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Towards a fully automatic system

 
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Marek



Joined: 02 Jan 2009
Posts: 2

PostPosted: Tue Feb 03, 2009 5:30 pm    Post subject: Towards a fully automatic system Reply with quote

Hi,

I've got a strong background in signal processing and statistical modelling and I've been studying technical analysis for about 3 years. In that time I've been paper trading using the thinkorswim platform and I've had reasonable success with trading options and stocks. I've read almost every book on Candles and I would say I have a pretty good understanding of the theory.

Having said all this I'm interested to know what people's experience is with Candles and technical analysis in general.

As a kind of hobby, I have been trying to build my own fully automatic system (writing my own software) which can identify successful buy and sell signals. So far I have not been able to build such a system, but I think I'm getting close.

I do however have a system that can automatically find Candle buy and sell signals in areas where the Market is overbought and oversold. My system finds very good candidates BUT no matter what I do automatically I always find that I need to study and choose from the final short list to find the best candidates. If I do this then I find I can make profits. Whenever I run a fully automatic simulation on previous data where the computer makes buy and sell decisions, then I always find that I don't make a profit.

Although I can make profits when I handpick the best candidates, I sometimes wonder if I am deluding myself and perhaps any profits I have made so far are just down to good luck. I say this because I would need to be successful for quite a few years for my results to be statistically significant.

So the questions are:

1. Do candle charts / technical analysis actually work?

2. Do you think it is possible to build a fully automatic system?

For interest - here are four short candidates that my system identified at today's close:

BK
CXO
EGN
GOOG


Thanks,

Marek.
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Snake



Joined: 06 Apr 2005
Posts: 223

PostPosted: Thu May 21, 2009 9:32 pm    Post subject: Reply with quote

Hi Marek...

Not sure if you're still around as this is pretty old, but maybe you can post your criteria and get a discussion going to help better hone your system.

I did notice on the four candidates that you picked out that none seemed to have really strong short candle patterns. All should have required confirmation the next day before entering a short position. All but GOOG opened higher the next day so that should have been a warning or for an automated system, probably rejected them as shorts.

I think you also need to work on a well designed sell system to limit your risk. Try to build a reward:risk ratio of 2:1 into your system if you can. Or, are you purely using candles to drive sell signals as well. You may consider something like risk is the high of the candle that starts the sell signal (for shorts) and target is the next closest major moving average (you can use 20, 50, 200 or 8 EMA if you'd like) and see if you have at least a 2:1 or 3:1.

You could also start your system by focusing on the 12 major signals first and building the system out from there. You may also try looking at candle sizes. For instance, say you're using a bullish engulfing as a buy signal and today's candle fully engulfs yesterday's candle. But, today's candle only has a range of say 40 cents on a $40 stock. I wouldn't call that a very impressive engulfing.

Anyway, these are just some of my thoughts off the top of my head.

Good luck. I'd be interested to hear how it's progressed since your post in February.
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Marek



Joined: 02 Jan 2009
Posts: 2

PostPosted: Fri May 22, 2009 3:37 am    Post subject: Reply with quote

Hi Snake,

thanks for your reply.

I've started focusing on JHook patterns only as they seem give more consistent results. I have found most other candle stick patterns to be unreliable when you back test them over many months, but I appreciate that you shouldn't rely on the pattern alone. Nevertheless for the purposes of building an automatic system JHooks work the best.

Its very noticeable that my system finds these patterns in waves. Typically you get nothing for a few days as the market is pulling back and then as the market starts to turn I can find one or two, then the following day I could find several. When I find several in one day this is a sign that the market is starting to go up. I then buy these and set an automatic sell stop at the previous peak. For the ones that donít go up, I typically sell these after 5 days (i.e. a time duration stoploss). I have found (through testing over many years of data) that I make less losses on the losers compared with putting in automatic stoploss sell orders.

I have set up my automatic system so that it can email out the candidates it finds. I email these candidates to a few friends. Iíll be happy to add you to the list if you tell me your email address. Then we can discuss the individual stock picks.

I can make an average of about 2% over the 5 day duration that I keep them. This works out at about 4 - 5% per month and is fairly consistent.

Marek.
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