PTMC team 14.09 2013

How to make your own Trading System

Linear Regressions

Introduction

Linear regression is a well-known, well-studied instrument used for statistics and econometrics. That said, it’s less known in trading as some big names like moving averages or oscillators.

Linear regression is built as a line segment that is spaced at least distance from the source data. In terms of technical analysis, the linear regression can be called a trend line. However, unlike trend lines which analysts draw by hand, linear regressions are built automatically using mathematical formulas. When building a linear regression in Protrader all you really need to specify is the amount of points that will be used for building the line. This number of points is called the period.

Let’s try to work through this together. First, upload the linear regression indicator to the Protrader 3 terminal by opening a chart, clicking on indicators, import, and adding the regression. Now go back into the indicator menu and choose it from custom indicators and add it to the chart with a period of 25.

Pic 1. Linear regression (period = 25) on a 30m EUR/AUD chart showing a downward trend.

Pic 2. Linear regression (period = 80) on a 1m EUR/CAD chart showing an upward trend.

As you can see from the drawing, the linear regression accurately indicates the current market situation. If the line is close to being horizontal then there is no trend. The period should be close to the current duration of the market phase (trend, trading range). If the period is too large, then the line will lag behind. Likewise, if the period is too small there will be more false alarms. This is similar to how most other technical analysis indicators work. Therefore before you go off and manually trading with this be sure to adjust the period to fit current market conditions. For automated trading it’s a bit easier to adjust this period through backtesting and optimization on historical data.

Starting your very own trading system

Let’s try making the foundation of a trading system using the basics of linear regression to help predict market momentum. Open and hold a long position when the line points upward and open another short position when the line points downward. For clarity add another indicator to Protrader 3, the Linear Regression Slope, which shows the slope in a separate window. It’s worth noting that the angle is not in degrees but in relative units. This just means that we buy when greater than zero and sell when less than zero.

Creating a program

We’ll be using AlgoStudio for creating indicators and trading systems. AlgoStudio is an integrated development environment for C# and is part of the Protrader 3 Desktop platform. AlgoStudio is going to give us the possibility to write, test on historical data, and optimize indicators and trading systems. We can even test on historical tick data. So our goal in creating a trading system is to reproduce a situation that is as close as possible to how the market works. In this example we are using C# for our indicators and trading system. Load AlgoStudio and open the file RegressionTrader.cs.

Here is the condition we’ll use for entering the market:

if(b>0.0)//buy if the angle of b is more than 0.0
{    
OpenOrder(OPERATION_BUY);
}

if(b<0.0)//sell if the angle of b is less than 0.0
{    
OpenOrder(OPERATION_SELL);
}

The codes for the indicators and system can be downloaded below. If you take a good look at the code you can see that the indicator code is completely integrated into the trading system. You don’t necessarily have do to this since you can just use the indicator definition with the function iCustom().

Testing

So let’s try a test. Below we’ll take the example of testing the system on EUR/USD with a 5m period. AlgoStudio lets you test the strategy with visual results on a graph. I use this feature in the screenshot below.

Pic 3. Graphic Balance

Pic 4. Trades shown on the chart

Hmm, looks like we have a negative result. Judging by the chart, all but two trades were negative. Even though they aren’t really big losses they still count as a large part of the overall loss. If you look at the chart where the trades were made the reason for our loss becomes clear. It looks like the entrance and exit points are based more on price fluctuations than trends in market segments. You see that the price isn’t really going anywhere but the system is still generating trades. To fix this we could add a filter that would turn the system off if there wasn’t a clear trend. This would involve establishing some type of minimum threshold for system response. For example, a condition to enter the market not when the regression angle is greater than 0.0, but instead after the angle crosses some optimized point based on historical values. But that kind of filter would cut off lots of our possibilities to profit. Also we could run into a situation where the angle of regression just barely hits the filter level but the price action doesn’t continue in the correct direction. This would give us some pretty big losses.

Pic 5. The angle of linear regression

In my opinion, the best option would be to use a filter that takes the nature of price changes into account. For example, price deviation from the regression line generally decreases when there is an increasing trend and increases when some range has been established on the market. Let’s try to capture this concept in our trading system by adding a rule to enter the market not only in the direction of the regression angle, but also there is a cross of the standard deviation channel.

Here is what I mean:

if(b>0.0&&BidClose(0)<bottomLine)
//condition for going long
{    
OpenOrder(OPERATION_BUY);
}

if(b<0.0&&BidClose(0)>topLine)
//condition for shorting
{    
OpenOrder(OPERATION_SELL);
}

The topline и bottomLine variables are borders of the standard deviation channel.

Optimization

Optimization is going to help us find the best parameters for the linear regression period. A distinctive feature of AlgoStudio is the possibility to change the settings of the genetic algorithm and go through optimization with specific objectives in mind. For our purposes we’ll choose maximum profit.

Pic 6. Optimization

Pic 7. The best optimization result.

