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4 Common Active Trading Strategies
Active trading is the act of buying and selling securities based on short-term movements to profit from the price movements on a short-term stock chart. The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy found among passive or indexed investors. Active traders believe that short-term movements and capturing the market trend are where the profits are made.
Active trading is a popular strategy for those trying to beat the market average.
There are various methods used to accomplish an active trading strategy, each with appropriate market environments and risks inherent in the strategy. Here are four of the most common active trading strategies and the built-in costs of each strategy.
- Active trading is a strategy that involves ‘beating the market’ through identifying and timing profitable trades, often for short holding periods.
- Within active trading, there are several general strategies that can be employed.
- Day trading, position trading, swing trading, and scalping are four popular active trading methodologies.
1. Day Trading
Day trading is perhaps the most well-known active trading style. It’s often considered a pseudonym for active trading itself. Day trading, as its name implies, is the method of buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight. Traditionally, day trading is done by professional traders, such as specialists or market makers. However, electronic trading has opened up this practice to novice traders.
2. Position Trading
Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading. Position trading uses longer term charts – anywhere from daily to monthly – in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend.
Trend traders look for successive higher highs or lower highs to determine the trend of a security. By jumping on and riding the “wave,” trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels. Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. This means that in periods of high market volatility, trend trading is more difficult and its positions are generally reduced.
3. Swing Trading
When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades. Swing traders often create a set of trading rules based on technical or fundamental analysis.
These trading rules or algorithms are designed to identify when to buy and sell a security. While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another. A range-bound or sideways market is a risk for swing traders.
Scalping is one of the quickest strategies employed by active traders. It includes exploiting various price gaps caused by bid-ask spreads and order flows. The strategy generally works by making the spread or buying at the bid price and selling at the ask price to receive the difference between the two price points. Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy.
Additionally, a scalper does not try to exploit large moves or move high volumes. Rather, they try to take advantage of small moves that occur frequently and move smaller volumes more often. Since the level of profits per trade is small, scalpers look for more liquid markets to increase the frequency of their trades. And unlike swing traders, scalpers like quiet markets that aren’t prone to sudden price movements so they can potentially make the spread repeatedly on the same bid/ask prices.
Costs Inherent With Trading Strategies
There’s a reason active trading strategies were once only employed by professional traders. Not only does having an in-house brokerage house reduce the costs associated with high-frequency trading, but it also ensures better trade execution. Lower commissions and better execution are two elements that improve the profit potential of the strategies. Significant hardware and software purchases are typically required to successfully implement these strategies. In addition to real-time market data, these costs make active trading somewhat prohibitive for the individual trader, although not altogether unachievable.
This is why passive and indexed strategies, that take a buy-and-hold stance, offer lower fees and trading costs, as well as lower taxable events in the event of selling a profitable position. Still, passive strategies cannot beat the market since they hold the broad market index. Active traders seek ‘alpha’, in hopes that trading profits will exceed costs and make for a successful long-term strategy.
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What is The Best Trading Strategy To Earn A Living (Updated 2020)
Answer: The best strategy is the one that fits your circumstances and personality best.
We get this question often because we are the website that everyone goes to for trading strategies. I wish I could give you a straightforward answer to this question. However, I think you know as well as I do that this is a complicated question. To find the solution entirely, we are going to have to give you a complete, in-depth answer.
The answer is the one that fits your style and circumstances. We are going to do that by asking and answering many questions. By the time we are done with this, you will know what strategy is best for you.
I could easily say that the best strategy is a price action strategy, and that may be true for me. But it would not be right for you. This is because you might not be able to trade as many hours or at the same times as me. That is why to find the best trading strategies, they must be custom built for each person.
Today by the end of this article you will know the best trading strategies for you.
Whether you need to develop a Stock Trading Strategies PDF that you can look at any time. Or a complete list of strategies that work. We will help you know precisely what you need to trade well.
I recommend that you bookmark this article right now because you will need to come back here often. You will be using this to assist you to build the strategy that is custom for you. We are going to have many trading strategy examples that you can use as a template to help build. You’ll complete a basket of useful strategies that you will be able to reference in the future. Here is another strategy called best Gann Fan Trading Strategy.
Question: What is the best trading strategy for Intraday?
Answer: Intraday trading will take a great deal of your time. This is because you will be focusing on the charts all day that you will be trading. This type of trading requires a great deal of focus. Make sure the focus is one of your strengths. If you cannot focus, intraday trading will be extremely difficult for you to master.
Here is a list of strategies that we have compiled that work well for intraday trading:
Question: What Are the Best Forex Trading Strategies?
The Forex Market has a high level of price movement which means that there can be fakeouts. This can move you out of your position. We recommend that you find strategies that will allow you to put a stop loss in a place. That will keep your trading from being stopped out quickly.
Here are three strategies we recommend if you start trading forex:
Question: What are the Best Strategies for Beginners?
Answer: When searching for beginner strategies it is essential to know how long you will be holding your position. If you are going to keep your trades for less and one day that means you are a day trader. And you should find a day trading strategies pdf that you can use as a guide to follow during each trading session.
Here are three strategies we recommend for beginning traders.
Question: What is the best trading strategy for Cryptocurrency?
Answer: CryptoCurrency is a challenge. This is because of the massive price swings that can take a trader out of his trade quickly. Here is a strategy we recommend for trading bitcoin. The scorching market means that everyone will be jumping into it. This is why it is essential to get an excellent plan so you will have an edge over everyone else.
Question: What are the best trading strategy books?
