Trading Systems: Search For the Holy Grail

Today I am kicking off my efforts at developing a new "mechanical" stock trading system.  By mechanical I mean that all trades are decided by computer algorithms with no manual intervention. 

Purpose

The aim of my blog www.StockMarketStudent.com is to share my ongoing research and thoughts with the general public as I develop my next trading system, taking advantage of the knowledge gained from the latest market turbulence.  This next trading system will be based on U.S. stocks only.   Once fully developed and backtested I plan on deploying my hard earned savings and will report the real trading results as they unfold.

I am starting this exercise with a clean slate.  I don't have a trading system in mind and have not even begun to develop one.   So my posts will simply be my current thoughts as they may apply to my future system.  In all likelihood I will stumble along the way more than once before hopefully succeeeding in my quest.  I will consider this exercise a success if:

• I manage to develop a system that trades a basket of stocks starting with $100K;
• the system has low drawdown (less than 20%);
• the system has sufficient profit per trade so that slippage and commission are a non-factor;
• annual performace is much better than a typical basket of mutual funds.  Otherwise what is the point to going to this effort?

Tools

In my younger days I once had a desire to learn how to paint as a hobby so I signed up for watercolor classes at the Ottawa School of Art.  At the first class my teacher made it known that I had to purchase the same tools that he used as a professional artist.  This included expensive paint brushes, top of the line paint and specific brand of paper as well as a host of other miscellaneous equipment.  Even though I was a complete novice and this was my first art class I was expected to spend a lot of money on supplies!

My teacher's rationale was as follows:  you are either an artist or not an artist.  If you are an artist then you must use proper tools.  There is no point to using cheap brushes, paints and paper because you won't be able to perform the techniques I am going to teach you and also, as a teacher I won't be able to assist you because I am not familiar with your instruments.  Furthermore, everything you learn will have to be re-learned once you finally migrate to good brushes, paints and paper.

With this in mind I would like to say that the same rationale applies to my blog except that I am not a teacher, but a student of the markets.  By the way, if you find someone who claims to be a teacher (or expert) on trading then run for the hills because you are about to lose all your money.

I do make an effort to make this blog as general as possible for the general audience so that everyone can follow along.  But if you want to develop a similar trading system then you will need to get a subscription to www.portfolio123.com.  I highly recommend Portfolio123 as a professional platform for stock trading. 

Portfolio123 has both fundamental and technical analysis data for U.S. stocks dating back to 2001.  All data is maintained at the website so you don't have to worry about spending hours every week downloading current data and finding bad quotes.

Portfolio123 takes pride in maintaining a historical database that is essentially void of historical bias, survivorship issues, etc.  The only negative comment I have regarding the service is that the database only goes back 7 years.  They are working on getting additional 10 years of back data but have been promising this for some time.

By the way I don't earn a single cent from making this endorsement.  Portfolio123 is such a good website I just have to spread the word.

About myself

My name is Steve.  I have traded stocks, futures and options for over 25 years.  For the last 15 years I have been searching (unsuccessfully) for the holy grail of trading.  I am generally an independent thinker and I believe that readers will find unique and valuable trading ideas within my posts as I continue on my quest.  I would like to state up front that I am not a financial advisor and readers should not consider anything I post to be financial advice.  If I ever make a buy/sell recommendation then it is in error.  Always consult a professional advisor before buying stocks to make sure you are operating within your risk tolerance.

As a final point before I get started - I consider all comments and opinions to be valuable so don't be shy.  No question or comment is dumb!   When someone puts up a comment on my blog it encourages me to keep going!

Now let's get started!