Wednesday, July 04, 2007

Developing and Testing Trading Systems: Resources for Non-Programmers

Not every trader is or should be a mechanical systems trader. Nonetheless, there is real value in testing one's core trading ideas and determining where one's greatest edge lies. For those unfamiliar with my prior postings on this topic, here is the excellent introduction to testing trading ideas written by Henry Carstens. You'll find many creative ideas regarding system development on Henry's site, including his efforts at designing an adaptive universal trading system by examining how markets behave under various volatility regimes.

One of the real hurdles to testing trading ideas is that traders may lack the skill sets of a programmer such as Henry. While such platforms as TradeStation and Wealth-Lab Pro simplify the programming required--it's not necessary to code from scratch--even those programming languages (and the time needed to master and apply them) may prove daunting for traders.

Enter the newest generation of tools that define and test trading ideas with no programming required whatsoever. The price one pays for such ease is typically a loss of flexibility: these platforms only test pre-defined indicators or systems (although those with some programming background can often add their own). The benefit is that such testing can be carried out across a variety of stocks and trading instruments, so that it becomes possible to see which markets can be traded with various combinations of indicator conditions.

Here are three tools that have caught my attention in this space:

* Trading Blox - Trading Blox has been developed by Curtis Faith, author of the book The Way of the Turtle. It comes in three levels: an entry-level module that enables traders to apply and tweak the original Turtles system to any market, testing for profitability, drawdowns, etc. The second, Professional, model includes a variety of other trading systems, such as Bollinger Breakout, ADX, RSI, Stochastics, and more. A third, Blox Builder, module enables traders to create their own systems for testing. A unique feature of Trading Blox is that there are separate "blox" devoted to entry conditions, exits, position sizing, etc. This helps traders determine how robust their ideas are (the degree to which small variations in entry, exit, sizing affect overall performance. The systems can be tested separately and in combination with user-controlled parameters, so that it's possible to create your own hybrid systems.

* Trade Ideas Odds Maker - Blog readers are no doubt familiar with my use of Trade Ideas as a stock screening tool. The Odds Maker module tests various screening conditions over the last three weeks of trading and determines their profitability for any user-defined index, stock, or group of stocks. In that sense, Odds Maker is not so much developing trading systems as identifying recent trading regimes that are relevant for current markets. This makes Odds Maker a very useful tool for short-term traders. It enables traders to test patterns as a function of time-of-day (very, very useful for intraday traders), and it allows users to specify a variety of price- and time-based exits. Ease and speed of use are excellent.

* Worden Blocks - This is a platform that I'm just now learning about. It looks quite promising at first blush. I've submitted a couple of questions to the company president and will attend one of their Chicago seminars shortly to learn more. The upshot is that Blocks enables traders to screen the entire market for a variety of conditions. These menu-selected conditions can then be included in backtesting to determine performance for any individual stock or group of stocks. An interesting example of a Blocks application is the ability to generate advance-decline lines for any group of stocks over any time frame, including intraday. The basic platform utilizes end-of-day data; the "Mega Minute" version comes with many years' worth of intraday data and the ability to conduct screens and tests in real time (including intraday). Programmers can write their own code to create conditions not included in Blocks.

Even dyed-in-the-wool discretionary traders can benefit from these tools, as testing enables them to determine best entries and exits, as well as patterns and time frames that are most promising for a given stock, sector, or index. If readers know of additional resources or have experiences to share with the above tools, I welcome comments to this post.