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Taking a Trading System Live
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Taking a Trading System Live

  #171 (permalink)
Market Wizard
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record100 View Post
Market conditions are changing over time. I have a feeling that requirements of having system that consistently shows profit over the period of 3 years is not valid.

OK, I understand your point of view. Let's discuss your position, since I know you are not alone in thinking this way. What timeframe of profitability do you think is appropriate, and why?
  • Profitability for longer than 3 years
  • Profitability for somewhere between 0-3 years
  • No history at all - just look forward
  • Losing history for x years (with the theory being that most systems are mean reverting, and many historically losing systems will eventually become profitable)
  • Some other criteria entirely




record100 View Post
What we all looking for is for some hints when to stop trading certain system, and switch to another one.

In my mind, this requires historical results of your system. So maybe your system does well in only bull markets. Then, your criteria should be to quit when market is in bear market. Or maybe your system thrives in volatility. In that case, turn off the system when it is low volatility.

Is that what you are thinking about? The key is to do this up front in your development, not at the end. I've seen people create a system, and then in an attempt to make it "better," create new rules. For example, they don't trade on Mondays, since Mondays are net losing days. This creates a better backtest, but may be awful going forward.

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  #172 (permalink)
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record100 View Post
Incubation does not serve any purpose

I disagree 100%. It will quickly reveal any big flaws in your testing methodology. Try it with a system that is optimized until today, and see how it does the next few months. That is one flaw incubation would reveal.




record100 View Post
just confirmation that market conditions are the same.

I agree, and if you historically test it over a lot of market conditions, that should give you more confidence. If market conditions change to something never seen before during incubation and your system falls apart, well you've learned something about your system and you've likely saved yourself some trading capital. If you pass incubation, you'll still run the risk of a totally different market making havoc of your system. But I think this is true of ANY system, historically tested or not.





record100 View Post
but it is not a guarantee that conditions could not change at the moment we start trading real money.

I agree 100%. I wish it was a guarantee. But I have saved a lot of money by not trading systems I thought were good, but that failed incubation. If I had immediately started trading instead of incubating, I would have lost a lot (more).

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Last edited by kevinkdog; September 10th, 2013 at 07:58 PM. Reason: added 2 sentences to point #2
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  #173 (permalink)
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Taking a Trading System Live


In my opinion, Incubation gives some comfort, mental readiness to go live. This is it . Bad Quality of the system should not unexpectedly be revealed at this stage. I agree this is important step before investing real money.


Last edited by record100; September 10th, 2013 at 09:47 PM.
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  #174 (permalink)
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record100 View Post
In my opinion, Incubation gives some comfort, mental readiness to go live. This is it . Bad Quality of the system should not unexpectedly be revealed at this stage.

Ideally, yes. And as a developer gets more experience, the unexpected happens less and less. But it does happen. It could be something subtle you do in the development, that you don't even realize you did.

Maybe your system is for T-Bonds, and one of your trading rules was coded wrong, and you unintentionally favor long trades. That probably would have tested great over the past 20 years, but if you were incubating over the first half of 2013, maybe incubation, with poor results, alerted you to a flaw.

Of course, if you incubated in mid 2012, incubation would not help you uncover the mistake. So it is not foolproof, that is for sure.

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  #175 (permalink)
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On 5 min chart I am considering trading system that is profitable over the period of one month. Of course system is tested over much longer period of time, that includes Bear and Bull markets and transitions in between . You should be confident that quality and the robustness of the system is high.

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  #176 (permalink)
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Incubation may have tradeoffs, but for those reading the thread and learning how to develop a system, I think it is highly valuable. Being able to see a system perform, see a system perform for a while then breakdown, and see a system fail immediately is part of the experience. Doing it rationally without monetary fear also allows for a better learning experience. Atleast there will be some realtime preparation before letting the emotions out on a live system.

Without knowing your personal system building success ratio over time it would be hard to quantify whether incubating is good or not. So in the end, I think it is up to the system builder to determine what value is added. Though I personally want to see some live/sim action before throwing money at a system.

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  #177 (permalink)
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record100 View Post
On 5 min chart I am considering trading system that is profitable over the period of one month. Of course system is tested over much longer period of time, that includes Bear and Bull markets and transitions in between . You should be confident that quality and the robustness of the system is high.

Thanks for sharing those specifics. I have some probing questions, not meant as criticism, but to help everyone (including myself) understand your approach...

Is one month of profitability your criteria?

How many trades occurred in that time period, and is that at all important to you?

When you say you tested over longer period of time, what influence (if any) does this play in your decision to go live or not? It sounds like you place much more emphasis on the last month.

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  #178 (permalink)
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Given all the flaws of the trading software and backtesting engines being used today by 99% of readers of this thread, incubation is quite simply a requirement.

It took years for me to learn how to overcome "flaws" in the trading engine. Anyone can write a system in 5 minutes that makes millions of dollars, if you don't realize you are hitting on a flaw in the engine. Backtesting alone will never tell you.

Mike

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  #179 (permalink)
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Big Mike View Post
Given all the flaws of the trading software and backtesting engines being used today by 99% of readers of this thread, incubation is quite simply a requirement.

It took years for me to learn how to overcome "flaws" in the trading engine. Anyone can write a system in 5 minutes that makes millions of dollars, if you don't realize you are hitting on a flaw in the engine. Backtesting alone will never tell you.

Mike

And sometimes incubation won't catch these flaws either. In those situations, trading 1 contract live usually will, though.

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  #180 (permalink)
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kevinkdog View Post
Ideally, yes. And as a developer gets more experience, the unexpected happens less and less. But it does happen. It could be something subtle you do in the development, that you don't even realize you did.

Maybe your system is for T-Bonds, and one of your trading rules was coded wrong, and you unintentionally favor long trades. That probably would have tested great over the past 20 years, but if you were incubating over the first half of 2013, maybe incubation, with poor results, alerted you to a flaw.

Of course, if you incubated in mid 2012, incubation would not help you uncover the mistake. So it is not foolproof, that is for sure.


kevinkdog View Post
And sometimes incubation won't catch these flaws either. In those situations, trading 1 contract live usually will, though.

Interesting points since if the primary goal of incubation is to uncover errors, wouldn't a market replay option be just as usable for this goal (perhaps with some random latency build in to account for the non-instant order execution of real-time trading)?


record100 View Post
On 5 min chart I am considering trading system that is profitable over the period of one month. Of course system is tested over much longer period of time, that includes Bear and Bull markets and transitions in between . You should be confident that quality and the robustness of the system is high.

I think this could work if you have a lot of trades (>1000) and different types of days (volatile, non-volatile, up trending, down trending) in that month, but otherwise, why not test on a longer time period and/or different instruments?

Oh speaking of different instruments, Kevin, do you believe that a system that works good on one instrument should also work good on similar, related instruments? Or are you more inclined to believe that every instrument is somewhat unique?


Last edited by Jura; September 11th, 2013 at 04:11 AM. Reason: Typo
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