Creating Self-Tuning Signals: How Internal Feedback Can Improve Your Trading System

While trying to improve the performance of a trading system I was backtesting, I found myself wishing there was a way it could turn itself off, or at least improve its odds, when it was performing badly. If for some reason the current market dynamics didn't agree with my system, why not allow the system to recognize the adverse conditions and take a hiatus until the trends returned to behavior it could make sense of?

On other occasions, I wished for a feature that would track particularly good signal performance, and would trigger additional trades outside my primary signals because their trades were going so well in a particular direction.

Essentially, I was looking for ways to amplify good performances and cut short bad ones. So I created what I call monitoring signals or meta-signals, which keep tabs on how the primary trading signals are functioning and have the ability to turn them off, to trigger a trade in the opposing direction, or to trigger "bonus" trades in the same direction if the signals are performing optimally. Here's how they work:

One monitoring signal observes the performance of long trades generated by my forex system. If the past 5 days of trading have generated over 150 pips in profit, this feedback circuit automatically triggers another long trade on the sixth day. In my backtests I've found this meta-signal provides a significant boost to system profitability.

Another signal compares the performance of my long and short signals. It counts how many long vs. short signals have been generated on the past 5 trading days. If there have been more long signals than short ones, and if on the current day no long signal has been generated, it automatically triggers a short trade. The idea being that after a run of long signals in the market, it's statistically likely to rebalance itself with a downtrend. On the short side, I have another signal that performs exactly the same function, stepping in to trigger long trades after a run of short ones.

Some other types of meta-signals I've experimented with, albeit with variable results, have measured the slope of trading gains on a chart, and have excluded trades made when the slope of recent gains is either too gradual, or is negative. Another similar feedback signal measures the percentage of successful trades generated by a particular signal, and excludes trades made when its success over the past N trades has been under a certain percentage.

I could go on, but I'm sure you get the idea by now, and most of my other meta-signals have been variations on these basic themes. When designing a trading system, it's always good to keep in mind that in addition to having it analyze the forex market, you can also have it analyze itself.