Answer: There are many books that traders should read if they want to become skilled in the craft of trading:.
Here are three books that we recommend if you are looking for trading books.
Question: What is the Best Trading Strategy in the Stock Market?
Answer: Here at Trading Strategy Guides we develop and teach strategies for every market. And we have a list that we recommend if you are trying to learn how to trade in the stock market. The Stock Market is one of the most popular markets for learning how to trade.
Here is the list of the best Stock Market Strategies:
Question: What is the best trading strategy for crude oil?
Crude Oil is a futures market. There are some things that you need to be aware of to trade it correctly. And we have some key setups to show you, including the best strategy pdf and best forex trading strategy pdf. It can also be essential to check the news for such events as the oil supply and demand release each week. We also have training for winning news trading strategy.
Here is what we recommend for trading crude oil.
Question: What is the best strategy for trading commodities?
Answer: We have developed several strategies that help traders to trade commodities. Here are two of the ones we recommend for trading commodities.
Question: What is the best trading strategy for small accounts?
Answer: This is one of our favorite questions here at trading strategy guides. We believe that traders should start small and grow accounts as their skill improves. There is a myth that states, to become successful you must start with a large sum of money in your account. That is merely not true. We have targeted strategies that help you if you only have a pittance to trade.
We have created the perfect strategy for growing your small account.
Here are two that we recommend:
Question: What is the best strategy for scalping the markets?
To scalp the markets, you need to have a short-term trading strategy along with an intraday trading mindset, and we have just the approach to help you with that.
Here are Three scalping strategies that we recommend.
Question: What are the best technical indicator strategies?
Here are three of the best indicator strategies to improve your chart reading skills:
Question: What trading strategy is the best for youtube?
Answer: We have posted many strategies on youtube and will continue to post more for you to learn from on a weekly basis. We have even published what some have said is the best forex trading strategy youtube video out there. The Video component of the learning takes learning to another level. That is why it is crucial to attempt to use visual, audible and execution learning methods so that you genuinely understand more deeply.
Question: What is the best trading strategy on TradingView?
We have developed many strategies, and they all work well with TradingView. However, there are two that we recommend that if you are going to be using the trading view as your trading platform, then you must try these two strategies out.
Question: What is the best options strategy?
Answer: Trading Options is an excellent way for traders to execute trades in the stock market. We have two unique strategies for options we recommend. This style of trading uses a simple set of rules based on technical and fundamental analysis.
Question: What is the best trading strategy exit?
Answer: When trading most traders think only about the trading strategy entry and entirely forget about the exit. The truth is that closing your trade is one of the most critical parts of your trading strategy. This is because if you can’t exit the trade with the profit, you won’t be a winning trader. Make sure you develop a plan that will help you get out of trades quickly and do not just focus on how to get into the trades.
Question: What is the Best Automated Trading Strategy?
Answer: Using Automated trading strategies for profit is extremely challenging because there are so many wild claims on the internet about making millions of dollars. Do your homework do not invest in something unless you understand how it works. Then I recommend starting very small with your investment and slowly increasing the amount you spend as you begin to learn how efficient the automated system is.
Question: What are the best blogs for trading strategies on the web?
Answer: The best trading strategy blog is the Trading Strategy Guides Blog. This is because they have a commitment to quality and excellence in their articles and posts. They use simple step by step instructions that make even the most demanding strategies easy to trade. The reports include the highest quality images. They also have videos about each plan to make the learning that much better. Finally, they put out an infographic for each strategy to indeed make the learning experience complete.
But don’t let us tell you this. See what that trading community has to say about the best trading strategy blogs on the internet.
Part Two: How to Determine What is The Best Trading Strategy For You.
Each trader needs to have a trading routine to find the perfect trading strategy that works for them. If you as a trader take your time on the front end to plan things out and ask yourself the right questions, then you will be able to get a head start and be ahead of 90% of the other traders. Developing a process that you use every day, will assist you in finding the exact plan that will be needed for you.
Some of the things you need to know are:
How much time per day do you want to dedicate to trading?
This answer will vary based on your circumstances. If you work a 9-5 job, then you will not be able to dedicate as much time to trading than someone who doesn’t work a full-time job.
If you are in that category, you will have to find the best long-term trading strategy that you can and then trade that in the mornings before work or in the evenings after work.
One of the great things about trading is that your strategy can be adjusted to fit your circumstances. No Wall Street day job needed.
Another thing you should be asking yourself is how patient you are. Because if you are not a patient trader, then you will not be able to wait for days and hours for entries. In that case, it might be necessary for you to find the best short-term trading strategy because you will not have to be nearly as the patient when trading in the lower time frames.
When determining your trading strategy, you will also have to consider how much money you will have to start with. The amount of money in your trading account can make a big difference as to what type of strategy would be best for you. If you start out with a small balance of fewer than 1,000 dollars, then you would be wise to find the best Mt4 trading strategy. This is because Mt4 is a platform that forex traders rely on. They do not need a large sum of money to start trading. It would also be wise to consider finding a suitable method for keeping your stop losses small. Larger stops can mean more significant declines.
Bottom Line Best Strategy Tips for success:
Yes, you can earn a living buying and selling using online trading platforms. The most important thing to remember is that you need to find a strategy that fits your specific trading style. The way to get the most accurate entries is to try to find the trend by looking at the various highs and lows. This should be able to help you to learn day trading and help things easy by always taking the most simple trade.
Remember always have a profit target when you are taking your trade that will help you with your risk to reward ratio and find the best trade exits.
Trading for a living is not easy, but if you have a fixed income, it can be an excellent additional source of revenue.
