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Equity curve trading - possible?


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Equity curve trading - possible?

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  #1 (permalink)
 DarkPoolTrading   is a Vendor
 
 
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Hi All,

So I am finding that equity curve trading is not as easy as it sounds. The concept sounds simple enough - Stop trading when your equity curve drops below a moving average (or some other measurement). Resume trading when it once again rises above a moving average. This in theory should reduce your drawdowns. Well, from what i've found this is not true. Please note that this is only ever possible with a mechanical system. Trading your equity curve is not possible if you're a discretionary trader.

I have developed a profitable system which I am busy backtesting. It has a good looking equity curve and reasonably infrequent significant drawdowns. The problem is that the maximum drawdown is higher than what im willing to accept. So i've been working on several ways to filter trades based on the equity curve in an effort to reduce the drawdowns.

The purpose here is not to increase profit, but rather to reduce drawdown.

I have tried several variations of the below:
  1. Dont trade when the equity curve is below a certain moving average
  2. Dont trade when the RSI of the equity curve is below a certain value (I had high hopes for this one, since the idea is that trades would only be taken when the momentum of the equity curve is up)
  3. If the drawdown reaches a certain value, stop trading until it has recovered a certain part of the drawdown. eg: If the drawdown exceeds 200 points, only start trading once it has recovered 100 points from the max drawdown. The idea being that you would stop trading during a string of losses and only start again once a certain percentage gain from the max drawdown has occured.
  4. Various combinations of the above eg: RSI combined with MA. or: MA combined with max drawdown etc

Basically I have come to three realisations:
  1. I am unable to beat the equity curve by trying to filter out the drawdowns.
  2. For the most part, I am unable to reduce the drawdowns
  3. Trading the equity curve results in even bigger drawdowns in many cases. This is because you miss many of the big positive trades and by the time you start trading again, you run into a string of losers which results in a bigger drawdown than what you would have had.

My feeling is that a system with a high win rate may benefit from trading the equity curve. However I have been unable to backtest this because my system does not have a high win rate. A trend following system with a lower win rate (but still a positive system), cannot benefit from trading the equity curve in my opinion.

Have any of you managed to sucessfully reduce your drawdowns by trading your equity curve?
Was this on a trend following system or something else?

Have you performed back testing on this? I ask because occasionally filtering trades based on your equity curve works, but after testing 5 years worth of data using a profitable system, I have not been able to come out with a better solution than simply taking every single trade that the system generates.

cheers.

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I have attached two images of some of my results

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 liquidcci 
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DarkPoolTrading View Post
Hi All,

So I am finding that equity curve trading is not as easy as it sounds. The concept sounds simple enough - Stop trading when your equity curve drops below a moving average (or some other measurement). Resume trading when it once again rises above a moving average. This in theory should reduce your drawdowns. Well, from what i've found this is not true. Please note that this is only ever possible with a mechanical system. Trading your equity curve is not possible if you're a discretionary trader.

I have developed a profitable system which I am busy backtesting. It has a good looking equity curve and reasonably infrequent significant drawdowns. The problem is that the maximum drawdown is higher than what im willing to accept. So i've been working on several ways to filter trades based on the equity curve in an effort to reduce the drawdowns.

The purpose here is not to increase profit, but rather to reduce drawdown.

I have tried several variations of the below:
  1. Dont trade when the equity curve is below a certain moving average
  2. Dont trade when the RSI of the equity curve is below a certain value (I had high hopes for this one, since the idea is that trades would only be taken when the momentum of the equity curve is up)
  3. If the drawdown reaches a certain value, stop trading until it has recovered a certain part of the drawdown. eg: If the drawdown exceeds 200 points, only start trading once it has recovered 100 points from the max drawdown. The idea being that you would stop trading during a string of losses and only start again once a certain percentage gain from the max drawdown has occured.
  4. Various combinations of the above eg: RSI combined with MA. or: MA combined with max drawdown etc

Basically I have come to three realisations:
  1. I am unable to beat the equity curve by trying to filter out the drawdowns.
  2. For the most part, I am unable to reduce the drawdowns
  3. Trading the equity curve results in even bigger drawdowns in many cases. This is because you miss many of the big positive trades and by the time you start trading again, you run into a string of losers which results in a bigger drawdown than what you would have had.

My feeling is that a system with a high win rate may benefit from trading the equity curve. However I have been unable to backtest this because my system does not have a high win rate. A trend following system with a lower win rate (but still a positive system), cannot benefit from trading the equity curve in my opinion.

