop.

Two valid processes if all the ingredients are the same, like set up and trigger entry, the product will be different.

These two examples should make it clear to you that your process is pivotal and you need to have objectives in mind and set up controls and procedure to reach them.

My system design philosophy consists of three main points. I have other, but this is a good place to start.

#1-strategy entries are based on observation of bar charts and price condition as it changes over time. Empirical study of the market itself, the set ups and triggers (price mechanisms to enter). My process is based on technical analysis and behavioural finance rather than data mining.

My observation of the market has isolated seven types of technical set ups. I listed them in my Contrary Thinker Strategy Classification brief.

#2 the strategies are designed without a buy or sell side bias. They should work equivalently well in both up or down markets, not equally.

#3 through market observation I isolate first principles to build from.

For example, proper trading system development is based on the notion of a-symmetry. The setup, execution and follow through for both a long and a short are the same but the time factor for each side is different.

Greed unfolds over time slowly, fear unfolds faster.

Another principle is based on my opinion that the financial industry is obsessed with transactions and the fact that after underwriting, transactional business it is their bread and butter.

Therefore, if your goal is to design a trading system that hold up well over the long term, design systems that are not interesting from a transactional point of view.

This notion also dove tails nicely into the technical analysis approach to isolating price patterns that repeat just often enough to keep the attention of the disciplined system trader. BUT not so often that every­one else sees it and wants to jump all over it. I call it stealth trading system development.

Within that framework I use several controls or constraints. Here is a partial list:

I test (with exceptions) over a large data-set, 400 plus trades or 5 years plus of historical data. However, I prefer to go back to at the last notable macroeconomic (big splash) event to work from, e.g., QE1, initiated in November 2008, roughly 3 months after the Lehman Brothers collapse.

If you have systems, pull up the system going back to 2003; see what happens to the results after 2008. You will see my point about knowing when conditions change.

System development Method:

Developing a trading system is similar to cooking a great meal; you need two essential factors to produce a great outcome. The first is good ingredience. All trading systems are composed of good ingredience like certain rate of change oscillators, volatility bands, support and resistance zones etc. By analogy when a chef is putting together a great steak, besides having a good cut of sirloin, he will have red wine, oil, soy sauce, brown sugar, and clove of garlic and oregano. The other key factor that goes into the element of a great trading system or a great steak is method, in other words how does the chef or system developer mix the ingredience. What the order is in adding the ingredience, how long do you marinade, how hot of a fire is used and so on. The real key point here is, is that while many system developers and system users solely focus on the magic indicators or ingredience themselves, what is as important or more important, is how the chef cooks the meal. All readers will agree that you can take the same set of ingredience for a great steak, give it to ten different people, and get ten very different steaks dinners. The same holds true with good trading systems.

Part of our method is to design systems, which are asymmetrical. In other words, we do not want identical patterns for both long and short entry. This is based on the notion that the market is 90% emotional and 10% rational. Hence, the old saying that only 10% of the market makes money. With that said, we expect the behavioral patterns of "greed" and "fear", as they are reflected in price, to unfold differently. Therefore, while each subsystem will use a general concept - like trade the breakout - each will take advantage of the peculiarity of the separate emotional pattern. %C-DT-Two is composed of six subsystems. Each can be traded as a stand-alone system. Like %C-DT, it was designed to trade on a fifteen-minute bar. The total system generates about fourteen trades per month or 2.67 per week. It is a day trading system, which exits all trades - at the end of the day - MOC.