Strategies that use specific trade entries and use a reliable risk management methods will help you on your way to having an excellent personal finance plan. The level of risk that you will be using should be comfortable for you, and we recommend contacting a financial advisor to help you with your situation.
We recommend that you test your trading system before putting real money into the markets and that you always use a trading system that uses many resistance levels so that you know how the market will react in as many situations as possible.
Overall Swing traders (also known as position trading) have the most success when first starting out to find the best trading strategy to make a living.
It is also possible to use exchange traded funds or ETFs for any of these strategies. The use of these funds relies heavily on the earnings calendar and the economic calendar. So make sure that you are always following the market news, so you don’t get burned.
There are many types of strategies that can be used to achieve financial freedom. One of those we didn’t discuss in this article was the fundamental analysis trading strategy. We will discuss that method of trading during a later section.
In summary, it is essential to use the right technical indicators to utilize each additional strategy whether it is range trading or momentum trading.
If you have any additional queries on finding the best trading strategy, then please leave a question in the comment section, and we will be glad to help you find what you need to help you become a successful trader.
Thank you for reading!
Please leave a comment below if you have any questions.
Also, please give this strategy a 5 star if you enjoyed it!
How to test Expert Advisors – a comprehensive MetaTrader 4 manual
Written and compiled scripts, so-called Expert Advisors, can be run on any MetaTrader 4 terminal. This factor has created a whole market of user programs, distributed both free of charge and on various terms of a one-time payment or subscription. Today, you can find more than one hundred thousand such programs on the Internet.
In theory, Expert Advisors should contain an open and repeatedly tested on demonstration trades and in real conditions strategy, and test results are usually attached to the program. It turns out that traders acquire fully automatic, already tested algorithms.
In practice, this is not always the case, and since robots get access to a real deposit, it is very important to make a rapid assessment of the advisor purchased at the first stage of the choice, regardless of the delivered and advertised results.
There are only two ways to check the program for compliance with the trading strategy, for code errors and for real profitability. Any MetaTrader user can check the effectiveness of the program via the strategy tester or run the program on a demo account.
Let’s consider both ways of testing in detail.
Preparing the MetaTrader 4 terminal for Expert Advisor testing
A custom script with a coded strategy for MetaTrader 4 is a mql4 or ex4 file. The trader should ensure the correct path when installing an Expert Advisor, so that it can be found and run on the MetaTrader 4 platform without problems.
The installation looks like an ordinary file copying, but there is one important feature — the folder for placing the Expert Advisor files is opened via the running trading terminal.
The first step of the trader is to make sure that the EA files are in fact intended for MetaTrader 4 by checking the extension (it should be mql4 or ex4). For the sake of providing an example, we will install VR Smart Grid robot, which consists of a single file.
The second step is the MetaTrader 4 launch
The third step is to open the Expert Advisor installation folder via the “File” -> “Open Data Folder”.
After this operation, the folder window will open as usual.
Indicators, Expert Advisors, auxiliary libraries, presets, templates and other files related to the custom configuration of the platform are located in the MQL4 folder. It is enough to open it to immediately find where to copy the Expert Advisor files due to corresponding folder names.
Step four – distribute the Expert Advisor files to the appropriate folders, following the recommendations attached to it or relying on extensions:
- mql4 and ex4 — to the Experts directory
- dll libraries — to the Libraries folder
- presets files — to the Presets folder
In the example, we will copy the VR Smart Grid file to the Experts folder.
If the Expert Advisor is installed correctly, its name will appear in the Navigator, after MetaTrader 4 restart.
The final stage before testing, is ticks history downloading. Define the instruments you want to work with and press F2.
Select the desired currency pair or CFD contract in the Quotation archive window, and then click the Download button. The tick history will be downloaded, the progress will be marked by the green bar at the bottom of the Quotation Archive window.
If the history is already loaded into the Metatrader 4 terminal and the broker’s servers do not contain new data, a message will appear with a suggestion to recalculate timeframes. Just in case it is better to make the suggested update of tick data.
The downloaded archive of quotations will provide the strategy tester with database for modeling (restoring) candles when recreating the trading history.
Using the Strategy Tester
The first way to test Expert Advisors – using the Strategy Tester – is faster, but it does not provide accurate results. This is a great option for pre-testing the script.
Preparation of Metatrader 4 Strategy tester for running Expert Advisors
The strategy tester opens as the bottom window of the Metatrader 4 workspace, allowing the trader to test and optimize trading systems and to keep track of current positions at the same time.
The trader can launch the service at any time through the “View” menu or via combination of shortcuts specified in the “Strategy Tester” option.
The developers tried to make this application intuitive, so a user, even barely familiar with the Metatrader 4 platform, has almost no questions, but some features are quite specific.
Setting up Advisors properties of the Metatrader 4 Strategy Tester
The EA properties are located in the right corner of the strategy tester field and control the direct setting of test modes divided into three tabs:
Never optimize the initial run of the Expert Advisor! Performance test of any trading system should not be started with an attempt to “adjust” the parameters of the indicators and conditions included in it.
The optimization system uses a “genetic algorithm” that can effectively improve the performance on the test. The side result of his work is parameters tailoring for a specific historical period and instrument loaded into the tester. In real trades, when faced with another form of fluctuations (volatility, laps, etc.), the robot will make a lot of losses.
- The “Deposit” defines the currency, the starting size of the deposit, the direction of trade (in both directions or trades of only one type) and the type of optimization that will be disabled
- The “Input parameters” are the settings of the Expert Advisor, the tab is completely identical to the one that appears when the robot is added to the chart.