Hey alright – a positive result! The profit factor was 30.95. That’s a pretty great number, but it is too early to get excited since there aren’t really enough transactions in the test. In order to get a better idea about the quality of our system we need to test it a lot more on longer histories and then of course on a demo account.

What else are we missing in this basic system? Well, it would be good to add some stop losses to keep our overall loss low and some money management parameters that would get the most profit for this type of system and our account size.

LinearRegression.cs

LinearRegressionSlope.cs

RegressionTrader.cs

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Referral Program Agreement (henceforth referred to as “the Agreement”, “Referral Agreement”) is made between PTMC (henceforth referred to as “the Company”) and Referral Partner (henceforth referred to as “Referral Partner” or “the Partner”).
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The Agreement contains all the terms and conditions that shall regulate relations between the Company and the Referral Partner.

The Agreement shall enter into effect as soon as the Referral Partner registers on the PTMC official website and shall remain valid until the termination of the Agreement.

Please note that the Company reserves the right to revise, modify, change or remove clauses of the Agreement at any time at its sole discretion. Please check periodically terms and conditions of this Agreement on the Company website.

The Company reserves the right to reject the registration of any entity or person in the PTMC Referral program including the case if such entity is a person suspected of fraudulent activities фе its sole discretion.

1. General Terms

1.1. The Company and the Referral Partner agree and accept the obligations under the Agreement.

1.2. The Referral Partner undertakes rights and obligations set forth hereinafter. The Referral Partner agrees to acquire users to the Company acting in his name.

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1.5. To become an Referral Partner a user must:

1.5.1. Register on the Company website PROTRADER.ORG.

1.5.2. After the registration on the PTMC official website the Referral Partner receives an individual unique referral link which is available in user profile.

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1.6.1. When the information provided by the Referral Partner during the registration is changing, the Referral Partner should inform the Company about such modifications and request the Company to update the data.

1.7. After the Referral Partner accepts terms and conditions of the Agreement, he/she has the right to:

1.7.1. Conduct advertising campaigns in the interest of the Company.

1.7.2. Introduce marketing and advertising campaigns with the aim to acquire new Clients to the Company, provided that such events are legal in the country where they are conducted.

1.7.3. Provide the Clients with the necessary information about the Company, including the Company contact information, as well as general conditions of the services provided.

1.7.4. The Referral Partner has the right to use promotional materials provided by the Company representatives, they are: banners, text links, landing pages etc. The Referral Partner may use banners with the Company logo provided by PTMC and/or his personal referral link.

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2.8. The Referral Partner shall not give any recommendations or advice to the Client related to trading operations on the market. The Company shall not be responsible for the consequences of such recommendations and advice

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2.11. In case it is detected that the Referral Partner uses documents of the third parties with the aim to get referral revenue, the Company has the right to block all such accounts including personal account of this Referral Partner without any right of further renewal.

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2.13. It is forbidden to the Referral Partner to use the following types of advertisement:

2.13.1. Advertisement on websites that contradict the laws of the country where the Referral Partner is located.

2.13.2. Advertisement on websites content of which is contrary to current legislation, morality, public order, good faith or is defamatory, aggressive, obscene, offensive, violent or incites violence, racist or xenophobic, or in general which is illegal or violates a person's rights and/or physical and/or moral integrity.

2.13.3. Spam mailing.

2.13.4. Advertisement with the false information contained.

2.13.5. Any other advertising that may affect credibility or reputation of the Company or any other dishonest marketing methods.

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2.17. The Referral Partner shall be responsible for the accuracy of the Client registration form and the authenticity of the data provided by the Client.

2.18. The Referral Partner allows the Company to use contact information provided during the registration, such as email address and other information specified in order to send the letters and proposals.

2.19. The Referral Partner agrees that the Company may unilaterally terminate and change terms and conditions of the Agreement without any explanations.

2.20. The Referral Partner is not entitled to: publish any negative comments (essays, letters) concerning the Company in any newspapers, magazines or other periodicals, blogs, Internet forums or other web-resources that may affect credibility or reputation of the Company. If the Referral Partner uses his own web-resource in order to attract clients to the Company, the content of the web-resource regarding the Company shall be approved by the Company.

2.21. If the Company detects that the Referral Partner has been involved in activities described in clause 2.20 of the Agreement, the Company is entitled to reject the Referral Partner request for funds withdrawal and to block his account, as well as inform the regulatory authorities of the jurisdiction of the Referral Partner.

2.22. It is prohibited to the Referral Partner to use PTMC brands in any way or manner whatsoever, including but not limited to the words “PTMC” spelled in any possible way (including with typos, spaces, signs, symbols or in any other way). Such forbidden use of the PTMC brands includes the use of such words/trademarks in the referral advertisements or in any part therewith, in the displayed URL and/or in the destination URL.

