Tutorial: Using the Interface
Analyzing Signals
Analyzing Signals
i Tutorial Task
Learn the basics of analyzing trading signals in TradingSolutions.
The primary reason many people have for using TradingSolutions is the ease with which trading signals can be created and analyzed. Let’s see how we can analyze existing trading signals to determine if they are worth trading.
i Important Note about Signal Analysis
Deciding whether to trade using a signal is a subjective process that depends largely on your individual profit goals and tolerance for risk. However, there are several tools TradingSolutions places at your disposal to make it easier to decide.
This tutorial will introduce you to these tools and provide you with some basic things to look at when evaluating signals.
Step-by-step Instructions
1. You can create multiple signals for each stock. Right-click on Amgen and select Analyze Signals…. This will display the Entry/Exit Signals page for this stock.
Figure 1. Selecting "Analyze Signals…"
2. From this page, you can compare the Annualized Return, Annual Trades, and Percent Wins of all of the signals created for this stock over a given date range.
General things to look for here:
· The Annualized Return should be positive – the higher, the better.
· The Annual Trades should typically be higher than 10. Smaller numbers indicate the signal is trading less than once per month. This can be because the signal is being selective about its trades, but is more often because the signal is staying in positions more than a few weeks.
· The Percent Wins should typically be higher than 50% and preferably be 70% or higher. Some signals can produce good results with lower numbers, but these signals may be riskier since they can require enduring lots of losing trades while waiting for larger winners.
Figure 2. Signal analysis grid for data series.
3. The Buy/Hold line indicates the results of buying the stock at the start of the analysis and holding it through the end. This is the same as investing in the stock for the entire period of time.
General things to look for here:
· The Annualized Return of your signal should typically be better than that of Buy/Hold. Lower values can still be produced by good signals, but only if they take less risks with short well-timed trades.
4. You can obtain a detailed analysis of any signal. Select Model: Optimal Signal (..) and press Analyze…. This will display the Signal Analysis page for the signal field.
Figure 3. Location of "Analyze" button.
5. The Overview page includes an Equity Curve. This is a graph of the amount of equity that this signal produced versus buy and hold. Select the Equity Curve tab to display a more detailed view.
General things to look for here:
· The Equity By Bar should increase throughout the entire period of the analysis.
· Special attention should be paid to the size and number of decreases in this chart. These are times when you would be losing money while trading with this signal.
Figure 4. Location of "Equity Curve" tab and results.
6. By default the signal analysis re-invests any profits, which can result in a logarithmically increasing amount of equity. Right-click on the chart and select Display in Logarithmic Scale.
General things to look for here:
· In the logarithmic scale, the Equity By Bar should increase fairly linearly. Note that this may not happen until the middle of the analysis range, but it should be fairly constant once it starts.
· Advanced users may want to look at the interaction between the Equity By Bar and the Buy/Hold Equity. This may provide information about what markets during which this signal is more effective.
Ä Note: The current logarithmic scale setting is preserved, so if you have already performed this tutorial, this setting may already be selected.
Figure 5. Selecting "Display in Logarithmic Scale".
7. Select the Analysis By Trade tab. This displays an analysis of each trade this signal would have indicated. Scroll to the bottom of this analysis to see the most recent trades.
General things to look for here:
· Check the % Gain column for the size and frequency of recent losses. When evaluating a signal, decide if you would be comfortable with any losses relative to the size and frequency of the winners.
Figure 6. Location of "Analysis By Trade" tab and results.
8. Select the Overview tab. Included in the overview are the date range and trading style used for the analysis. The range is probably set to all of the data that is available. Let’s change it to just analyze recent data. Press the Change… button.
Figure 7. Location of "Overview" tab and results.
Figure 8. Location of "Change" button.
9. When optimized signals are created, TradingSolutions automatically sets aside the most recent data for testing. This date range is the most important to analyze since it is most like any new data. To analyze this range for this field, press Copy Optimization Range from Field….
Figure 9. Location of "Copy Optimization Range from Field" button.
10. The defaults for the Copy Optimization Range from Field Dialog will be to use the Accuracy Testing Set Only for Model: Optimal Signal (..). This is what we want to analyze, so press OK.
11. On the Signal Analysis Options Dialog, press OK to analyze the newly selected date range.
Look at the same things you looked for in the entire date range, specifically:
· Look at the Gain/Loss and compare it to Buy/Hold.
· Look at the Trading Overview for the total number of trades and percent wins.
· Look at the Equity Curve to verify it is increasing fairly consistently.
12. Look through the other pages of the Signal Analysis. If you would like additional information about any of the other values press the Help button. You can return to this tutorial page by pressing the Back button at the top of this window.
Figure 10. Location of "Back" button to return to tutorial from help.
13. Press OK to return to the list of all signals for this stock.
14. Here are some additional notes about this page:
· The date range for this combined analysis is listed at the top of this page. Notice that a Change… button is available to change the date range associated with this comparison.
· When you locate the signal that you would most like to trade for this stock, make it your Primary Signal by selecting it and pressing Make Primary. This will make it easier to display and analyze in the Portfolio View.
· If you would like to watch another signal in addition to your Primary Signal, you can do this by making it your Secondary Signal.
· Optimal Signals cannot be used for trading. The usage of optimal signals will be explained in a later tutorial.
15. Press Close when you are finished with the analysis of all signals for a stock.
16. One additional thing to look at is the signal in a chart. This gives you a visual sense of how often the signal trades and under what conditions. You can quickly view a chart of the Primary Signal by pressing the Chart button in the Information View.
Figure 11. Location of "Chart" button.
Congratulations!
You have learned some of the basic things to look for when analyzing trading signals. Specifically, is it likely to make you money on a fairly consistent basis. The next task will show how you can add signal analysis fields and other information to your Portfolio View so you can keep track of the performance of the signals you are trading.
_ Continue to the next task.