Tutorial on Trading System Design & Implementation

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Introduction

• After 30 years of trading and research, Sunny

Harris has developed many strategies both for

herself and for clients.

• More important than developing the strategies,

Sunny has developed testing methodologies that

have stood the test of time, and have become the

defacto standard in the trading community. In this

webinar Sunny will share some of her more

important testing strategies, and reveal some of the

tricks advertisers use to lure unsuspecting buyers

with backtesting.

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1996-2012 Sunny Harris Enterprises, Inc.

1547 Mission Meadows Dr., Oceanside, CA 92057

Phone 1.760.908.3070 • Fax 1.760.859.3057

email: sunny@moneymentor.com

skype: 1.760.444.4174

3

Disclaimers

SUNNY J. HARRIS AND SUNNY HARRIS ENTERPRISES, INC. ACCEPTS NO LIABILITY

WHATSOEVER FOR ANY LOSS ARISING FROM ANY USE OF THIS INFORMATION. THIS

INFORMATION IS FOR EDUCATION ONLY.

This information is in no way a representation to buy or sell securities, bonds, options or futures.

ALWAYS CHECK WITH YOUR LICENSED FINANCIAL PLANNER OR BROKER BEFORE BUYING OR

SELLING ON ANY ADVICE WHETHER CONTAINED HEREIN OR ELSEWHERE.

It should not be assumed that the methods, techniques, or indicators presented in this book will be

profitable or that they will not result in losses. Past results are not necessarily indicative of future results.

Examples and methods in this book are for educational purposes only. This is not a solicitation of any

offer to buy or sell.

TRADING AND INVESTING ARE SPECULATIVE AND INCLUDE RISK OF LOSS. PAST

PERFORMANCE IS NO INDICATION OF FUTURE RESULTS.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT

REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES MAY NOT HAVE BEEN EXECUTED,

THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMNPACT, IF ANY, OF

CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS

IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE

BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR

IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

Any statement of facts herein contained are derived from sources believed to be reliable, but are not

guaranteed as to accuracy, nor do they purport to be complete. No responsibility is assumed with

respect to any such statement, nor with respect to any expression of opinion herein contained. All trade

recommendations should be discussed with your broker and made at your own risk.

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1. Overview & Preparation

• Questionnaire

• Vocabulary

• Exchanges

• Psychology Questions

• Must Read Reading List

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MUST Reading List for Beginners

• Technical Analysis of the Futures Markets (by John Murphy)

• Technical Analysis from A to Z (by Steven Achelis)

• The Ultimate Mutual Fund Guide (by Warren Boroson)

• A Short History of Financial Euphoria (by John Kenneth Galbraith)

• Technical Analysis of Stock Trends

• The Encyclopedia of Technical Market Indicators

• Technical Analysis of Stocks, Options & Futures

• Options as a Strategic Investment (by Lawrence McMillan)

• Economics (A Self-Teaching Guide)

• Strategic Investment Timing (by Dick A. Stoken)

• Understanding Stock Options & Futures Markets

• Wall Street Journal Guide to Understanding Money & Markets

• The Great Crash 1929

• Computerized Investing

• Economic Analysis: Theory & Application

• The Intelligent Investor (by Benjamin Graham)

• Money Guide: The Stock Market

• Keys to Understanding the Financial News

• Contrary Investing

• Principles of Economics

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Let’s Discuss You Computer Know-How

• What is your level of expertise?

• What are your fears?

