How to Develop a Dynamic Trading System ?
another question, Mr. Prathmesh ji we are doing a good discussion never got a chance to do this before so this is a daily chart, so a bigger parameter in daily chart or a smaller parameter on daily chart or a bigger parameter on a lower duration chart if we just see the 30 minute chart and then I use the same parameter reason is using bigger duration chart in smaller parameter It is confusing at times, I have made a 2 hourly chart, so I have a made a model that I will look at RSI in 2 hours Now I am having the same thought that should I use this like how I have been using all this while? for 2 hourly, ideally it should not be done, but still it is working so I will again do that hello hello, I am your friend Vivek Bajaj, co-founder of Elearnmarkets and StockEdge one thing I am always trying to tell you all is that please make your own trading setup sometimes the trading system is in our mind, so when we pen down it becomes really clear when this happens we have to do this, and when that happens we have to do that so this trading setup development process, you can also call it a flowchart, or a thought process I have seen in stock market that when you come here for big money when you are working with little money like 50,000 or a lac then the trading style don't have much relevance that time you do things randomly, but when you are working with crores then you think about it then obviously, until or unless you don't have a trading system you can't succeed so I have discussed this before and recorded videos so I thought I will record another Face2Face today, it will be about how to make your own trading setup and what are the typical errors made while using technical indicators so there are a lot of mistakes that you have added a particular indicator, and then again and again so what is the right market indicator, and what should be used should we use the same indicator in every market, even I have questions like that so I will try to take most of the answers, the person who is here is actively involved in the market he has designed his own trading system, if you see his face you will realize how peacefully he has worked in the market just a small reminder before I invite him that the guest I invite on my face2face I try to bring them with a full credibility you can build credibility in a lot of ways, one is money that you earn, which is earning more money second is people refer or they start talking about you or this person talks really well, the strategy is really nice or they are doing very well so all this is a credibility, so I track the profit record, type of business being done and all these things but there are some experts who are not comfortable in showing their profits everyone has their own boundaries and they all have their own thoughts you are getting the knowledge or not, it is my responsibility, if you are not learning anything then it is no use making the video live I have no commercial interest, if I have any interest then I will let you know in the video that this is revenue sharing but generally I do not have so today's guest is doing a great job, someone referred to me and I checked I have not seen his money, but I am sure he is doing very well He is not comfortable sharing his profit, even I am comfortable recording this video without seeing his profit because what he talks and speaks it makes a lot of sense and you will have conceptual understanding so without wasting much time, I will invite the guest without taking too much time away now Prathamesh Godbole, so hello! thank you Vivek ji for the warm welcome, it is my pleasure I have been following you on Twitter, and I know that I can take some good knowledge from you in this session for my learners it is a very interesting topic, and with time I have realized after investing money for 5-6 years in the market it is like we have to do something big and if not then a new system has to be created I am glad you are following that system but before that tell me something about yourself what made you come to the market and what are you doing in the market? so I started trading at a young age, when I was still in college in final year and it was just after the 2008 crash early 2009 and at that time it was experimentation and learning after which I did CFA, then I applied for my masters because I wanted to learn more more on this, I got MS degree from New York Univeristy then I worked there for a while, then I move back to India and then worked there for equity broking, mutual funds etc so it is a different kind of environment, how big funds trade and how it affects the market, then I started trading on my own so from which year are you trading from your own capital? 2017 technically you cannot trade from your own account if you are a broker before I was there it was blocked, and then I traded so tell me something before we get into technical discussion this decision of leaving a job and doing trading this is like crossing the Ganga, from here to there so what made you take this decision? so I think I had been observing the market from the beginning I was exploring many options and many different markets were explored, and traded forex and options I had an idea in the market what kind of price action can be used worst case if it doesn't work then I can go into equity broking, fintech I should have an idea about what should I be able to do so you knew your plan B if nothing happens then you will do something I think that is very important someone came to me from Gujarat to meet me in the office few days back if your mindset is not in the right place, you still won't be able to execute it if you have taken loan it will be a lot of stress to payback will the next trade make any profit or not, should I hold the position or not, your system will tell you not to hold for stoploss stress will not help you in taking your trades, so Prathamesh has done everything with planning, like he has this amount and he will do this so you should know everything before leaving your job because it sounds good but it is not that easy so Prathamesh the screen is all yours is my screen visible, many times in the market people ask me what strategy do I use? if you are using indicator, super trend, moving average they ask me what parameters do I use, I think this is a wrong question because that is not an important part there are no magic indicators that can change your PnL and there is nothing automatic that if you use it, it can run your system forever so the correct question is what type of market are you trading? it depends on how you want to trade in or what type of market you want to trade in, fundamentally you can divide your market in 4 categories one is trending market, other is consolidating market, the other 2 is similar there are two variants, one is high volatility one is