Have any of you managed to sucessfully reduce your drawdowns by trading your equity curve?
Was this on a trend following system or something else?

Have you performed back testing on this? I ask because occasionally filtering trades based on your equity curve works, but after testing 5 years worth of data using a profitable system, I have not been able to come out with a better solution than simply taking every single trade that the system generates.

cheers.

I have personally never been able to make trading with an equity curve work. I often find reduces profit and increases draw downs. That being said I am sure there are those who use equity curves and they help. I think it depends on strategy etc.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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 Nicolas11 
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Hi,

This thread may also interest you:


Nicolas

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 Luger 
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I have not really toyed with the idea of working the equity curve myself, though i have read some threads on it. Were it me trying to make this happen then I would be most likely to try using a bollinger band approach.

Inside the bands = standard contract amount
Above the upper band = reduce contract size
Below the lower band = increase contract size

You would then be taking action against the lower probability trade sequences that are present in trading.

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 DarkPoolTrading   is a Vendor
 
 
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Luger View Post
I have not really toyed with the idea of working the equity curve myself, though i have read some threads on it. Were it me trying to make this happen then I would be most likely to try using a bollinger band approach.

Inside the bands = standard contract amount
Above the upper band = reduce contract size
Below the lower band = increase contract size

You would then be taking action against the lower probability trade sequences that are present in trading.

Using bollinger bands is an interesting idea, I think I might do some tests on that. However im not sure I agree with your suggested approach. If you were to increase contract size below the lower band, you would essentially be increasing exposure when there is a large increase in downward volatily of your equity curve. Surely that will be a recipe for disaster? Never the less, some sort of investigation around this may be worth while.

I think im still leaning towards the idea that equity curve trading is not possible with a trendfollowing system. This is because there is a lower winning percentage, but with big wins. That means you need to be in the market when those big wins come around.

On the other hand with a higher winning percentage system, but with small wins equity curve trading may be possible. This would be because a string of losses would be abnormal and you're not going to miss out on any big wins because your system is designed around many small wins.

Any other thoughts on this?

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 Big Mike 
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I think a smooth EC is very important. I've asked @NinjaTrader to make it possible in NT8 to optimize based on a linear equity curve, with the smallest deviation from optimal as an ideal result.

Counter-trend or mean reversion systems typically have smoother EC's in my experience. But with trend or counter-trend, the real key is scaling in my opinion.

I don't believe you listed what product you are trading, but an idea is to trade a different class of product with less risk per dollar, so you can carry more size and scale in and out.

For example, if trading ES futures and you don't want to trade up to 10 lots at a time (just an example), then consider trading SPY ETF instead. If trading 6E, consider trading M6E instead. etc.

Mike

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 DarkPoolTrading   is a Vendor
 
 
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Yes I agree completely, a smooth EC is critical. That is why I will not even consider trading this system live in its current form. It will be great if NT8 allows for integration of EC testing into backtesting / optimisation.

I trade the ALSI (It's the main index future in South Africa based on the top40 companies). Because of the time zone I am in, I am in some part limited by that. In general I am able to trade South Africa and European (UK, Germany etc) markets. Because of that the products I have available to trade are fairly limited in terms of trading mini sized contracts (at least that im aware of). I agree completely though, that scaling down rather that not trading is a valid approach. Im just not sure of any mini sized contracts in a time zone that Ill be awake for.

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 grausch 
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DarkPoolTrading View Post
Yes I agree completely, a smooth EC is critical. That is why I will not even consider trading this system live in its current form. It will be great if NT8 allows for integration of EC testing into backtesting / optimisation.

I trade the ALSI (It's the main index future in South Africa based on the top40 companies). Because of the time zone I am in, I am in some part limited by that. In general I am able to trade South Africa and European (UK, Germany etc) markets. Because of that the products I have available to trade are fairly limited in terms of trading mini sized contracts (at least that im aware of). I agree completely though, that scaling down rather that not trading is a valid approach. Im just not sure of any mini sized contracts in a time zone that Ill be awake for.

How is the liquidity on the ALMI? I remember looking at them when they just started, but daily volume was sometimes 0. However, they are 1/10th the size of the ALSI and would help with scaling in/out.

I believe there is now an active market maker on the ALMI, so at least you will be able to trade them although spreads might not be as good as the ALSI.

Edit: Actually when the ALMI started daily volume was mostly 0.

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