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Taking a Trading System Live


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Taking a Trading System Live

  #161 (permalink)
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How I'm Doin, Part 2

Last post I showed my Monthly Summary sheet to reveal my current performance. It gets data from the individual strategy sheets. I have one page of my spreadsheet for each of the strategies I am currently trading or incubating.

The screenshot at the bottom shows the individual strategy summary sheet. It is pretty simple, but pretty effective. I can see at a quick glance how a strategy is performing, compared to my expectations (which of course are based on historical performance). When you have 30-50 strategies to keep track of, a quick summary like this is really invaluable.

In the sample I show below, you can see that the NGEC system (2 strategies) are currently underperforming my expectation by a bit (return efficiency is 92%), but the trend in general is pretty good. For many strategies I trade, that is all the information I need - a quick view at performance. If something catches my eye, I can always dig deeper.

On a monthly basis, the only number I have to update is in the "actual" column. This repsresents the actual profit or loss for the strategy for that particular month. It can be taken from trading statements, after adjusting for the number of contracts, or it can be taken from the strategy performance report. I typically do the latter.

The expected numbers can all be obtained from your historical testing. In the sample I show below, the annual profit trading one contract of the NGEC system is $12,264. I obtained this value from the Monte Carlo simulations I run prior to going live. This $12,264 equated to $1,022 monthly return.

The max drawdown is obtained from the strategy report. Note that this is an intraday value, where the drawdown the spreadsheet calculates is on a monthly basis. This obviously is not totally correct, as ideally you would want to compare drawdowns over the same length of time. But for my purposes it is adequate.

With these individual sheets for each strategy, once I fill the data in, it takes me 15 minutes or so to quickly run through each sheet, and assess its performance. It is a great way to quickly see "How I'm Doin."



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  #162 (permalink)
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kevinkdog View Post
(...)
Now, fast forward a few years. I am trading full time, working alone. But, I still want to see at a glance "how I'm doin" with my strategies and trading. Obviously, my account statements and equity curve tell the overall story, but that is not enough detail for me. What strategies are doing good? Which are underperforming? Of strategies I am incubating, how do they look? Should I make some changes in what I am trading? This "How I'm Doin" report can help me answer all of these questions.

This is a great idea, thanks for sharing.


kevinkdog View Post
(...)
To keep things simple, I base everything on one contract being traded, even though that is usually not what I am actually trading. Why? My goal with this spreadsheet is to see how my strategies are doing compared to how I thought (calculated) they'd be doing. If I included position sizing, it would muddy up the view for me.

Sorry for being nosy, but are those expected returns also based on a position size of one contract? (Just to get an idea of what is possible in the light of the 'how much capital is enough to get started with automated trading'-thread).

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  #163 (permalink)
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Jura View Post
This is a great idea, thanks for sharing.


Sorry for being nosy, but are those expected returns also based on a position size of one contract? (Just to get an idea of what is possible in the light of the 'how much capital is enough to get started with automated trading'-thread).


Thanks for the nice words.

All the values I show are based on one contract being traded. Where it gets a bit confusing is in the percentage returns. I use "notional capital" for those calculations. I use a notional capital number that is as if I was trading the strategy by itself. It is based on a drawdown probability I feel comfortable with having to endure.

So, I would not put any faith in those percentage returns, since they really are based on my personal likes/dislikes.

The dollar figures should be accurate.

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  #164 (permalink)
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NJAMC View Post
@Big Mike,

Unfortunately, it is easy to over-fit even a large data-set. It is a matter of having enough degrees of freedom in your "solution" or what I am less familiar with, but have seen none the less is a simple MA crossing that gets lucky. (Likely large drawdown ,MAE, or ETDs)

From the "black magic" side, all you really need to do is give an algorithm enough time and degrees of freedom (input values, products/sums of terms, square's, square roots, etc.) and you can match to the max of degrees (ultimately more good trades) of freedom. Sometime it is difficult to see all the degrees of freedom, but there is likely more than you can see.

Completely agree. In the early days I wrote strategies that had so many options you had to scroll the page to see them all.

Now I try to stick with very simplistic strategies that adjust based on market behavior, internally. Think of it like being ATR or volatility based, that type of stuff. I've found it to be a good compromise.


Quoting 
This is why Forward or Out of Sample testing is critical. The more "over-fit" a function is, the fast it will fall apart as you test values that were not used to train the system. What you are looking for is a "fit" function. One that does okay, but generalizes the solution into the future. This is the goal of my Genetic Programming investigation.