2.23. The Referral Partner shall only deal with third parties as a client of the Company. The Referral Partner shall not use the Company name, Company logo, etc. anywhere, including promotional materials, letterhead and business cards, advertisements and publications without the Company’s prior consent, with the exception of the case described in clause 1.8.4. of the Agreement.

2.24. The Referral Partner shall respect the confidentiality of the Company business and it is prohibited to him/her to disclose any confidential information or any information concerned the Company business for five years after termination or cancellation of the Agreement.

2.25. The Referral Partner guarantees the precise performance of the above mentioned obligations.

3. Rights and obligations of the acquired Clients

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3.3. The Referral Partner shall not be entitled to refer his close relatives in case if the Referral Partner is an individual; or close relatives of the founders in case if the Referral Partner is a legal entity. The Referral Partner shall not be entitled to refer his own accounts.

3.4. Account owned by the Referral Partner and those owned by his close relatives if the partner is an individual, as well as private accounts of founders or accounts of their close relatives if the partner is a legal entity shall not be considered as those that the Referral Partner has acquired.

3.5. Accounts detected to be registered by the Referral Partner himself in order to get money through dishonest means shall not be considered as those that the Referral Partner has acquired. In case if such violation of the terms and conditions is detected the Company is entitled to terminate the Agreement and to block the Referral Partner account.

3.6. The Referral Partner himself, his relatives or any other affiliated parties shall not be considered as the Clients acquired by the Referral Partner. In case if any data of the Referral Partner coincides with the data provided by any acquired Client (such as ID data, address, telephone number, email address, IP address, etc.), such Client shall not be considered as the acquired one and shall be removed from the Referral Partner list. In such a case the referral revenue credited for this Client will not be paid.

3.7. Should the IP address of the Client be the same as that of the Referral Partner then they shall be considered affiliated and the referral revenue credited for this Client will not be paid.

4. Rights and obligations of the Company

4.1. In case if the Referral Partner fails to perform any obligations under the Agreement, the Company is entitled to terminate this Agreement.

4.2. The Company reserves the right to take legal actions against the Referral Partner in case the Referral Partner attempts to manipulate the Company and/or the Company proprietary trading platform and/or abuse the Referral Program. The Company reserves the right to withhold and/or deduct from any payment to the Referral Partner in the event of such manipulation and/or abuse.

4.3. The Company reserves the right under its sole discretion to reject the registration of any entity or person to the Referral Partner, including the case if such entity is involved in fraudulent activities.

4.4. If the Referral Partner appears to belong to one of the categories described in clause 4.3 the Company is entitled to terminate the Agreement and to block the Referral Partner account.

4.5. If any activity conducted by the Referral Partner is contrary to international law, morality, public order, good faith etc., the Company has a right to terminate the Agreement and to block the Referral Partner account.

4.6. The Company shall pay referral revenue to the Referral Partners after the Company receives payments for the software license paid by the acquired Clients.

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4.10. In case if the Referral Partner fails to perform any obligations under the present Agreement, the Company has a right to exclude Clients from his list of the Clients acquired by him/her.

4.11. The Company is responsible for calculations of the referral revenue. In case if the Referral Partner wishes to check the calculations, the Referral Partner may request his Clients to provide the necessary statements. The Company shall not provide Referral Partners with the payment statements of the Clients.

4.12. The Company agrees to pay referral revenue to the Referral Partner in accordance with Appendix 1 of the present Agreement.

4.13. The Company determines method of the referral revenue calculation at its sole discretion.

4.14. In case if revenue is charged for the allegedly fraudulent accounts the Company reserves the right to cancel the revenues from such accounts and exclude such Referral Partners from the Referral Program.

4.15. Neither Party hereof shall be held liable for the complete or partial failure to fulfill its obligations in case if this failure results from Acts of God (including but not limited to fire, earthquake and other natural disasters, war or other military operations, blockades, government regulations and other extraordinary and unavoidable circumstances beyond either Party’s control).

4.16. Under the above mentioned circumstances the Party that fails to fulfill its obligations is obliged to inform the other Party through written notification within five business days from the moment of their onset and cessation.

Appendix 1. Referral revenue calculation

The Company shall pay the Referral Partner percentage in the amount from 10% up to 30% from the software license payments carried out by the Clients acquired by the Referral Partner.

The equivalent of the above mentioned referral revenue is calculated immediately as soon as the acquired client pays for the software and displayed in the user profile of the Client on the official PTMC website.

The Company shall pay the Referral Partner a certain percentage from 10% to 30% from the software license payments. This percentage is determined by the total number of the Clients acquired to the Company by the Referral Partner. The percentage is calculated according to the table attached below.

Crediting of the referral revenue shall be made on a monthly basis and shall be calculated within the first 10 days of each calendar month.

Any other payments are possible only in case if the Company and the Referral Partner agreed it in an amendment agreement.

Total number of the attracted users*	Referral revenue percentage
1 – 9 users	10,00%
10 – 99 users	20,00%
100 + users	30,00%