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Overview 1-10

1. OVERVIEW & PREPARATION

2. BASIC MATHEMATICS

3. CHARTING TECHNIQUES

4. SYMBOLIC LOGIC & PROGRAMMING SKILLS

5. TECHNICAL ANALYSIS

6. POTENTIAL HOURLY WAGE ANALYSIS

7. SOFTWARE FOR TRADING & TESTING

8. DESIGNING YOUR SYSTEM

9. SPECIFYING YOUR RULES

10. PROGRAMMING YOUR SYSTEM

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Overview 11-20

11. TESTING YOUR SYSTEM

12. OPTIMIZATION WITHOUT CURVE FITTING

13. EVALUATING YOUR SYSTEM’S POTENTIAL

14. MONEY & RISK MANAGEMENT

15. BUSINESS PLAN DEVELOPMENT

16. EASYLANGUAGE

17. STATISTICAL ASSURANCE

18. MONITORING YOUR PERFORMANCE

19. WHAT IF YOUR SYSTEM FAILS?

20. LET’S BEGIN TRADING

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2. Basic Mathematics

• Introduction

• Bar Formation

– Bars Ago

• Parentheses

• Order of Priority

• Decimals and Fractions

• Percentages

– PHW

• Ratios & Proportions

• Performance Summary

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2: Introduction

• What we’ll talk about

• I know you already know math

• This is different

• Please don’t think I’m trying to insult you,

just bare with me

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2: Bar Formation (Bars Ago)

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0 1

2

3

5 4 6 7 8

2. Bar Formation

• Close = Close[0] = C //all mean the

close of the bar in current formation

• C[2] = Close[2] //all mean the closing

price of 2 bars ago

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2: Parentheses

• X = 3 + 4 * 5

• X = ( 3 + 4 ) * 5 = 35

• X = 3 + ( 4 * 5 ) = 23

• True or False and True

• (True) or (False and True)

• (True or False) and True

• CLOSE + OPEN / 2

• ( CLOSE + OPEN ) / 2

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2: Order of Priority

• parentheses

• exponentiation

• multiplication and division

• addition and subtraction

• < , >, = , <= , >= , <>

• AND

• OR

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2: Decimals & Fractions

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2: Percentages

• If you are interested in futures trading, or if you have a

large equity account and want to trade it on margin,

you’ll want to know about percentages.

• If your equity account is backed by another account or

by a cash instrument, your broker may let you use that

cash value to leverage your equity account. You will

need to be able to figure percentages if you use

margin for your equity account.

• If the stock price goes up to $25 (and we’ll ignore

commission for this exercise), what percentage profit

have you made on your investment? We figure this

on the cash outlay, not on the total account value.

Thus, you would have made a $5 profit per share on

1,000 shares with a $10,000 investment.

• That’s ( 5 * 1,000 )/10,000 = 5,000/10,000 = 5/10 = ½

or 50%. Wow!

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2: Ratios & Proportions

• Formally, a ratio is the comparison by division of two

quantities expressed in the same units. That just

means that first of all, you can’t compare apples and

oranges. But, secondly that you divide one number by

the other to get a ratio. Why bother, when you could

just have easily stayed with percentages? Sometimes

ratios present the information to you more visually.

For instance, if you have a system where the ratio of

wins to losses is 4, you know right away that on

average each win will be 4 times as large as each

loss. Sure, you could have said you had a system

where each win was 400% of each loss, but it just

doesn’t ring as intuitively.

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2: Performance Summary

• View g Strategy Performance Report

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2: Strategy Performance Report

• Several Pages

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2: Strategy Performance Report

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• There are (at this writing) 7 tabs in the

report.

• Each one shows you statistics from a

different perspective.

• Don’t be afraid to click on each one and

see what you get

2: Interpret This

• INPUTS: FASTMA(9), SLOWMA(18);

• VALUE1=AVERAGE(C,FASTMA);

• VALUE2=AVERAGE(C,SLOWMA);

• VALUE2=VALUE2/3;

• VALUE2=INTPORTION(VALUE2);

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3: CHARTING TECHNIQUES

• Required Reading for this Lesson:

– John Murphy’s “Technical Analysis of the

Financial Markets”

– Edwards & Magee “Technical Analysis of

Stock Trends”

– Chart Patterns (Bloomberg)

– Steve Achelis’s “Technical Analysis from A to

Z”

– Perry Kaufman’s “New Trading Systems &

Methods”

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3. CHARTING TECHNIQUES

• Introduction

• Technical vs Fundamental Analysis

• What Is Your Goal?

• Specific Techniques

• Q1: 1-min, 5-min, 15-min, 30-min, 60-min,

daily charts Print Out – Mark the Technical Analysis patterns you see on each of the charts.

