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Trading Strategies >> Development >> Best indicator for trading rules
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Message started by Maltamir on 07/01/08 at 00:30:27

Title: Best indicator for trading rules
Post by Maltamir on 07/01/08 at 00:30:27

I mainly use stochastic momentum for my algo, do you know some other strong indicators on which one can based its trading rules ?

Title: Re: Best indicator for trading rules
Post by Algo Designer on 07/08/08 at 12:54:22

You have asked one of those fundamental questions that bothers many of us!

A technical analysis purist could recommend you to look at MACD, MAs, RSI, OBV, ATR. As people learn that the classical averages suffer from a time lag, they look into fancier formulae/indicators such as StochRSI, TEMA, DEMA, IE/2, adaptive MAs, triangular MAs. The list goes on. With a passage of time, many realise that static symbolic models, even when properly constructed and back-tested, barely make money if at all and "unexpectedly" break down as the market conditions change.

This is where the real fun begins. People try linear regression models and soon discover that even those seeming inefficiencies that looked good on paper are removed by the other market players. The next logical step is non-linear models that cost you lots of sleepless nights, and if you are lucky and persistent enough, let you see some interesting properties that can be exploited in the context of a prop trading model or as a bias adjustment function in various agency strategies.

Sorry for giving you such an open ended answer. There is no magic formula here. If you get your "momentum" function right, your trading model is 60% ready, the rest is the risk management which is... a bit easier.

Title: Re: Best indicator for trading rules
Post by sany on 07/23/08 at 20:20:22

IMHA there is no such thing as "Best trading indicator".

If you construct profitable trading signal and start trading, you will greatly decrease profitability of your indicator. Some trading indicators were profitable in a past but as soon as someone starts trading based on this indicator - profitability goes away.

Also pnl of trading signals greatly depends on market conditions, i.e. sometimes it works sometimes it does not.

According to efficient market theory you can't make any money by using trading signals (that is why some people like for example Warren Buffet believe that TA is BS). However markets are not perfectly efficient and it is well known that properly implemented trend following and mean reversion arbitrage strategies are profitable.

Title: Re: Best indicator for trading rules
Post by Co0olCat on 07/23/08 at 21:26:47

The best trading indicator is the one which nobody is using at the time. It could be either because nobody know about it or people think that it does not work any more.

In my opinion the best trading indicator should be of adaptive nature. That is to be of AI origin.

Title: Re: Best indicator for trading rules
Post by nickgurtsu on 11/16/08 at 17:05:28

Linear and non linear systems
How would you define a non linear system ?

A lot of arbitrage systems that are considered as non linear still use indicators that are based on the price

Are those linear or non linear

Title: Re: Best indicator for trading rules
Post by Algo Designer on 11/21/08 at 07:55:58

If by the "system" you mean an arbitrary trading system, I would assume such system to be driven by a single or multiple functions that return values (e.g. probability of the short-term trend reversal, "volatility explosion", momentum) that may result in certain trading actions. If any of those functions is non-linear, i.e. does not satisfy the superposition principle, I would consider the system to be non-linear as well.

Statistical arbitrage systems are generally non-linear. Although, some people assure me they can still make money in pairs (or composite pairs) traded off linear regression (who knows...).

The basic index arbitrage, on the other hand, can be linear.

Title: Re: Best indicator for trading rules
Post by RoadManiac on 04/07/09 at 15:46:35

nickgurtsu wrote on 11/16/08 at 17:05:28:

A non-linear model has exponents, logarithms, or other functions of the independent variable and parameters. It could also have threshold values which, when crossed, change parameters

Some non-linear auto-regressive models to check out could be STAR or SETAR Models.

Title: Re: Best indicator for trading rules
Post by gauravr on 04/08/09 at 11:14:16

hey ...
Around a year back, I was developing automated trading strategies for forex. The question that is being discussed is very misleading.

First you have to eiher define the horizon of the trade, objective, patterns that you observe and want to take advantage of , returns expected etc etc...

One of the prime srategies that proved to be successful over a period of 3 months in USD JPY was a combination of 5 min candles and observed were ADX, Parabolic SAR and Bollinger bands of 3 std dev, with a trailing stop Loss

Of the 119 trades executed, 82 were ITM and there were pretty decent results... You need to see discussion on Automated Championships for more of this on Forex.

However the question asked is too vague to be answered any more clearly

Title: Re: Best indicator for trading rules
Post by Algo Designer on 04/08/09 at 11:40:18

The question being discussed here is the location of the Holy Grail. :-)

The approach you have described is a static TA system that can work for a few months and die unexpectedly as the structure of the market changes. Three months of trading considering the number of trades you have mentioned bear no statistical significance IMHO.

Title: Re: Best indicator for trading rules
Post by gauravr on 04/08/09 at 14:01:19

Like I said in the beginning... this is just one trading system which worked for three months and then I moved on... I had better strategies mebbe.. but it worked well...

You are absolutely right that there is no "right" way of making profit in any market. Times change, market changes and approach changes too.. sometimes you lah change, sometime you pre-empy change. However what works ... is debatable..

I just gave an example of what worked here.. and you know what it did not work for other currency pairs... :)

Title: Re: Best indicator for trading rules
Post by DerikB on 08/13/09 at 17:51:02

Hi,

My opinion on AI:

Price data or any form of price data won't work because price doesn't normally osscilate and it bassically shifts. So in general oscillator type TA like stoch, momentum, RSI, MACD, returns etc will work or help but anything build on price data like moving averages won't work...

Algo what do you mean by structure?

Do you guys only use TA as inputs? Do you have any other suggestions than oscillator type TA as input?

Regards
Derik