As already mentioned above, for Expert Advisor’s correct operation, you should follow the settings recommended or set by default by the developer of the trading system.
In some cases, changes are possible within “presets”, special files attached to the robot. If the Expert Advisor is popular, the settings files can be found independently on the Internet.
The VR Smart Grid robot, considered for example, has similar files of custom settings, which after downloading should be placed in the Presets folder. To do this, you need to open the MQL folder in the terminal via the Data Catalog, so that you can place the file with the extension “set” in the Presets directory.
Then, in the strategy tester, you will only have to click the “Upload” option and select desired file in the window that pops up. Often, the Tester folder is opened by default when you select a download, so use Windows navigation to find the Presets folder yourself:
Metatrader 4 tester fields description
When you open the test service, the default option “Expert Advisor” is set to the left. It automatically displays the entire list of robots in the Experts folder and the Navigator window.
If you select the second option – the indicator, a list of files in the Indicators folder will be displayed.
To run the Expert Advisor test, double-click on its name in the drop-down list. Next, the instrument, according to the quotes of which the effectiveness of the trading system will be checked, is selected in the same way – one click is enough to display it in the settings window.
The “Model” function determines the accuracy and duration of testing, the “every tick” method restores historical quotes using all data of the archive, so it is the longest, the other two types do not provide an accurate estimate and are used by developers at the stage of testing “trading hypotheses” to save time while searching for ideas.
In some cases, when the logic of the robot is “tied” to a long-term strategy, where trades are opened at the price of opening a candle (bar) at the beginning of the day, you can resort to a model with the appropriate name — will allow the trader to “rush” the Expert Advisor through the maximum time period.
The duration and accuracy of the test is affected by the date or length of the historical segment. Some traders believe that the bigger it is the better, but empirical experience proves that:
It is much more important to choose a section with the most symmetrical (even) distribution of upward trend, flat and various volatility levels
A segment from 2000 to 10,000 candles or bars of the timeframe — the interval selected in the “Period” menu — is enough
As mentioned above, one of the tasks of testing is to check the “logic” of opening and closing trades, the work of money management — automatic placement of pending orders fixing losses and profit. Thanks to the visualization option, the trader can personally observe these processes in the “high-speed run” mode of trading sessions.
The “Visual mode” option offers the user to choose the inclusion and duration period of the trading demonstration.
Setting the above settings allows you to simply press the start button of the test, leaving out the “Spread” parameter, where the default value is “Current”. This can lead to unreliable results for two reasons:
- When testing at the weekend when the market is closed, the spread on the instruments may be implausibly overstated
- In real trades, the spread can change, besides there will always be slippages, delays affecting the entry and closing price of the transaction
Sometimes traders input the spread cost manually, higher by one point of its real value, in order to somehow take into account the losses described above.
Launching the Expert Advisor Testing
After choosing the method of modeling the trading history and the length of visualization segment, set a fixed lot size equal to 0.1 in the EA input tab. This will help to display the dimension of the test report indicators in points, which will make the analysis of test results convenient.
Testing starts by the “Start” button and passes automatically, displaying only the segment selected on the chart above. You can pause (1), accelerate (2), reduce or expand trades by moving the slider (3).
If the “every tick” method is selected, the candles are recreated in the tester and the price produces fluctuations, almost with reliable accuracy, which allows to display trades not at the opening and closing price, but directly “inside” the candle.
After the test is finished, new tabs are added to the service, which were not present at the tester startup stage: Journal, Graph, Results and Report.
Analysis of the Expert Advisor Test Results
Preliminary evaluation of the effectiveness of the trading algorithm is carried out:
- Generalized, with the help of graphical analysis of the yield curve — equity
- Mathematically, by checking the correspondence of the obtained parameters with valid theoretical values
- Step by step — considering each trade on the chart and in the results table
The stability of the EA code is determined by the tester log.
“Testing finale” Anomaly
At the final stage of testing in the Metatrader 4 strategy tester, the service performs a “trading breakout”, i.e., forced closing of orders with an actual loss or profit. While testing medium-term, long-term strategies or Expert Advisors practicing order grids, as in the case of VR Smart Grid under consideration, the trader can see an inflated loss at the end of the test, which will be reflected in a sharp drop in the curve of profitability — equity (equity).
The Results tab contains a detailed description of the completed or modified trade transaction, as well as pending orders and trading results.
All actions of the Expert Advisor’s automatic strategy have a sequential numbering, which is contained in the first column for easy navigation when searching for work failures, as well as the time of operation, located in the second column.
Numbering of trades is contained in the fourth column “Order”. When modifying limit placed orders, it does not change, for example, the yellow marker marks the placing of the second limit order for sale, so the column contains the number 2. It is repeated in the following line: due to the change of the previous Sell order, the robot added a related stop loss order to limit losses in case of an unfavorable price movement.
The trade type is determined by the third column, the operation of the money management unit of the strategy is displayed in S/L and T/P (stop loss, and take profit) numbers. The “Price” column shows the price level of pending or executed orders on the market, “Balance” – the dynamics of the deposit changes.
In the above example of testing the VR Smart Grid Expert Advisor, the trader should pay attention to how the volume increase and the trailing stop is rearranged after the positive change in the in the direction of the open trade and check on the chart whether these operations coincide with the logic of the robot algorithm.
