New idea of the "two steps" of the new rule — Japan stock system trading basics course 7

The "Two Steps" that Create New Rules

I am Takeshi Nishimura, a securities analyst and seminar lecturer on system trading at Fairtrade Co., Ltd. In this course, we will explain in simple words and with easy expressions so that everyone watching can understand the basics of "System Trading." Please stay with us until the end. The theme this time is the "Two Steps" that create new rules. Now, let's get into the content.

I would like to explain how we are coming up with "new ideas" that are useful for trading.

Before thinking about trading rules, it is necessary to clarify what purpose the rules are for. For example, if you want to consistently profit on a monthly basis, it would be difficult unless the rule is a day-trading type with a high number of trades.

For those who work on weekdays, a swing trading type that does not require watching the market during trading hours would be appropriate. For a day-trading type, you would need to test on minute bars (1-minute, 5-minute, etc.). For swing trading, you can typically test using only the daily chart.

Among the viewers of this course, there are many beginners, so here I will proceed with the premise of creating a typical swing trading type rule.

First, when thinking about trading rules, you need a rough concept of "what type of rule to create" (the concept of what kind of rule to make is sufficient). When using commercially available software, many people start by trying to combine various technical indicators and backtest repeatedly. Isn't that what they want to do first?

For example, consider "what would happen if you combine RSI and stochastic." However, simply stacking many technical indicators available in software to create a good rule is not very wise. This is because, if you combine dozens of indicators, there are almost infinite combinations, making the task impractical. Therefore, the first essential is the fundamental concept of "which market situations we aim to trade."

For example, consider the following possibilities.

・Is it a contrarian trade aiming for a short-term sharp decline,

・Or a trend-following trade that trades in the direction of the trend,

・Or are you trading by targeting a specific pattern (such as candlestick shapes)?

This level of generality is fine. If the concept is solid, the choice of technical indicators will naturally become clear.

If you are creating contrarian-type rules, typical indicators include "RSI" and "deviation from moving averages." If you are creating trend-following rules, indicators like "MACD" and "breakouts" might be used.

As long as the basic concept is decided, any technical indicator can be used. We have received questions before like “which technical indicators should I use to create contrarian-type trading rules?” However, there is no single right answer. If you think carefully, you will understand that, for example, to create a short-term contrarian trading rule, saying "deviation from the XX-day moving average by -YY%" and saying "the price drop from XX days ago by -YY%" essentially convey the same meaning.

Technical indicators are simply tools that process past price data for a specific purpose. In other words, as long as it is close to your objective, you can use any of them. However, to choose which to use, you should at least know the general meaning of the indicators. Now, let's summarize the content here.

The steps to create a trading rule are as follows.

■ Step 1
■ Decide what kind of market situations you are aiming to trade (short-term or long-term, trend-following or contrarian, etc.)

■ Step 2
■ Choose which technical indicators to use (consider multiple combinations)

Perhaps this alone will be difficult to understand how to conceive a trading rule. Therefore, in the course "Challenging the Construction of Trading Rules," we will not only craft a simple rule but also provide a somewhat deeper explanation.