Click here to Login




How to create a market timing system

Updated on 2010-05-04





Our goal is to build a profitable trading system that buys and sells a given index using several trading rules. This trading system or market timing system can be used later to trade this index through futures, options, ETFs or it can be added as a rule to trade stocks.

In this post, we will show you one way to do this using QuantShare trading software. This technique or process can be applied to any market; it can be used by U.S. stock traders, U.K. stock traders...

In order to create our market timing system, let us start by creating some composite indicators.
This part is very important; you should create as many composite indicators as you can.

Here are some ideas:
- Percentage of stocks that are trading above their 20-bar simple moving average
- Percentage of stocks that are trading above their 5-bar exponential moving average
- Average Relative Strength Value of all stocks listed on a specific market
- Ratio of the number of stocks with one-bar rate of change higher than 2% to stocks with one-bar rate of change lower than -2%

You can also create or download some market breadth indicators available in sharing sever. Example: Advance Decline Volume Ratio, Up/Down Volume Spread, Cumulative Volume Index - CVI, Arms Index - TRIN...
Or some economic and exchange specific indicators. Example: Distress Index - Economic measure, Inventory to Sales Ratio - I/S Ratio, NYSE - Trading Volume, Short Selling historical data...

The next step would be to analyze these indicators to see if they have any predictive power.
For this, we will use the "Rules Analyzer", which can be accessed by clicking on "Analysis" then "Rules Manager".
Create a new list and add several rules; you can for example create the following rule for the "Average RSI" composite index:
GetSeries("_RSI2", close, LastData) > 70

_RSI2 is the symbol name of this composite.

You may also optimize some variables by transforming the last rule into:
GetSeries("_RSI2", close, LastData) > a; where "a" vary from 50 to 90 with a step of 10.

Try to create as many trading rules as you can and once you are done, click on the "Analyze" button to open the Analyzer settings form.
In this form, select the index you want to analyze. As an example, you can use the S&P 500, Russell 2000, ....

In the Outputs menu, select the outputs or exit rules. The output should be selected depending on the type of trading system you want to develop. If for example, you want to create short-term market timing system, then select "Buy then sell after 20 bars" and if you want to create a long-term market timing system, select "Buy then sell after 150 bars". You can also select several outputs to analyze the performance of your rules for each one of them.
Click on "Continue" to start the analyzing process.



You should now create a list of the most profitable rules; do not include rules that produced few positions.
Check the rules that interest you and then click on "Create a new list of rules from...".

If you have not found any profitable rules, you should go back to the first step (creating composites) or the second one (creating trading rules) and repeat the process until you come up with interesting results.

Note: In order to speed up the creation and selection of trading rules, use the Clipboard control. You can drag trading rules and drop them into this control
To create a new list of rules from the rules contained in this Clipboard, click on "Copy" and move your mouse to the "Rules" or "List of Rules" panel.



To be continued.











no comments (Log in)

QuantShare Blog
QuantShare
Search Posts




QuantShare
Recent Posts

Lock, Link and Undock your Charts
Posted 352 days ago

QuantShare
Previous Posts

Backtesting Process
Posted 3310 days ago

Trading software new features
Posted 3316 days ago

Optimization of a trading system
Posted 3331 days ago

Short Index - Part 2
Posted 3366 days ago

Short Index - Part 1
Posted 3373 days ago


More Posts

Back







QuantShare
Product
QuantShare
Features
Create an account
Affiliate Program
Support
Contact Us
Trading Forum
How-to Lessons
Manual
Company
About Us
Privacy
Terms of Use

Copyright 2019 QuantShare.com
Social Media
Follow us on Facebook
Twitter Follow us on Twitter
Google+
Follow us on Google+
RSS Trading Items



Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.