The Graph tab is divided into two fields. The first one contains two lines: balance (blue) and equity (green). The balance changes only when positions are closed, and the current funds change depending on the current values of accumulated profit or loss, which explains the mismatch of these curves. The second window, located at the bottom, displays a histogram of position size, it will be constant for a strategy using a fixed lot opened by trading signal of the robot. In this example, VR Smart Grid Expert Advisor works on a complex grid strategy using position increment, which is displayed with different height of columns.
“Report” is the most important tab, objectively, by the numbers, determining the results of testing. First of all, you should pay attention to the quality of trading history modeling (1), sometimes it is difficult to achieve 90% accuracy, so the EA should be checked on a demo account.
Simulation errors will be displayed by:
- Red or grey stripe
- A number of candles that do not coincide with the chart on which the auction is conducted
- Percentage ratio and green bar of properly recreated candles or bars
The length of the tested period is indicated by the number of candles and timeframe, in this example it is Н1. The line below (2) contains the initial deposit and spread set by the user prior to testing.
Line (3) defines the strategy results in terms of total net profit, gross profit and gross loss, but the following parameters are by far the most important:
- Profit factor
- Expected payoff, which is calculated by the formula:
The losses and profits in the strategy are posted in line (4):
- Absolute drawdown — maximum real loss
- Relative drawdown — the maximum loss obtained from a single open position
Other parameters are not as important as:
- Total number of trades — indicates whether the test length is sufficient or insufficient
- Percentage of loss and profit trades
The rest of the report is a kind of “collection of records” for the biggest test losses and profits, where you should pay attention to the maximum series of continuous trades closed in the negative.
The journal is a statistical step by step report on the work of the Expert Advisor. Unlike terminal logs, it does not contain service messages (information about robot start, shutdown, etc.), there is only a description of trades.
The log will definitely display code errors if any are found. If this happens, you need to contact the developer or download the Expert Advisor elsewhere.
Saving and Analyzing Test Report
By right-clicking on the Report, Results, and Graph tabs, you can save them for further analysis.
In the drop-down menu one can choose from options of copying or saving to a file, the path to which the trader chooses independently or agrees with the default option.
Copies are needed to compare with other test options for which you will need to select other options or settings.
What to look for
The main goal of testing is express assessment of the Expert Advisor, so on the first tab “Chart” the trader should observe the growing equity line. At the same time, the stability of earnings is guaranteed by indirect indicators:
- Smooth growth of the capital line, with no sharp growth or failure of the curve
- Trend tangent inclination angle of 30-45 degrees
On the “Report” tab, first of all, we pay attention to the number and percentage of profitable trades
- The higher the number of closed trades is, the more reliable the received report parameters are
- The ratio of profitable trades should be at least 60% for intraday strategy and above 70% for medium- or long-term trading system
A large number of positively closed orders can result in a loss if the trader “forgets” about such parameter as profitability:
- The resulting profit and loss ratio, ideally – should be higher than 2
This figure can be achieved by controlling the size of stop losses — orders limiting loss, relative to automatically fixed profit, the size of which is determined by pending orders — take profit.
The table on the Results tab shows the totals for each positive and negative trade. Studying random sampling will help to understand the logic behind stop loss and take profit size. If the algorithm contains too high losses, their series can “kill the deposit”.
The parameter “continuous loss trades” will give an idea of the possible length of a series of negative trades.
Analyzing the results above, the trader should understand that the task of the tester is the rapid analysis of the robot. Testing proves only the absence of code errors in the Expert Advisor and the existence of a “workable” trading algorithm.
The real profitability of the strategy can’t be measured accurately due to:
- Insufficiently accurate emulation of historical quotes movement
- Failure of the service to take into account market circumstances of trading in full
The fluctuation of exchange rates or other instruments of the Forex market is ensured by a continuous flow of customers trades, so-called ticks. This information is stored on the broker servers, to which the Metatrader trading platform is “tied” to. Despite the versatility of the program, each broker independently engages in filling, i.e. collects its own version of quotations.
When you start the tester, each candle (or bar) is emulated — filled with ticks according to the server, it is millions of trades that cannot always be accurately repeated in full. The program will remind it on its own, if the trader chooses this option of testing.
Even with 99% accuracy of candles (or bars), the tester will not be able to consider:
- Spread fluctuation, which is not a constant – the broker always reserves the right to expand this parameter upon news release
- Various technical overlays — failures of quotations coverage, loss of archival data
- Slippages in execution of trades
Based on the above, it becomes clear that despite advertising the tester as an ideal tool for determining the profitability of the strategy, the result of real trading will be very different from the received figures. Use the received profit data to set test parameters on a demo account as close as possible to real trading. Only it can accurately determine the real profitability of the Expert Advisor.
Testing the Expert Advisor on a Demo Account
Running the EA on a demo account provides the greatest reliability of the test results, but this method requires considerable amount of time. In addition, it is advisable to use a VPS server when testing.
What is a VPS server?
VPS server is a service that has appeared in hosting providers with the development of automated trading. The company provides traders with remote access to the Metatrader platform installed on its own powerful data center servers.
The operation of the Expert Advisor algorithm depends on a continuous Internet connection, by which the robot manages the placed pending and triggered orders, according to the the logic of the trading strategy.
Disconnection or shutdown of the Metatrader 4 terminal leads to a failure, the user will have to close open and cancel pending trades, after its restart. If at this moment the trader is not near the computer, the trades will remain “hanging” on the broker’s server and can cause unlimited loss.
VPS server is used to allow trading to take place automatically without the risk of any failures. Stability of operation is guaranteed by:
- The company is the owner of the data center, for which this is the point of business
- Locating broker and trader servers in the same place
The latter fact gives an additional advantage to the user of VPS server, increasing the speed of execution of orders due to smaller ping size and faster changes in quotations.
