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What is the difference in a strategy/portfolio TP?
Last Activity 3/8/2012 11:04 AM
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Matthew Greenslet

Posts: 2077

Joined: 2/27/2006

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Subject : What is the difference in a strategy/portfolio TP?
Posted : 4/21/2006 8:35 AM
Post #1409

Q: What is the difference between using a trade plan in a strategy and opening a position in the portfolio with a trade plan?


A strategy using a trade plan is very different from actually placing a trade with a trade plan or having OmniPilot enter the trade for you using a trade plan. One is a theorical entry and one is an actual entry (paper trading). We first introduced trade plans as the chevron that you can pull down to enter and manage trades. After this we introduced trade plans in strategies. I will explain both and their functions and intentions.

The trade plans for the portfolio, in a way, was in response to the question, "I entered a trade based off a signal on the vote line and the next day the signal vanished! How do I manage my trade?" This is how trade plans were born. The vote line is not meant to tell you when to get in AND when to get out. The exits in a strategy are meant for profit calculations as well as to satisfy the approximation of when to start looking for entries again. But as the nature of the vote line is, signals will change based on your optimization settings. Optimization is good, because it keeps the settings for all of your systems relevant to the current market. But you are left to manage the trade yourself after entering it. So we introduced a powerful automated money management too, trade plans. These are separate from the strategy so that they are not affected by optimization. When you get an entry signal you place a trade with a trade plan. The trade plan dictates the entry and exit rules now, not the strategy. the strategy has done it job of finding the entry and if the entry looks good, we take the position, and the trade plan manages it for us. Now if tomorrow our strategy re-optimizes...Great! We now have better settings for our systems which will give us the best signals, and we can still manage our previous trade with our trade plan.

But now the question arises, "How do I know my trade plan works? I can't back test it. I have to trade it day by day to get any type of testing!" This is one reason we added the functionality of trade plans to strategies. On top of the ability to utilize partial exits and improve the strategies performance, we can also now back test trade plans! Keep in mind everything on the vote line historically is theoretical. Our vote line is optimized. Signals that fired 5 months ago are being fired from the best settings for today's market. 6 months ago the software would have most likely picked different settings for the systems thereby changing where signals were fired, which would also change the exits and our profitability. But this gives us a close approximation of our performance and what we can expect in the future.

But this arose to the question, "Well its nice I can backtest and get an approximation of my performance. But how can I quickly test my strategies with a trade plan, and get actual, accurate, precise results of how it performs?" In short the only answer is to test it day by day. Since this is cumbersome and time consuming, this is how the walk forward test was born. The walk forward test will test your strategy now with lab made. This will take it back historically and test it on historical data with the correct backtest boundaries just as if we really went back in time. It will vote, assign trades a trade plan, move to the the next day, retest, and reoptimize as our test settings dictate. It will manage the existing trades that we have opened with our trade plans in our portfolio while continuing to look for additional trades with our strategy that may or may not use a trade plan. Then it will move to the next day and repeat.

The major difference in using a trade plan block instead of an orders block is the ability to use partial exits and various entry order types. But now you may be asking, "If I am using trade plans to manage my trade, what difference does using a trade plan block or an orders block in my strategy matter?" Here is where it gets a little confusing and gives you some food for thought. When a strategy is in trade it is not looking for new entries, it is looking to get out of or manage the trade. Using the trade plans block or an orders block does not matter as long as we replicate our personal exit tactics as close as possible. This will give us a closer approximation of when we will actually start looking for another entry. In addition to this it is also used for profitability reporting. Using the actual trading entries and exits you would most likely use will give you a more accurate answer to the question, “If I got in the market when these conditions happen and I got out using these exits; how profitable is this trading strategy?”

[Edited by Barry Cohen on 4/27/2006 4:54 PM]

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