Mechanical trading systems have many components. The common components usually include entry signals, exit signals, trade management actions like moving stops or moving targets, scaling in, scaling out, position sizing, profit targets, bar period, market traded, trading times of day and so on.
Designing a trading strategy entails putting these components together into a system.
The ESA is intended to be an entry signal analyzer. Meaning it's intended as a tool to test the edge of the entry signal component of the trading systems on its own in isolation as much as possible. Isolation meaning that you remove any trade management, signal based exits, etc.
Its intended for answering the questions - how strong is the signal (how much does it go in my favor vs against me) and, how long does it last? Once you start adding exit criteria you start adding an exit component to that which important and useful but was it takes the tool in a different direction and closer to a backtest territory.
Fast results, easy to execute
Part of the tool box, is not a replacement for a full backtest.
Evaluating the effectiveness of the entry signal on its own
Related Reading Material
“Way of the Turtle”, Curtis Faith
“Building Winning Algorithmic Trading Systems”, Kevin J. Davey
ESA Workflow
For each iteration
Process all signals on the chart
For each signal, based on the settings, simulate a trade execution and calculate the results for that trade (i.e., the PnL, MFE/MAE for that trade)
Once all signals on the chart are processed, tally the results and post aggregated results to the summary table
Defining Iterations
Trade Simulation
For each signal on the chart a trade is simulated and the results summarized.
This section focuses on explaining how trades are simulated.
The objective of simulating a trade is to determine two things:
The entry point (bar and price)
The exit point (bar and price)
I.e., we want to know the bar and price at which we entered and the bar and price at which we exited. With those at hand, we can then proceed to calculate the trade result such as PnL, MFE/MAE, duration, etc.
How is the entry determined?
The entry is assumed to be the signal bar.
Price wise, users can simulate an entry at the Close of the signal bar or the open of the signal
Close of the signal - simulate as if we entered at the close of the signal price
Open of the next bar - simulate as if we entered at the open of the next bar
How is the exit determined?
Each trade can exit in 3 possible ways
Time based, exit after X bars
Profit target hit
Stop loss hit
Which ever one of these is triggered first will end the trade.
For example, say we are have set a target of 10 points, stop of 10 points and a the max duration is 10 bars.
If the trade does not hit the target or stop within 10 bars the trade ends and the results are calculated as if we had flattened after 10 bars in the trade.
If the trade hits the target before the 10th bar, then the trade ends at that point and the results calculated accordingly.
Signal References
The study requires a long signal reference and a short signal reference.
The signal reference are simply subgraphs that signal an entry signal.
Sierra Chart provides multiple methods to create these signals, for example:
Spreadsheet formulas
Color Bar Based Alert studies
ACSIL based custom studies
You can reference studies and subgraphs that you create yourself or you receive from someone else.
Summary table
Viewing trades for a specific iteration
Exporting Trades for a Specific Iteration