Although a trading style may change over time, it’s important to know what kind of trader you are today.
- Do you trade Options, Forex, Equities?
- And if you trade Equities, which kind of Equities?
- Are you a day trader, buy and hold or something in between?
- Do you trade momentum or mean reversion.
- Do you enter with a market order or wait to enter with a limit order?
- Do you wait for a pullback or enter as soon as you see a setup?
- Are you a system trader or discretionary?
Answer these important questions before you put your money into a trading system.
Quant or Discretionary
QiT trades 100% with algorithms and has no discretionary overrides. If we don’t know how a particular decision will impact the overall results. In other words, if we can’t test it, then it is not part of our system. For further discussion about system vs discretionary, please read this. Quantitative vs discretionary
In theory, we might say that the markets are abnormal in the aftermath of a surprise, and we shouldn’t trade our models. In practice, its hard to determine what exactly constitutes a surprise and I have seldom found any benefits in overriding the model.” Ernie Chan, Author of Quantitative Analysis.
Market
QiT decided, above all, use a simple rule set. The market had to be liquid leaving the most obvious market to trade the entire US Equity market with volume restrictions.
Holding Period
What timeframe will the system use and how long will the strategy hold positions? Are the portfolios going to hold positions for minutes to hours, days to weeks or the strategy be the old proverbial, buy and hold?
Needless to say, the longer a position is held the greater the chance it has of encountering the “black swan” events, therefore, a timeframe should be chosen that gives the shortest holding period logistically possible. One of the options available was day trading – holding for minutes to hours. QiT realized immediately day trading was not possible since we want to use end of day (EOD) data and keep it simple.
Drawdowns increase in proportion to the square root of the holding period” Howard Bandy
Buy and hold was not possible for … well let’s not go there. The only option left was swing trading. Swing trading keeps us in a position for the shortest period of time, uses EOD and no need for the complexity of intraday data.
Mean Reversion vs Momentum
Another aspect you need to consider is if you prefer a Mean Reversion or Momentum.
Long or Short
In order to get the kind of balance needed in portfolios, it will need an algorithm that trades long and an algorithm that trades short. Of course, in margin accounts, this is no problem but in retirement accounts, it is an issue for you can’t short in a retirement account. This means retirement accounts have to know when to step aside.
Pullbacks
If trading a Momentum strategy QiT will always wait for a pullback before entry. That is to say, we try to buy when an up trending market takes a breather. Or we try to short a down trending market when it is in a short-term rally.
Entries
We always enter on a limit order making a good trade even better. The limit order will always be a percentage from the close on the setup day but will change as the market changes. Sometimes a larger percentage is needed and other times a smaller. QiT does optimizations at the end of every month to ensure the percentage used is optimum for the current market conditions.
Exits
QiT uses dynamic exits, which means our exits are based on an indicator and not on a stop loss percentage or number of days. All our exits are based either on the RSI or the ConnorsRSI.
Software and DataProviders
We use Amibroker for coding our algorithms and nightly scans.
We use Norgate Premium Data for our data.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
“If awesome were inches, we’d be the Effiel Tower.”