– Mark Support and Resistance on each of the charts

– Go back to TradeStation and put 3 different moving averages on each

chart:

• Simple

• Exponential

• Weighted

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3. Charting Techniques

• Q1 Continued:

– Then make notes of the differences between

the averages. Which one is more accurate?

– Does the more accurate average have any

disadvantages you can see?

– Mark the “perfect” entries and exits on each

chart

– Calculate the potential profit and loss from

each of the ideal trades on each chart

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3. Charting Techniques

• Q2: – Let’s go with the 15-minute chart for now, of the same

symbol you chose above.

– Print out charts for each of the following types of bars:

– Standard OHLC bar chart

– Candlesticks

– Point & Figure

– Line Chart

Line charts require only closing prices to plot, whereas Candlesticks require all

four pieces of pricing information--open, high, low, and close. And as their

names imply, Equivolume or Candlevolume incorporate volume into the price

plot. These last two kinds of chart are not available in TradeStation unless you

purchase a special indicator to display them. I have just such an indicator, called

SunnyBars, if you are interested. Check the Products page of

www.moneymentor.com to take a look at SunnyBars and how volume is

incorporated into the width of each bar.

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3: Support & Resistance

• Support is the level under current

market price where buyers come in and

cause prices to cease falling. Buyers

see the support level as a good price at

which to purchase (a good deal).

• Resistance is the level at which the

market is too expensive. Resistance is

the price level above current market

price where buyers hesitate to buy. At

this level selling pressure overcomes

buying pressure.

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3: Floor Trader Pivots

• Look at EasyLanguage Code for Floor

Trader Pivots

• In the standard package

• Be able to explain the essence of the code

to me on our next visit

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3: Channels

• Channels are formed when prices go

back and forth between loosely defined

price points. I say “loosely defined”

because in real life the channels are

not so clear to see. They tend to break

tops and bottoms and then return to the

channel anyway. And they are often

not horizontal, but are curved or

sloping.

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3: Attractors

• I coined my own term for areas where

price tends to come back to with

relative frequency. I call these areas

ATTRACTORS. Attractors can be

formed by moving averages, by

support and resistance, by channels,

etc.

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3: Attractors

• Horizontal Lines drawn carefully. Discuss.

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3: Attractors

• Moving Averages. Discuss.

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3: Attractors

• Fibonacci Retracements & Extensions.

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3: Triangles, Wedges, Pennants

• Read appropriate section of Perry

Kaufman

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3: More Congestion Patterns

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3: More Congestion Patterns

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3: More Congestion Patterns

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3: Sunny’s Pennants Indicator

• Shows Congestion of all kinds.

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3: After congestion comes the BIG move

• Take a look again

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3: Head & Shoulders

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4. SYMBOLIC LOGIC & PROGRAMMING

• Required Reading for this Lesson:

• Introduction to Symbolic Logic (Karl J.

Smith)

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Boolean Algebra

• Boolean Algebra

• AND and OR

– Link two or more comparisons

• Evaluating “truth tables”

• Mathematicians use shorthand

– ^ means AND

– v means OR

• Complex Expressions

– (( A ^ B ) v ( C v D)) ^ E

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Truth Tables

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5. Technical Analysis

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6. Potential Hourly Wage Analysis

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7. Software for Trading & Testing

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8. Designing Your System

47

9. Specifying Your Rules

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10. Programming Your System

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11. Testing Your System

50

12. Optimization Without Curve Fitting

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13. EVALUATING YOUR SYSTEM’S

POTENTIAL

• Statistics that matter

– Total net profit

– Drawdown

– Number of trades

– Profit per trade

• CPC Index Components

– %P

– R

– PF

• Equity Curve

• Drawdown

• Maximum Adverse Excursion

• VAMI

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13: Equity Curve

• How smooth is it?

• How is the

drawdown?

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14. Money & Risk Management

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15. Business Plan Development

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16. EasyLanguage

57

17. Statistical Assurance

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18. Monitoring Your Performance

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19. What If Your System Fails?

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20. Let’s Begin Trading

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APPENDIX

• Book List

• Glossary

• Exchanges

• Money Management

• Formulae

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Booklist

63

Glossary

64

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