Thursday, July 12, 2007

4 Steps to Get the Jargon Out of Your Strategy

We were recently asked by Technical Analysis of Stocks & Commodities magazine (a review of our event-based backtesting tool The Odds Maker appears in the July 2007 issue) what's the biggest stumbling block faced by new users when trying to work with The Odds Maker. We answer the question below.

How Jargon Harms Learning

The biggest problem is that traders cannot articulate what they want to see. Thinking of market movements in terms of RSI, Stochastics, MACD, Elliot Waves, etc. never help in articulating the picture.

The customers we help use these technical terms as mental foot and handholds up the steep side of the mountain. We tell them, why not take the chairlift we've created? The chairlift refers of course to the plain English, pattern-based alerts and filters found in Trade-Ideas. We believe this approach makes for a easier to use and more powerful tool.

Example: Many of our customer start by asking us can your software tell me when the RSI does this and the MACD does that. Many customers reduce their ability to articulate what they seek as they bog themselves down in the use of jargon. Jargon is meant to be short-hand for understanding larger conceptual ideas among experts. The real harm of jargon is that it can short-cut the process of how such concepts are learned. The Trade-Ideas approach is much simpler: be an expert in trading - not technical analysis indicators.

Here then are the steps we use to design successful systems and clear out the jargon:

1. Write down what you want to see on a chart in simple English

DO NOT USE ANY technical analysis jargon in the description. Leave the MACD, RSI, CCI, and the rest of the alphabet at the door. Here is a better, descriptive example:

The stock has been consolidating for a couple of days and I want to see it today as it makes a new high that is above yesterday high - on above average volume.

2. Reduce the Universe (Start first with the Window Specific Filters)

The challenge is to avoid jumping right to the trigger event that generates the alert. Better to start with the filters to make sure you have the pattern on the left hand side of the chart modeled. We describe further the difference between filters and alerts here.

In the example above use the Minimum Consoldiation (in Days) set to 3 or more depending on your preference. Then add the Minimum Position in Previous Day's Range (percentile) set to 100 to see all stocks above yesterdays’ high. Finally for the volume component, add the Minimum Current Volume (ratio of Current/Historical Average) set to 1.5 or more to see all stocks trading at least 50% above normal at the time of the alert.

3. Choose an Event (Set the Alerts)

Once the left side of the chart matches your pattern requirements using the filters, modeling the trigger event means selecting an alert. In this case it's a simple alert of a new daily high.

4. Keep your system simple

The biggest mistake customers make is using too many alerts in a system - it creates too many variables to isolate when testing results with The Odds Maker. This applies even to filters (where too many can reduce your trading results). Keep you system simple so that you can really trade it and get the right results. Think of Hemmingway, Strunk & White, or Stephen King - wherever possible, omit needless words or in this case, extra indicators. Make it a goal to use one alert as the trigger when designing systems with The Odds Maker.

Fortunately in addition to this blog and our online support, we schedule one on one training sessions to help customers get through the learning curve in the fastest way possible. Please contact us to schedule your appointment.

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Chris said...
This comment has been removed by the author.
Chris said...

I have been steadily working on using Trade Ideas to get only what I really want to see. Recently I have been focusing on a certain type of momentum stock, but it's more about using the scan and seeing if over time I can narrow the results to something stellar. Here is the scan:

Here is the post:

D TradeIdeas said...


Thank you for sharing your set-up in an attempt to get some feedback. I hope we can provide some helpful suggestions.

The only true way I currently know how to evaluate a strategy is to use our Odds Maker tool. In this market I actually found that shorting the ideas from your set-up yielded better results.

Note: These are my trading rules for this strategy, it is not meant to be a suggestion to you on how to trade this strategy. You should adhere to your trading and risk management rules.

65 / 207 = 31.4% [purposely omitted]; Average winner = $0.6262, Average loser = $-0.1436, Net winnings = $20.45, Best = $6.13, Worst = $-0.15 (forced trailing stop); Casino Factor = 97.86%

For an explanation of what these results mean visit any of our blog posts about The Odds Maker

Daily summary:
6/25 : 0.7700/6 +
6/26 : 0.2100/4 -
6/27 : 0.0000/0
6/28 : 2.9000/7 +
6/29 : 7.8100/16 +
7/02 : 0.0600/23 +
7/03 : 2.0900/19 +
7/04 : 0.0000/0
7/05 : 0.5000/19 +
7/06 : 1.7800/19 -
7/09 : 2.4400/37 +
7/10 : 1.8800/7 +
7/11 : 1.0400/12 +
7/12 : 1.7600/28 +

D TradeIdeas said...

I'll talk with a few others here and see if I can't get some additional answers for you.