Completely agree again. Still, I have a special place in my heart reserved for you and your machine learning project, I guess I hold out hope that there is a "better way"

Mike

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  #165 (permalink)
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kevinkdog View Post
Of all the numbers on this sheet, I am primarily interested in two columns:

1. Return Efficiency - How am I doing, compared to my expectations? That is how I define return efficiency, and it is simply my actual return divided by my expected return. If my strategy is performing exactly as I had calculated, it will be 100%. Obviously, I want this to be close to or above 100%. Typically, when I take all the strategies together, I find my efficiency is somewhere between 70-100%. So, this says that if my historical testing says I should make $10 a year, I am actually making somewhere between $7-10.

2. Drawdown Efficiency - This is how I am doing with regards to drawdown. Just like with return efficiency, I calculate this as my actual drawdown divided by my expected drawdown. I then subtract the result from 1, to make the number 100% the ideal value. It is a bit backwards to do this, but I do it that way so that both efficiency numbers have 100% as their ideal value. Then, the closer to efficiencies get to zero, the worse off things are.


Kevin,

Do you pay attention to things like MAE or MFE, average time in trade, win percentage, number of trades per day, etc when comparing results? Naturally, if these things are awry then it is likely to effect the drawdown and net profit that you mentioned.

Mike

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  #166 (permalink)
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Big Mike View Post
Kevin,

Do you pay attention to things like MAE or MFE, average time in trade, win percentage, number of trades per day, etc when comparing results? Naturally, if these things are awry then it is likely to effect the drawdown and net profit that you mentioned.

Mike

Not at this point in the process - the monitoring phase. So, I already assume that I am comfortable to trade the system with whatever those metrics you mentioned and others come out to be.

I have never looked at using other metrics as an "early warning" system, and I believe that is what you are getting at. Maybe for example, if the number of trades per day goes up or down significantly from history, that could be a warning that the market has changed.

When I get some time, I may just go back and look at some failed systems of mine - were there warning signs that could have saved me some cash?

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  #167 (permalink)
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Big Mike View Post

Completely agree again. Still, I have a special place in my heart reserved for you and your machine learning project, I guess I hold out hope that there is a "better way"

Mike

You and me both! I have to say I am getting closer, just need more time to focus upon my task. Some of us 9-to-5ers only have nights and weekends to work on special projects. This would be so much easier if I was retired, but if I was retired, I probably wouldn't need this system.... Another paradox....

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  #168 (permalink)
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kevinkdog View Post
Not at this point in the process - the monitoring phase. So, I already assume that I am comfortable to trade the system with whatever those metrics you mentioned and others come out to be.

I have never looked at using other metrics as an "early warning" system, and I believe that is what you are getting at. Maybe for example, if the number of trades per day goes up or down significantly from history, that could be a warning that the market has changed.

When I get some time, I may just go back and look at some failed systems of mine - were there warning signs that could have saved me some cash?

Exactly - I mean if a system is operating outside the norm, whether it is number of trades, average per trade profit, or whatever - I want to know it because, well, that means it's not normal! And while sometimes "not normal" can be a good thing (more profit), it usually isn't free -- meaning it carries increased risk, so again, I want to know it...

Mike

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  #169 (permalink)
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Big Mike View Post
Exactly - I mean if a system is operating outside the norm, whether it is number of trades, average per trade profit, or whatever - I want to know it because, well, that means it's not normal! And while sometimes "not normal" can be a good thing (more profit), it usually isn't free -- meaning it carries increased risk, so again, I want to know it...

Mike


Here is a great example of what you said - performance that is too good being a bad thing.

I started incubating this strategy a while back, and it took off...




It was "too good to be true" - way above its historical norm. For that reason I decided to keep incubating it. Here are the next few months...




Now the strat is in line with historical norms, but the standard deviation of monthly performance is a KILLER (look at the down month size). I looked into it further, and saw that the system was not acting normal. So I decided to keep incubating. Here is what happened...






So, this is a good example of 1) performance that is too good being a bad thing, and 2) standard deviation of results being an early warning sign that things were not quite right.


Epilogue: I am still incubating it, but did not trade it with real money.

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  #170 (permalink)
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Taking a Trading System Live


Market conditions are changing over time. I have a feeling that requirement of having system that consistently shows profit over the period of 3 years is not valid. What we all looking for is for some hints when to stop trading certain system, and switch to another one.
Incubation does not serve any purpose, just confirmation that market conditions are the same, but it is not a guarantee that conditions could not change at the moment we start trading real money.


Last edited by record100; September 10th, 2013 at 06:34 PM.
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