Sunday, May 9, 2010

Why is it difficult to trade?

I wish to share basic stats for one of the variations of 30min Higher High/Higher Low system for ALSI futures. Results are for period 19.12.2007. – 03.05.2010.

trades: 691
W%: 42.11%
Avg. W/Avg. L: 2.14
largest loss: 823 points
t-formula: 3.77
f-formula: R 54 414 over margin amount
start equity: R 60 000 (6000 points)
end equity: R 491 710 (49171 points)
CAGR: 142.69%
Sharpe: 1.96 (calculated with 7.25% as risk-free rate)
Max drawdown: 3738 points

year 2008: 27914 points from 245 trades
year 2009: 13378 points from 304 trades
year 2010 (so far): (568) from 140 trades

System is always in the market and it does take both, long and short trades. Results are on basis of one contract being consistently traded and do account for brokerage of total of 2 points per trade, while these results do not account for slippage or any other costs that trader might encounter. Interest earned on margin and interest earned on trading account are not included in these results.

If we look at the entire sample, closed equity curve was at all time high only 106 times. The rest of the time system has spent either going deeper into drawdowns or getting from bigger drawdown level to smaller drawdown level.

If we look at year 2008, which was the best year we have on the record for this system – System has recorded 44 all time highs on closed equity curve, while the reminder of 201 trades ended somewhere within drawdown.

Simple conclusion: While trading one will often be wrong. Also, one will often be right, but that is still not going to be enough to move equity curve to new all time high levels. Understanding this is, simply, portion of the foundation on which any novice might and should try to build successful trading activity.

Trade with trend!

Note: Readers who are not familiar with difference between open and closed equity curves should do some reading on the subject in order to familiarize themselves with these two approaches.


Corne' said...

Hi Igor,

Could you please spare a moment to help or guide a very, very amateur trader with a few questions regarding his models?
More particularly on the degradation of performance of a strategy/model.

From my reading it seems I have two options in monitoring for degradation and they are the Profit Factor and the equity curve.
Are there any more ways to check the performance?

And at what point does a strategy/model become unusable? I don’t want to lose all my profits again just because I am using the wrong strategy. 

With regards to the above it has been suggested that one monitor the Profit factor and if it hits a predetermined cut off below 1 then stop until it moves back up above 1. But then one misses out on all the trades that take it from under 1 to over 1. Should one track it on a chart and check the trend of the profit factor or use some or other SMA to check if it is moving in the right direction.

And if one were to use the equity curve would one draw an upward canal on it and if it is broke then stop? But how will one know when it becomes viable again? Once it has formed a new upward canal? I have also read that one can use a SMA(10) to track the curve and if the curve breaks the SMA then stop. And if it breaks back above the SMA then trade again?

Are there any ways to check the randomness of a market?

Are advice will help me immensely. Even if it’s just suggested reading or a website or two.

Alsi Trader said...

Hello Corne.

Thank you for the questions.

Detailed and complete answers would lead us to the holly grail of trading.

For me, a lot that has to do with equity curve is work in progress and the best answer I have is:

There are numerous ways to look at health of one’s model – being single traded instrument or complicated portfolio. Basic, simple and minimally optimized look at equity curve should always provide enough information on what’s going on.

Some good reading on this subject could be found on and and

If you read all posts related to equity curve on cssanalytics; all posts on dvindicators and almost all posts in Money Management section of tradingblox there is going to be enough information on future reading and personal research.

Good luck with your efforts and please feel free to share.

Corne' said...

Hi Igor,

Thanks for the info I will go and read.


Corne' said...

Hi Igor,

Ok I did a bit of the reading and from it I have decided to use the channel on the Equity Curve to check if the system is working. If it breaks out of it on the down side I will papper trade until a new channel has forms. The down side is that I will miss profitable trades but one has to protect capital. There will be more oppertunities later.

I have also relized that I need to add something like the Sharpe ratio to messure risk vs return. Something that I have never done. I will use the repo rate as the risk free rate?

I also think my main problem is not my system (even though I have improved it by adding to it) but its my mind set. Now I just have to figure out how to get it like it was at last years start. Anyway thanks for the assistance :-)

Alsi Trader said...

Hello Corne,

Thank you for the update.

My advice would be not to rush with any decisions. Do a lot of reading and lot of testing to find out what works for trend following systems and what works for mean-reverting systems. Personally, for me this is 6+ months long journey and I am not there yet despite I have basic thesis, framework and lots of work done. Sites I provided are excellent source of information.

Also, you need to decide what are you looking for – more points or more points while controlling risk or “just” better risk/reward. All the metrics and techniques should than be created to meet criteria you chose.

You can calculate risk vs. return in many ways – Sharpe, Sortino, DVR, Lake Ratio, Ulcer, etc. Learn about them and find out which one works for you and which one is in line with your goals. Personally, I just calculate Sharpe (among others) and I use it as one of the metrics. My choice is to use 7.25%. Simply chose any number you wish and keep it constant – Don’t forget, you are not some kind of fund that has to publish these numbers, so choice of risk-free rate is from that point of view less important.

When it comes to mindset – That’s ever-changing battle. This is the best I could share:

All the best.

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