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Idea to Decrease Drawdowns
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Idea to Decrease Drawdowns

  #11 (permalink)
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kevinkdog View Post
It is a compelling idea, if you could get it to work. It is kind of like equity curve trading, where you stop trading a system when the equity curve falls below its moving average. Except in this case, it is in reverse - you start trading it as heads into deeper drawdown territory.

The first issue I have with this is that you are making the assumption that the strategy will recover, and eventually reach new highs. But, what if it doesn't, or what if it hits a new historical maximum drawdown? You'll be trading it on the way down, and you might get wiped out before it recovers.

The second issue may be the bigger problem. You are now making a "wrapper" system to trade another system. And with your new wrapper system, you are reviewing all the results to make a decision when to turn it on. That means it is all in sample data, with no out of sample. So, of course the drawdown you choose is going to yield good results, because it is all in sample. You need to evaluate it for a while with out of sample results. This will be a problem, because drawdowns of that magnitude don't happen all that often, most likely. It will take a while to collect sufficient data.

I think the second issue is the big one. It is not to say it couldn't be done successfully, but you'd need a lot of out-of-sample data to verify it actually works. One possibility: make your "start" drawdown point a percentage of max historical drawdown, which you can get by optimizing over a bunch of your old strategies. Then, apply that percentage to a bunch of OTHER strategies (your out of sample set). If it yields good results on your out of sample, maybe you have something.

Good Luck. My personal experience is that equity curve trading does not really help, ever if at all. I find it better to just always trade the strategy, until you decide to turn it off for good.

Hi Kevin, thanks for your response. Yes, in hindsight, you can make anything work. I will be doing some testing with out of sample data / live simulation to see how things go.

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  #12 (permalink)
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nourozi View Post
So, I have developed a trading strategy which shows consistent profitability in Live Sim for over 6 months now. 'Problem' is, some weeks are inevitably not so good which is expected with any strategy/trading plan.

There is no holy grail strategy which makes guaranteed profit every week. Markets change day to day, week to week, month to month. Markets are dynamic.

To be a trader, means accepting loss and managing risk, as a prerequisite to making profit. You can not have profit without loss/risk in trading.

So, I have been thinking about how I could minimise my drawdowns and therefore increase my overall profit. There is one idea that I would like to share with you, which can theoretically be applied to any strategy!

It is quite simple really. This will work if you already have a strategy running for a few months at least for enough data to analyse. I will tell you how I am thinking of incorporating this idea:

I have a strategy, it will run on simulation. Once the strategy reaches a certain amount of drawdown, I will start the strategy in my Live Account and leave it running for a certain period of time.

Now, the idea behind this is that every strategy has a drawdown. After the drawdown, every strategy makes profit (the lowest point of a drawdown is when things start to go up again). For example, you may look at your results and see that the max drawdown was $2000. You may see that your strategy typically recovers after an average drawdown of $1500. So this is what you do: Run your strategy in live simulation. Once the strategy reaches a typical drawdown, that is when you begin the strategy in your live account.

So what you are doing is cutting out some of the drawdown in your live account, AND beginning your strategy at a typical time that it will recover, meaning higher probability trades!

Note: This is just an idea that I thought was worth sharing. I know there are some faults and I am not saying this will definitely work, but as long as it gets people thinking and adds to the community, I'm happy.

Thanks, and would appreciate feedback!

Some investors who buy into trend following strategies / managers actually do wait for decent drawdown prior to investing check Google should be some detail of it.

Now the big issue is timing this which is harder for u to do because you do not have enough unseen data.

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  #13 (permalink)
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6 months of curve fitted data is irrelevant.

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  #14 (permalink)
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Cachevary View Post
6 months of curve fitted data is irrelevant.

In what way did I imply that it is curve fitted data? This is 6 months live simulation testing data. Nothing curve-fitted here.

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nourozi View Post
In what way did I imply that it is curve fitted data? This is 6 months live simulation testing data. Nothing curve-fitted here.

It`s 100% curve fitted as you`ve built it to the current environment.Test it on at least 8-10 years sample,and see what you`ll get

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Cachevary View Post
It`s 100% curve fitted as you`ve built it to the current environment.Test it on at least 8-10 years sample,and see what you`ll get

Wait, I don't think you understand what I am saying. I have tested it in REALTIME, for 6 months. I have backtested it for years.

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nourozi View Post
Wait, I don't think you understand what I am saying. I have tested it in REALTIME, for 6 months. I have backtested it for years.

Sorry for misunderstanding then.Can you tell us what was your period sample and Sharpe?

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  #18 (permalink)
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Cachevary View Post
Sorry for misunderstanding then.Can you tell us what was your period sample and Sharpe?

I don't have them on this computer. But the main factors I looked at to gain confidence in the robustness of the strategy / and avoidance of curve-fitting are:
  • Consistency of results
  • Monte Carlo Simulation
  • Changing the paramaters/rules of the strategy (I only have 1 or 2 parameters and no indicators) slightly to see if the results were still similar
  • Testing on multiple markets (Most markets showed similar results after changing the parameters to adjust for price/time opportunities. e.g CL has a much larger average range over 1 hour than ES)

The forward testing results in REAL TIME have predictably not been as good as the Market Replay results due to fills, but that is the only difference. I could also note that the strategy is based on my view of the market, what makes sense to me. It's based on an idea I can relate to and not just a black box random number algorithm that seems to work. I know why every trade is taken.


Last edited by nourozi; February 22nd, 2015 at 02:30 AM.
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  #19 (permalink)
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nourozi View Post

Now, the idea behind this is that every strategy has a drawdown. After the drawdown, every strategy makes profit (the lowest point of a drawdown is when things start to go up again). For example, you may look at your results and see that the max drawdown was $2000. You may see that your strategy typically recovers after an average drawdown of $1500. So this is what you do: Run your strategy in live simulation. Once the strategy reaches a typical drawdown, that is when you begin the strategy in your live account.

So what you are doing is cutting out some of the drawdown in your live account, AND beginning your strategy at a typical time that it will recover, meaning higher probability trades!

You can also add another arrow to the quiver.You can use your failed entries while on sim, for the profit target levels in live trading,as the price is on the way back.Works 99% of the time.

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  #20 (permalink)
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Maybe look into the underlying cause of the system drawdown. Is there a repeating pattern associated with the system drawdown ?

For example we can look at two common types of trading methods or systems, that being trend following and reversion to the mean. In this case, one trades against the other, where the trend follower enters the trade expecting the trend to continue, and the reversion trader takes the opposite side of that trade expecting the trend to end or fail and price to revert to it's mean.

The big problem trend trading systems have is false start's, this is where the market is stuck in some sort of price range or congestion and is having trouble getting free of that price range. Within the range conditions, every time the price looks like it might be starting a trend, the initiating move fails and price reverts to the mean resulting in a loss.

So if the trading system is a trend following system, then obviously many of the signficant drawdown episodes can be correlated back to these trading range conditions. Under this hypothesis the drawdown would be correlated to the lack of a sustained price trend, and thus the system would need to see two things to begin taking trades again. First price would need to break free of the bounded price range area / zone, and secondly the system would need to record at least one winning trade event once outside that area demonstrating the capacity of the market to continue or sustain the directional price move. The winning trade(s) would trigger the signal Kevin mentioned about using a moving average of the equity curve to turn on the system.

Conversely, reversion systems fail (get run over) when there is a sustained trend. So in this case, the system would allow the trend to create the drawdown streak (on paper), then once the trend ends and a trading range becomes established, the equity curve would turn up initiating the trigger for the system to become active.

Be Patient and Trade Smart
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