What is the difference between the scan and system tracking functions?
The scan function can be used to determine whether there are any strategies with signals as of the close of the most recent bar in daily data that fulfill the user-defined criteria set on the scan workspace.
System Tracking determines which strategies in a saved strategy generate a signal as of the last day in the data file, on the close or open of next day. In case the close was used as the trade input, signal tracking determines the conditions that must be met on the following day’s bar to have a signal at the next close.
How to determine the minimum % profitable for long and short?
The formula for the minimum profitability P is: P = 100/(1+ Rwl)
where Rwl is the ratio of average winner to average loser and for fixed dollar size trades it can be approximated by the ratio of profit target to stop loss. P is the ratio of winning trades to total trades times 100.
To account for slippage, commissions and other things it is better to use the following adjusted formula: P > 100/(1+ 0.6*Rwl)
Example 1: for profit target to stop-loss ratio of 2:1 the minimum P is 33%. The recommended value is: P > 45%
Example 2: for profit target to stop-loss ratio of 1:1 the minimum P is 50%. The recommended value is: P > 62.5%
For a desired profit factor PF value, the above formula becomes:
P = (100xPF)/(PF+Rwl)
One can solve the above formula for the minimum profit factor required as a function of profitability P and ratio of avg. win to avg. loss Rwl:
PF = (P x Rwl) / (100 – P)
DLPAL DQ includes a Profitability Calculator in the Tools of the main menu. The calculator can be used to get an estimate of the minimum profitability P to use in a scan workspace when an estimate of Rwl is available along with the desired profit factor.
How to select the proper profit target and stop-loss values?
DLPAL DQ discovers strategies formed by market price action, not some strategies one would like to see formed. Profit targets and stop-loss levels should be set at reasonable levels and outside of the daily or intraday volatility range. If the exits are set too low, then stops are hit very frequently and the program cannot find profitable strategies. It takes some parameter adjusting to get to the point of identifying strategies successfully. That’s exactly the reason the DLPAL program was developed as a development tool.
It is best to first try setting exits with a ratio of profit target to stop-loss of one. In the same T/S file you may include smaller and higher ratios and notice the results. For example, in the case of T-Bond futures, you may set the profit target and stop-loss both equal to 1.00 ($1,000 per contract) but also include the pairs (1.5 , 1) and (1, 0.5). This is easily done in the same T/S file. In the case of stocks, you may want to try sets like (2%, 2%), (3%, 2%) and (5%, 3%) for example. When the scan is completed, you may select those strategies that better reflect your trading style.
In the case where points are used instead of percentage, for long positions, a constant number is added to the entry price to determine the profit target exit price and a constant number is subtracted from the entry price to determine the stop-loss exit price.
Case 1: The entries in the T/S file are determined based on a number of ticks:
The formula in this case for the calculation of the correct entries in the T/S file is: T/S = (number of ticks x tick value) / Full point value
Examples: In the case of bond futures a full point is $1000, the tick value is $31.25 and for 3 ticks target and stop the formula gives T/S = (3 x 31.25)/1000 = 0.09375. If the stop must be set to 4 ticks then the value to input in the T/S file is: S = (4 x 31.25)/1000 = 0.1250
In the case of the ES mini, a full point is $50, the tick value is $12.50 and for 5 ticks target and stop the formula gives T//S = (5 x 12.50)/50 = 1.25.
Case 2: The entries in the T/S are determined based on a fixed dollar amount
The formula in this case is: T/S = (profit or loss)/(full point value)
If in the ES mini case the target/stop is $62.50 then the formula gives: T/S = 62.5/50 = 1.25. For the bond futures for $250 target and $125 stop the formula gives: T = 250/1000 = 0.25 and S = 125/1000 = 0.125.
The formulas in both cases (1) and (2) assume that the prices used correspond to the full point values definition, i.e. that an increment of 1.00 in the price corresponds to a full point.
Are commissions and slippage included in the scan for price strategies?
Commissions and slippage are not included in the scan for price strategies since the program deals only with strategy formations and their number of occurrences rather than with equity performance, which is something that depends on many factors some controllable and some random. If the profit factor is sufficiently high (see the help file section on the Profitability Calculator), the impact of commissions and slippage on profitability is minimal. Note that the strategies will form whether or not commission or slippage is considered. These parameters have more to do with the equity performance of the strategies rather than with their presence in historical data. DLPAL DQ can generate code for popular backtesting platforms and you can test the performance of the strategies with commission and slippage added.