The hosting provides full technical and consulting support as well as assistance in setting up VPS server, so the service can be used with any level of knowledge.
How to choose the right demo account type and amount for strategy testing
Forex brokers provide traders with a choice of different types of accounts designed to optimize fees. These conditions are fully duplicated in the demo accounts.
Testing the Expert Advisor on a demo account should not differ from real trades, so the deposit type and amount must match the real Forex trading account which you plan to use advisor on. This question should be solved by the trader independently before the first start of the robot, based on the algorithm of the trading strategy, or it can be taken into account in the instructions/recommendations attached to the Expert Advisor.
Sometimes they pursue advertising purposes for affiliate earnings – developers recommend a specific broker even, so we will give a brief overview of the main types of accounts.
In the Forex market brokers offer 4 different options for payment of fees:
- Fixed spread
- Floating spread, sometimes for advertising purposes called “zero spread”, so this word is often marked with a star
- Cent accounts
- “Islamic” or “swap-free” accounts
Swap is a daily charge/withdrawals of a leverage fee. It is calculated as the difference in the rates of the central banks of the countries that own both currencies in the pair. Broker, like any bank, withdraws interest for the loan on the sold currency, at the same time paying interest on the purchased currency.
For example, selling EUR/USD looks like buying dollars for euros sold. The European Central Bank holds almost zero rate, so interest for the use of the euro will be zero, and on the amount of purchased US dollars fee will be charged for each day at the rate of 2.5% annual. This is rather low income or loss, so “Islamic or “swap-free” accounts do not play a significant role in choosing the demo mode of the Expert Advisor testing.
A cent account is opened by traders trading for an investment amount not exceeding $100, which Metatrader 4 will present as 10000 cents. This “cent transformation” of the deposit is necessary when trading vis Expert Advisors by a grid strategy (placing multiple orders against the trend) or Martingale (increasing the order size after every loss-making transaction). To run it on any standard account you will need a deposit of $1000, in the “cent version” $100 will suffice.
Fixed spread accounts are selected by traders who launch robots once, twice a day or rarer. The average profit from the transaction makes the fee negligible, and the calculation of expenses is simple, it is enough to multiply the spread by the number of trades
Intraday, short-term or scalper strategies with a large number of trades per session use floating spread accounts. They are presented under many abbreviations: ECN, NDD, STP or DMA. The name determines the method of execution of the trade and the mechanism of spread formation, the subtleties of which are described in the accompanying specifications of the account.
If a trader does not understand dealing desks, glasses, rules of market execution of orders, he should not use a scalper robot, which in the absence of knowledge of intricacies of intraday trading will kill the deposit in one day.
The amount is determined by the results of testing in the strategy tester. The first part of the description defines the tactics of launching the Expert Advisor with a fixed trade size of 0.1 lots. This selection allows you to equate the maximum drawdown parameter from the “Report” tab with the currency pair exchange rate points.
In the example of VR Smart Grid testing the result was 155.38, which means that the robot must “withstand” the loss:
- Of $15,54 when trading 0.01 lot, the margin for which is $10
- Of $155,38 when trading 0,10 lot, the margin requirement for which is $100
The trader can read how to correctly account for losses from a mathematically justified point of view in Ralph Vince books, but the easier way to determine the size of the deposit is to multiply the number of maximum drawdown on the maximum series of loss-making trades and then apply the coefficient of 3.
In our example you will get the following deposit amount:
15,4 x for maximum consecutive loss series (4) x 3 = 186,45
This means that when testing the VR Smart Grid Expert Advisor, the amount of deposit on the demo account should be:
- For trading 0.01 lot – $186,45
- To trade 0.1 lot – $1864,56
The coefficient is chosen empirically and means the triple maximum margin, so the higher it is, the more stable is the strategy.
How to choose the number of currency pairs to test thean Expert Advisor on a demo account?
Often trading algorithms are written for specific Forex instruments, this fact is highlighted in the settings or recommendations to the Expert Advisor. If the strategy is universal, the robot testing on the demo account should be based on:
- The planned amount of investment determined by the deposit volume according to the calculation method above
- Trading frequency in the strategy
- Testing goals
The Metatrader 4 platform allows you to run as many copies of the Expert Advisor as many instruments the broker offers. A large number of instruments in theory diversifies the strategy, compensating the loss on one pair with profit from the other.
In practice, all movements in the Forex market are subject to the laws of correlation — falling and growth of currency pairs coincide, especially in moments of global macroeconomic events. Therefore, choosing a large number of instruments only multiplies the load on the deposit instead of the diversification expected.
Before increasing the number of currency pairs, the trader will have to return to the strategy tester again and determine the maximum loss for each pair in order to take it into account when testing the Expert Advisor on the demo account. The trader will have to increase the amount of investments or decrease the volume by allocating a trading deposit separately for each currency pair, calculating the reserve according to the formula described above.
Tthe situation of running the Expert Advisor on medium- and long-term strategies, provided that different classes of instruments are selected, can be an exception: currency pairs, indices, commodities and raw materials. If the run on the strategy tester shows the frequency mismatch of trades on the selected instruments on the “Visualizations” or “Results” tab, the trader can calculate one deposit for all instruments. by selecting the average drawdown size and using the coefficient of 5 (instead of 3) to calculate the deposit size.
If the user is faced with the task of finding the most profitable currency pair for the Expert Advisor during testing on a demo account, then he can run many instruments using larger size of the deposit than is planned for real trading. However, this process will lengthen the tests on the demo account – a second stage will be required, where only the selected pair will be tested separately, with the planned deposit.
