Most traders search for a "traditional" strategy when in pursuit of profits. After about 6 years of conversations with futures traders - both struggling and profitable - I've discovered a few things when it comes to building a successful trading strategy using NinjaTrader - or any other platform for that matter that are important for consideration.
Ask any trader whose been around a while if they've ever come across a scenario like the one I'm about to describe, and I'd warrant a guess that about 90% of the hands in the room will go up in agreement:
"......you purchased a program or a strategy that worked really good for a short amount of time....say 3-5 weeks or months, and then the results just started falling apart when the market conditions changed....a method or a strategy that was undeniably profitable was after a point seemingly incapable of being profitable...."
Seems like many traders have been there, and have had that experience. I've learned a few things after talking to the guys who persevered through that experience, and here's what they've all said (more or less).
Simple strategies work better than complex ones
I've worked with professional NinjaTrader strategy programmers, professional traders, and even the lead tech's at NinjaTrader corporate and there's been one commonality when it comes to the question, "what does a successful NinjaTrader strategy or methodology look like?". Everyone says the same thing - the most profitable traders have the simplest strategies. In even more specific terms, they have fewer than 3 indicators working simultaneously to determine their entries and exits.
James O'Shaughnessy says this about the perceived success of complex trading systems:
".....We also prefer the complex and artificial to the simple and unadorned. We are certain that investment success requires an incredibly complex ability to judge a host of variables correctly and then act upon that knowledge..."
In a public research paper, Brian Leip studied the effectiveness of complex forex trading strategies as opposed to simpler forex trading strategies. In his own study of over 60 available trading strategies, he concluded the following,
"Overly complicated systems collapse under their own weight and the technical trading tools must be selected carefully. Similar to the writing process, perfection in trading systems 'is achieved, not when there is nothing more to add, but when there is nothing more to take away.'"
As can be seen, there is a only a marginal increase in profitability from a 'complexity level 2' system (68%) to a complexity level 6 trading strategy (71%). The author concludes in his thesis that phrases like "the trend is your friend", and "keep it simple, stupid" are to be applauded when constructing a strategy - in NinjaTrader or any platform for that matter.
Building Dynamic Components into strategies
Across the board, traders will confess that their "secret ingredient" is one that allows their strategy or methodology to change as the conditions of the markets change. Some traders call this a "dynamic" trading system, as the system itself changes over time.
Some examples of dynamic trading strategy indicators include technical indicators such as the ones that can be found in Ninjatrader's indicator list like ATR (average true range), ADX (average directional index), Parabolic S.A.R., or the VIX - as these are indicators that flex and change with the market(s).
In this dynamic example using NinjaTrader indicators, we see the use of the Average True Range for both stops, and targets. The trail stop (green triangles) is following a 2.786 ATR value away from price action. The targets, once the trend trade is entered is 3x the ATR, and then 6x the ATR. Note how the ATR values change throughout the trading day - allowing the trader's system to flex as the market volatility increases, and decreases.
In their paper, "Mapping the Intraday Price Movement in the S&P Index" , technicians constructed a relatively fine resolution (60 minute increments) study of positive (bullish) and negative (bearish) behavior. When we first look at this study, you'll note that there is a significantly large number of positive periods in the ten o'clock hour, as well as in the four o'clock hour. The majority of the returns from the ten o'clock session come from the pre-market session.
Dynamically incorporating turning times of the market
When you begin to understand that simplicity and dynamic components enhance the profitability of any NinjaTrader strategy, your mind becomes open to unique possibilities.
Many of the traders from BTTFT.com have incorporated turning times into their overall trading strategies. Using a 2,800 bar look back into historical data (which allows us to adapt as market conditions change) we see that we can "harvest" the times lately that the market is actually turning or trending at. Maintaining a 2,800 bar look back allows us to always be searching into the markets most recent timing patterns as opposed to a static one time analysis that never changes or updates.
In this user submitted example, you can see how this trader look for cumulative bid-ask patterns at the times the market is turning, lately - using that dynamic 2,800 bar look back. In essence - his trading system says, "I will be a buyer when I see positive net volume accumulation at a TIME the market has been going up almost consistently, lately (across the last 2,800 bars of historical data). " As the market turning and trend times change, his system adapts to the new behavior patterns and allows him to capitalize and flex with the new patterns
Conclusion - when building a new methodology or strategy in NinjaTrader - avoid complexity and err on the side of simplicity. It makes the system easier to test, and forward implement. You're also more likely to stick with it, because you understand "why" you are taking the trade. I've seen systems so complex, you weren't sure that it was working correctly or not, as it was nearly impossible to test. Second - build a dynamic trading element into the system that allows you to shrink as the market shrinks, and expand as the market expands. Adaptability is key to maintaining your sanity, and keeping your trading system alive more than that dreaded 3 to 5 month shelf life we've all become accustomed to.