Best Practices

Lune Automated Strategies is a suite of trading tools designed to help you trade with precision, objectivity, and a foundation in statistical probability. By using backtested strategies, you can navigate financial markets with more confidence. This guide gives you tips and tricks for using Lune Automated Strategies.

Understanding the core principles#

Lune Automated Strategies works on several core principles that every user should understand:

• Probability and statistics: Trading, at its core, is a game of probabilities and statistics. Trading relies on identifying patterns and using them with a positive statistical expectancy.
• Market inefficiencies: Financial markets are not always perfectly random. Inefficiencies, non-random market activities, present opportunities. Lune's algorithms detect and act on these inefficiencies.
• Statistical significance: The trading signals Lune's algorithms generate are rooted in statistical significance. Signals trigger when market events occur that have a high probability of leading to a predictable outcome.

The reality of trading: losses are inevitable#

Acknowledge a fundamental truth about trading: no trading strategy never incurs losses. Even well-designed strategies, including Lune Automated Strategies, experience losing trades, losing days, and even losing weeks. The goal is not to eliminate losses entirely. The goal is to:

• Manage risk: Keep losses small and controlled.
• Maximize gains: Improve the potential for profitable trades.
• Reduce probability: Decrease the likelihood of significant losses.

Getting started#

For beginner users#

If you are new to Lune Automated Strategies or just getting started, using pre-built strategy configurations may be the way to go. Here is a step-by-step approach:

• Backtested strategies
  • Lune Trading provides backtested spreadsheets and a discord channel that contain settings you can copy, paste, and use for yourself.
  • While the spreadsheets may highlight particular equities or assets, the configurations are versatile. You can adapt them across a wide range of markets, including stocks, cryptocurrencies, forex, indices, and futures, and across various timeframes.
  • You can also use these strategies and make further tweaks to them.
  • You can also use these as baseline strategies to help you build your own unique strategy.
• Important note for prop firm traders:
  • Traders using proprietary trading firms must be careful. Prop firms often have rules against traders using identical strategies, which can lead to disqualification of payouts.
  • To reduce this risk, personalize your trading strategies. Even slight tweaks and adjustments can differentiate a strategy enough to comply with prop firm requirements.

For advanced users#

If you want to get the most out of Lune Automated Strategies, building a custom strategy is key. Here is a step-by-step approach:

• Strategy selection:
  • Begin by carefully evaluating the available strategies to determine which aligns best with your trading style and objectives.
• Parameter tuning:
  • Once you select a strategy, the next step is to fine-tune the input parameters that govern signal generation. This needs a deep understanding of how each parameter influences the strategy's behavior.
  • To help with this, set the Take Profit/Stop Loss settings to "Signal." This gives you a clear view of the signals the strategy generates.
  • Adjust the parameters, carefully observing how each change affects the frequency and quality of the signals. The goal is a balance that aligns with your trading style and risk tolerance.
  • You do not have to tune every parameter available in the strategy to get a profitable trading strategy.
  • Tip for simplifying parameter tuning: To make this simpler, you can try a browser extension like the "TradingView Assistant" found here: https://chromewebstore.google.com/detail/tradingview-assistant/pfbdfjaonemppanfnlmliafffahlohfg. This extension can automatically test different settings for you. It can make things easier and faster because you can let it run in the background while you do other things.
    • Disclaimer: We are not associated or affiliated with this browser extension. Use at your own risk.
• Trade management configuration:
  • After you optimize signal generation, configure the trade management settings. This defines how trades are managed after entry, including exits, stop-loss levels, and profit-taking targets.
  • Carefully consider the options:
    • Signal-based exits: Exiting trades based on opposing signals.
    • Percentage-based exits: Exiting trades at predetermined percentage gains or losses.
    • ATR-based exits: Using the Average True Range (ATR) to set dynamic exits.
    • Trailing stops: Using trailing stops to protect profits while letting trades run.
  • You can configure advanced trade exits to further tune gains and reduce losses.

Essential trading tips#

• The importance of the Sharpe ratio:
  • The Sharpe ratio is a risk-adjusted measure of return. It quantifies how much excess return is earned for each unit of risk taken.
  • A higher Sharpe ratio indicates better risk-adjusted performance.
  • Interpretation:
    • A Sharpe ratio above 0.3 to 0.5 is generally considered acceptable.
    • A Sharpe ratio of 1 is considered good.
    • A Sharpe ratio of 2 or higher indicates a strategy that generates significant returns relative to its risk.
• Understanding profit factor:
  • The profit factor is the ratio of gross profit to gross loss.
  • It indicates the overall profitability of a trading strategy.
  • A profit factor greater than 1 suggests the strategy is profitable, while a profit factor less than 1 indicates losses.
• The truth about win rate:
  • Many traders fixate on win rate, but understand that a high win rate does not guarantee profitability.
  • In fact, some effective trading strategies have win rates between 40% and 60%.
  • A very high win rate can be a red flag, often indicating poor risk management. This happens when a strategy takes small profits frequently but incurs large losses infrequently.
  • Win rate is linked to the risk
    ratio. Strategies with high win rates typically have low risk
    ratios, and vice versa.
• Avoid strategies with a low number of trades:
  • Be careful with strategies that show a very low number of trades during backtesting, even if the results look good.
  • A low trade count does not automatically mean a strategy is bad, but it does suggest the results might not be reliable. The strategy has not been tested enough by the market. Use such strategies with caution, or after much more testing.
  • Generally, you want to use strategies that have been deeply backtested over many market conditions (like bull markets, bear markets, sideways markets) and long periods of time. This gives more confidence that the strategy's performance is robust and not just due to luck or specific short-term conditions.
• Portfolio construction and diversification:
  • A robust approach to trading is to build a portfolio of multiple trading strategies.
  • Ideally, these strategies should be diverse, with varying entry and exit points and different trading styles.
  • Diversification reduces overall portfolio risk and improves stability.
  • Hedge funds and quantitative trading firms use this approach. By combining numerous diverse strategies, they aim for high Sharpe ratios.
  • Example: If you have 5 diverse trading strategies, each with a Sharpe ratio of 1.3, the combined portfolio Sharpe ratio could potentially reach 3, 4, or even 5, showing the power of diversification.

By following these guidelines and applying these techniques, you can use Lune Automated Strategies to work toward your financial objectives. Do so with a realistic understanding of the inherent risks and the inevitability of occasional losses.