How to determine a timeframe — a trading period?
The timeframe size — the time period represented on the chart by a candlestick or bar determines the “accuracy” of the EA trades, so this parameter is initially set up by default or is reflected in the recommendations.
Some strategies implemented in robots have scalability, i.e., the trading algorithm can work on different time periods. Before testing the Expert Advisor in Metatrader 4, the user must determine what period he will use in real trades and choose the same in the demo account settings.
The size of timeframes is standard: 1,5, 15, 30 minutes; 1 or 4 hours; higher intervals: day, week, month.
The choice of lower, minute, periods assumes a higher frequency of trades, often used to “overclock” the deposit. If the trader does not have large funds and sets the goal of “fast earnings” in the market, he will choose minute intervals. This will mean intraday trading, where the following restrictions must be used:
- Trading time limit to avoid inactive trading segments during the day
- Ban on moving positions “overnight” and over weekend
The choice of an hour timeframe is a medium-term strategy, the daily one is considered long-term, candles per week or month are seldom selected by traders.
The fluctuations in the Forex market have a fractal structure, which means the similarity of cyclicity and pattern shape within one hour and within day or week. This knowledge allows the trader to deliberately choose a shorter period to speed up the Expert Advisor test on a demo account. Profitability on small timeframes means that the strategy will definitely “pass” on higher periods.
How to change and apply the settings of an Expert Advisor?
When changing timeframes, the trader should take into account the interconnectedness of their size with the EA settings. Inside the robot, a trading system can be programmed, whose periods are synchronized with calendar data, the dimensions of automatically constructed levels are “tied” to certain percentage changes in exchange rate, etc.
In order for the strategy to work effectively on custom timeframe settings other than those set by the developer, the trader should understand the mechanism of placing trades, understand the composition of indicators or other principles used for the formation of trading signals by the robot. This will help you to select and synchronize the Expert Advisor parameters when any changes are made to one or more settings blocks.
First of all, the developer’s variants are tested on the demo account.
The ability to change parameters independently is limited by the Input Parameters tab. Coders – the creators of the robot – bring in this window only those settings that a trader can change without the risk of “destroying” the algorithm efficiency.
If a trader is not familiar with the implemented trading strategy, he can find its analogues in specialized forums. If there is convincing evidence about the operability of certain parameters included in the Indicator Expert Advisor, they can be changed in the robot settings.
How to attach an Expert Advisor to selected instruments?
The EA is added to the chart of the instrument by simple dragging from the Navigator window.
Attachment will automatically open the EA settings. Most of them are accepted by trader by default or modified according to the instructions attached to the robot. Adjustment of the strategy should be carried out using only ideas of the trading system proven in the tester, as well as on demonstration and real trading in Metatrader 4.
After installing the Expert Advisor on the chart, the trader should pay attention to the emoji appearance in the upper right corner – a smile means successful start the robot. Sad emoji indicates problems with settings.
Metatrader 4 platform for working with Expert Advisors requires the inclusion of additional options. They are located in the Tools -> Settings menu and are installed once, then are apllied for any new robot.
In the window that opens, find the “Expert Advisors” tab and select (enable) all items by clicking on them with the left mouse button.
Click the “OK” key and go to the “Properties” setting of the robot, they are available by right-clicking the indicator on the chart, in the drop-down menu of the “Expert Advisors” option.
Allow the EA to trade by initializing the option with the appropriate name and pressing “OK”.
The rest of this settings window is used “by default” unless otherwise provided by the instructions that come with the robot. In this case, the trader can connect libraries, limit trade in one way, etc.
How to choose the correct period of Expert Advisor testing?
Testing process on the demo account should give the trader understanding of what performance the robot will show in any “state” of the Forex market, especially in “vulnerable” areas for any trading system. These include:
- Flat — for trend systems
- News — for range trading strategies
- Impulses – for trading on levels “breakthroughs”
Test data, which includes only continuous growth or decline, for trend strategies are unrepresentative, as robots incur losses on flat. In this case, the trader must initially visually determine the average length of this type of oscillations using historical quotes and wait for the same period on demo account.
Trading in the range is mainly conducted at the Asian session, which involves the least number of Forex traders, which guarantees no trends. The situation changes drastically with the release of important unpredictable news in China or Japan, fluctuations caused by other publications can be avoided by predicting them in advance thanks to information from the economic calendar.
In this case, the number of news cannot be predicted accurately, so the trader should rely on the empirically calculated average result. Evaluate losses from unpredictable movements will help the results of trading during the release of important economic indicators, which the trader avoids at real trades. The time of their publication is known beforehand, and the number of sessions to test the Expert Advisor should be equal to the average result of the appearance of “unexpected” news.
Impulse trading is placing pending orders at important price levels in anticipation of strong exchange rate changes in a short period. They can be “provoked” by news or predicted by technical analysis methods. During testing of an Expert Advisor for impulse trading, the trader needs to wait for a symmetrical number of buy and sell trades (breakthrough of the “down and up” level).
Advantages and disadvantages of Expert Advisor testing on Forex demo account
Forex demo account is a 99.9% guarantee of creating conditions similar to real trading, which allows you to rely on the result shown by the Expert Advisor. The trader chooses the account type, deposit size, timeframe and can predict the profit and loss of future investments in the selected robot.
