MODUS Mini-Course PART 3

The Modus Method - Steps 3 and 4

The remaining steps – 3,4, 5 and 6 of the MODUS Method describe the evaluation of system rules – a task that is done for any and every set of rules you wish to evaluate. Different tests, using specialist trading software, are carried out during each of these steps.

Is my system complete?

At this point, we turn to the rules we are interested in - the Crossover System.

The first and essential requirement is that your system must be complete. This is a subject covered by my report 'The Seven Elements of a Complete Trading System' which is part of the Expanded Version of my 'Golden Rules' eBook.

With the MODUS Method, you know that you will be using the Trading Blox System Tester and that Portfolio Management, Risk Management and Money Management functions are included.

Therefore, as long as you have entry and exit rules plus a protective stop, your system will be complete.

You may or may not know whether your proposed system rules have a positive expectation. It is not necessary to know this because the evaluation will soon tell you! 

The MODUS Method : STEP 3 Find The Risk Resonance (And Series 1 Tests)

Having chosen your universe of commodity futures and set goals for the % return and risk, you are now ready to find the risk resonance of the system.

Every system ‘rides the markets’ a different way, which is referred to in the MODUS Method as its risk resonance.

The Series 1 Tests make use of values calculated from your trading goals to discover how the system is likely to perform for you and to determine the risk per trade level you should adopt to ensure the system will operate within your risk limits.

Getting the balance right

Risk of ruin due to overtrading and loss of profit opportunity through underinvestment are the major threats to be avoided.

Reported results from the software allow you to better understand how a system trades the markets. All systems are different in the risk exposure they produce through the demands they make on your account balances. 

The MODUS Method directs you in your selection of risk per trade levels. 

STEP 4 Determine Parameter Settings (And Series 2 Tests)  

Most system rules contain values that can be varied, called parameters.

In the Crossover System contemplated here, there are the long and short term moving average day values.

How should these values be set?

MODUS Commodity Trading Course & Trading Blox System Tester

Establishing parameter values is usually a hit or miss exercise carrying with it the likelihood of being caught by what are known as ‘curve fit traps’.

The MODUS Method provides techniques and tools to help traders select their preferred settings and avoid curve fitting, which results in production of faulty systems.

Curve fitting - the worst of all sins?

Curve fitting describes making your system rules fit the prices or other trading data you are using for tests. Often it is deliberately done by those wishing to falsify results but it is often done unintentionally.

You will want me to tell you more about this - although I can’t actually demonstrate it without the whole course and software.

Proper methods for choosing parameter values are centred on finding regions showing where good results would have been obtained, rather than looking for ‘best’ values. The emphasis is on seeking robustness and avoiding events such as wild price movements or spikes.

More often than not, two or three parameter ranges need to be covered. This creates a heavy step testing load, as hundreds or thousands of complete portfolio runs over the whole time period may be needed. (In the Crossover System there are two obvious parameters to be tested.)

This work demands very fast software, in order to get full results within minutes rather than hours. Even so, it can be difficult to interpret results from tables in order to identify favourable regions where ‘good parameter values’ reside.

The MODUS Method includes special tools that do this work and produces easily interpreted grid charted outputs enabling parameter selection to be made easily.

MODUS Commodity Trading Course & Trading Blox System Tester

This grid shows the 'hot area' where the system's parameter settings appear to indicate potentially profitable trading.

 

Modus Commodity Trading Course

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