low volatility so first type is trending market and it is not even volatility so the example will be 2017, when the market was really smooth even in 2007, the previous bull market, it opened in gap up it opens on top from green and the market is only giving you return so this is an easy type of trend and this is where people make money the second is you have a trend with a very high volatility like in 2020 there was a sell off and the trend was very strong but it was difficult to trigger it it is difficult because the pullbacks in the trend are very sharp in 2020 there were days when the market has pull offs if you panic and sell off this trade then it will be different and in high volatility it is also difficult to trade I think 2018 was a great example of both trending and consolidating every year the market goes in a space where the closing price is the same the level in June was similar to August and maybe it has gone up and down in a low amount so in this market no trend system will work even if you add any moving average so indicator won't solve the problem, you will have to design it like that you just have to focus that your signals should not come the signals should be as less as possible because the trend system always works in trending market I think the last one is the most difficult to trade with, which is a consolidated market high volatility, I think after the 2020 sell off, the market in March and April the market used to gap down and gap up 5% so everyday you will see a reversal in the trend, there was no direction in the market and the volatility was also very high so these are the 4 markets, so if you got the chance to even trade in anyone so there are 4 types of market, so you have to see if they have smooth trend and low volatility so this is what we will do today, we will talk about the trend following strategy when we build a system, it shouldn't start with the indicators we will see later which indicator is appropriate first we have to see what type of market to trade so we will see trending market, which has low volatility there are 2 conditions here, first we need to have a trend indicator and the second volatility should also be low it has to be low, one will be volatility indicators and it should be the same the moving average will show you a trend, if the price is below that then it is below the trend and if up then above the trend for example, bollinger bands both are showing you the same thing which is volatility so if the bollinger bands are narrow it means the volatility is low if the ATR is same then it is the same thing, the volatility is low we will form a view with these 2 basic indicators then we will see how to set the stoploss we have got the entry but we also have to see where to keep the stoploss we don't know if every trade we make will be profitable, so we can't make assumptions we have to take trades in average and then we will get some profit we will ideally see where to keep the stop and then where to keep the position should we risk the 1% or 1/2%, how do we allocate? because all this is theory, if it gets better in backtest then only we can proceed with this so this is a consolidating market where the price action is like that and you can see that, then it is moving down another topic is why are we using so less indicator, why are not using 3-4 indicators the reason is that if everyone is using the same indicator then the output will be more or less same This is 1.9% and this here is hardly 0.5%, so let’s say I put a stop loss of 2.5% or 3% then also my stop loss won’t be triggered but I can define my risk. So there are cases where the market has gone down much more and the super trend may have crossed far much lower than 3% or 8% so I will avoid those losses. In this case, there’s a toll called Maximum Adverse Excursion, a regularly used tool in optimizing systems. What you’ve to do is when you’ll create a list of trades in back test You have to see how many points or percentages have gone against you after entry in whatever are profitable trades. You’ll get a distribution, some must have gone 0.5%, and some have gone 1% maybe 4%. So in that, you’ve to see how much percentage will be optimal which decreases your net loss. It might happen that you cut off at 1% and in turn, you might lose some profitable trades
It might happen but then also your net profit will increase because maybe you were losing 5% on the other trades which now you’re losing only 1%. S even if you give up 2-3 trades with 4-5% then also your net profit will increase. I think this is an important optimization and this is applicable in all the timeframes. You can do it in daily, 15 minutes or even 1 hour there’s no problem. Optimization may not be necessarily price-driven no? I can optimize time also because in the quarter its result season and behaviour is typically different. Absolutely.
So how do we quantify that? We want that data in excel to see how it has moved in every quarter. Correct. The simplest way is to if you’re trading a few instruments like Nifty or Bank Nifty You can manually use any platform to export the trades to excel or CSV and if you’re very enthusiastic then you can also note the trades in the charts. This is a one-time exercise. and then you can plot the distribution You can see the trade list in excel that on and average how much percentage the trades are going. It’s a rough filter and there is no exact procedure to it. but in 99 out of 100 systems you can see that the stop loss will be less than what you’re getting from the indicators or it’s happening by buying or holding.
Like people ask me a common question why you held 10,3 and not 10,1; so how to optimize the parameters of every indicator? Excellent question! All markets are either trending or consolidating and even when you say a market is trending there is essentially some part of price action that trends and the remaining is noise. The price is going up or down because of whatever people are buying or selling. So you just need trends and not noise. And noise is unavoidable, it will happen at any timeframe Like the consolidation is about to happen in the daily, hourly and even monthly chart. So use as much as shorter parameters in timeframe if I do 10,1 then the noise will become more. Since I'm looking at smaller data, i’ll get more signals whereas as much as I increase the parameters, for example, moving average, supertrends then the noise will reduce but trades will also get delayed. Here, I’ll show you by putting both the supertrends. I’ll change the colour. Theses coloured supertrends are 10,1 and the black line is 10,2. So you’re seeing every time that the coloured
supertrend with lower parameters, it’s always giving me signals first but it’s also catching a lot more signal than it should like here it gave downtrend but also a false uptrend which again reversed