The only downside of this type of testing is the duration, the EA must pass multiple stages of trading, and the trader wait for the trend, the volatility jump on the news and other Forex market states on which the size of the greatest possible loss depends, as well as to trade a “calm” period equal to these periods afterwards. This helps to understand the rate of recovery of the deposit after a series of negative trades and correctly determine the size of the trading lot and the reserve of the investment.
Testing is an obligatory part of the adoption process of any new trading system, especially important when you intend to automate trading. During the analysis, the trader will get a visual idea of the mechanism of opening and closing positions, the theoretical scale of loss, the share of profitable trades.
At the same time, the strategy tester is not a reliable indicator of the Expert Advisor’s performance for a number of reasons mentioned above. Reliable data will give real trades, which at the first stage need to be replaced by the period of operation of the robot on the demo account, in order to prevent loss of deposit.
The tested strategy should be put in the market using Metatrader installed on a VPS service for reliable round-the-clock Internet provision and protection against technical failures in power networks or on broker servers.
Algorithmic Trading 101 — Lesson 2: Data, Strategy Design, and Mean Reversion
Last week, we jumpstarted our Algorithmic Trading 101 series with a lesson in time series analysis. Now we’re taking it one step further by introducing mean reversion as a model when trading a single asset. As we walk you through the fundamentals, remember that there’s never one correct model. Building a profitable strategy takes good data management, fine tuning parameters, and optimizing execution. One strategy today might be not be viable tomorrow.
Don’t forget: We’re always here to help! If you get stuck or have your own strategy that you’d like to port over to The Ocean X, ping us on Telegram or email us at [email protected] We’ll also be awarding five prizes of $1,000 in crypto to students or mentors during our series, and it’s not too late to sign up! Discuss, submit, or help out, and we’ll consider you in the running for our little contest.
A Quick Comment on Data
Data is the lifeblood of algorithmic trading — it’s how you identify initial patterns, backtest your strategies, and make sure your models respond in real time. But more data is not necessarily better.
- It takes time to organize and clean data in a format that’s easy to use, e.g. changing values from integers to floating decimals or converting data that’s in minutes or seconds to milliseconds.
- Testing big data can eat up server space and slow down performance of your machine.
- Too many variables in your models can lead to multicollinearity, where parameter estimates become unstable and make it difficult to assign explanatory power.
There’s a right balance to strike — how much data do I need to explore vs. how much data can I manage effectively and efficiently. As we progress through the course, we’ll include additional references for data management and processing. But SQL and other relational databases are good places to start: Silota provides a great SQL query example with cryptocurrency data, and CoinAPI lets you collect information from different cryptocurrency exchanges. (And once we launch, we’ll show you how to grab data from The Ocean API.)
Creating a Strategy Revisited
Last time we outlined the steps you need to take when building an algorithmic trading strategy. Let’s discuss it with more detail:
1. Determine the type of strategy
We’ll show you a few types of models, but there are endless opportunities for experimentation depending on your objective: alpha generation, spread capture, arbitrage, market making, event driven, etc. And there is no type of strategy that is better than any other. It really depends on your risk/reward profile, and how well you implement and test. Algorithmic trading websites and quantitative finance papers can be good sources to find ideas. Some of our favorites include Quantstart, Quantopian, QuantConnect, Wilmott, arXiv, and SSRN.
2. Generate the signals for position taking
It’s also important to have entry and exit signals. If you’re holding only one position, this can be fairly straightforward. With multiple positions, it’s important to make sure that your signals do not overlap and/or do not contradict (i.e. your model tells you to enter and exit positions on the same asset at the same time). Entry signals are generally easier to create — once your model’s trigger ‘hits,’ you trade. Exit signals can be a bit trickier — you could take small quick wins, but you might also think to yourself, ‘if I wait just a bit longer, maybe I can get a bigger score’. So your decisions around exit (as defined by total profit or stop loss) depend on your risk tolerance — the longer you hold your position, the more uncertainty you face.
3. Backtest and optimize the model’s parameters
Backtesting means testing your model against historical data before trading with it live. You can simulate results in a controlled environment, over many different time periods or scenarios, to see how your model performs in a variety of conditions. And you can play with the ‘parameters’ (e.g., should I use one or five lag periods?) to find a set that produces consistent, positive results — optimized for your risk/reward profile, of course. You may need to run many, many, many iterations and model configurations to find a profitable strategy. And small changes to parameters can have a large and sometimes unexpected impact. That’s why it’s important to collect data, test your models against it, and continuously update/fine tune with new data. You can read more about backtesting here.
4. Consider outside risk factors like execution
No model can predict the future. A model, by nature, is a simplified representation of the world. In the volatile cryptocurrency market, this rings especially true around execution. For example, the current price of an asset is 1.00, and you’re in a long position with your stop loss set to sell at 0.95. Suppose prices aren’t updated continuously, but instead in intervals, and the next price you actually see and can trade is actually 0.90. Well, then you’re selling for a loss of 0.10, even though your supposed ‘max loss’ was 0.05! This issue arises due to liquidity and latency within a price (it’s an issue that’s common in cryptocurrency exchanges, especially DEXs).
Another outside factor that can mute strategy profitability is transaction costs. Even a perfectly backtested model can be unprofitable, especially if the modeler didn’t account for transaction costs (as measured not only by fees but slippage and other factors) properly. If your live strategy performance deviates from your backtests, you may need to dig into some of these issues. We’ll highlight some of these issues related to cryptocurrency in later lessons.
5. Evaluate the benchmark returns
Observing magnitude of returns can be misleading because profits are naturally higher if you invest in larger positions. The most common benchmark that people use is the Sharpe Ratio:
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