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Taking a Trading System Live


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Taking a Trading System Live

  #1 (permalink)
Legendary Market Wizard
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Taking a Trading System Live

OK, if you'd read my other journal here at Big Mike's, you'll know (as of today) that I have attempted 2 TopStepTrader Combines in the past few months. I did not achieve the profit goal in either of them , but qualified for a rollover ("a do over") each time by finishing slightly profitable, and by meeting all other Combine criteria.

While not passing the Combine has been disappointing and more than a little embarrassing, it did have a silver lining...

When I developed the trading strategies for use in the Combine, I thought that they might be appropriate for my own trading, even if they weren't good enough for the Combine.

That was back in March 2013. Now, 5 months later, I have enough "real time" data to make the decision to go live.

And that is what this thread is about - once you've developed a strategy, and watched it in real time or sim traded it for a while, then what?


- When do you decide to go live, and what criteria should you use?

- How do you actually trade it? Automated, manual, etc.? Do you need a new account, or a new broker?

- How do you determine how much to fund the account with?

- How do you position size? Do you start small, or big? Do you have a position sizing scheme?

- If things go bad, when do you quit trading the system?

- How do you monitor it on an ongoing basis?

- How do you track mistakes?


In due time, I'll address all these questions and more in this thread, along with showing the ongoing performance. I'll also answer any questions you may have.

If you are looking for details of the trades my system takes, or a discussion of why I took certain trades, you have come to the wrong place - this thread is about the trading process, not the trades themselves.

I truly have no idea how this system will do over the next few months. My hope, as always, is that is will do great, but as with any strategy, I am always prepared to cut my losses and stop trading it if need be.

Comments and questions are appreciated!

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  #3 (permalink)
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The Beginning


Let's Start at The Beginning...

To avoid confusion later on, here are some basics you need to know:

Trading System Name: NGEC - this stands for "Not Good Enough for the Combine." Why such an odd name? Well, I had to call it something, and I always like to remind myself of my trading shortcomings. As much as I like this system, and as well as it may or may not do, it still wasn't good enough to pass the Combine. That to me is important to remember, as it helps keep me humble. I know quite a few very good traders, and also quite a few arrogant traders. Interestingly enough, though, I don;t know any arrogant AND very good traders.



2 Trading Strategies in NGEC:

Strategy #1 - Trades Overnight session, has high winning percentage, lots of little wins and an occasional big loser
Strategy #2 - Trades Day session, lower win percentage, primary profit generator

All strategies are out by 3 PM ET each trading day. Both strategies are independent, and I'll only be in one at any given time.



Market:

Euro Currency Futures (6E)




With the basics out of the way, my next post will be the "decision point" post. Do I go live, or not?

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  #4 (permalink)
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kevinkdog View Post
Strategy #1 - Trades Overnight session, has high winning percentage, lots of little wins and an occasional big loser
Strategy #2 - Trades Day session, lower win percentage, primary profit generator

All strategies are out by 3 PM ET each trading day. Both strategies are independent, and I'll only be in one at any given time.



Market:

Euro Currency Futures (6E)




Hi @kevinkdog,

Thanks for starting this thread. Would you mind sharing the R:R ratio for the 2 strategies?

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  #5 (permalink)
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gulabv View Post
Hi @kevinkdog,

Thanks for starting this thread. Would you mind sharing the R:R ratio for the 2 strategies?


Here are the summary performance reports for each strategy. The Overnight Strategy #1 is the 74.86% winning strat.







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  #6 (permalink)
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Decision Time

At this point, I have 3.5 or so years out walkforward backtest history (the key word being walkforward, if you don't understand the importance of this compared to a standard optimized backtest, please take some time to learn about walkforward testing). On top of that, I have about 5 months of "incubation" results - watching the NGEC system perform real time, with no changes to the original code (other than regularly scheduled re-optimizations).

Walkforward Results: July 2009 - Mar 2013
Incubation Results: March 2013 - August 2013


If the incubation results of the last 5 months "look" similar to the walkforward results, I should feel comfortable going live with the strategy.

Does it?


Here is how I determine if incubation and walkforward data "match." Keep in mind that I am not a statistician, so I tend to keep things simple, at the risk of not being 100% mathematically and scientifically rigorous. What I do passes a common sense test, though. I use 3 methods to check for a match:

1. Student's T Distribution test. This statistical test will tell you if 2 data groups (the walkforward results and the incubation results) are significantly different from each other.


You can pretty easily do this in Excel (with the TTest function), or you can use this handy calculator (Data Entry: Student's t-test).

When I run this test, it tells me that there is a 56% chance of these distributions are not different.





2. Data Distribution Comparison. I create 2 histograms of the data. The first one is the actual data, and I lay the walkforward and the incubation results on top of each other. Do they look like they overlap? The second chart plots a theoretical normal curve histogram, based on the mean and standard deviation. Again, do these curves overlap?







3. Equity Curve Comparison. This is my favorite method, but is not very scientific or mathematical. I simply plot all the data and create an equity curve. When I do that, can I see where the walkforward ends, and incubation begins? If I can, that suggests something happened when incubation started, and that is usually a bad thing. If you wonder about this method, just create a strategy with optimized parameters, and then let it run live for a while. Most times, you'll notice a change in the curve.





In case you were wondering, here is the equity curve with the incubation period clearly marked.









CONCLUSION: Based on this analysis, I'd say the system is performing in Incubation the same as it performed in its walkforward test. In fact, Incubation is better than walkforward, which does concern me a bit (usually it is the other way around). But, it is close enough to give me confidence that I did not screw up during testing in development. It does not guarantee that when I go live, the system will be profitable - that is important to remember.


Next: I am ready to go live. This will start on Monday. Lots of questions still to address. My next post will address my "quitting point," since that helps me determine initial account size, initial position sizing, etc. I may not post this before Monday, but rest assured I have already completed the work (which is why I can trade on Monday).

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  #7 (permalink)
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Looking at your stats, specifically annual returns, (2.62% & 6.67%) and question if the strategies are worth the time and effort?

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  #8 (permalink)
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deaddog View Post
Looking at your stats, specifically annual returns, (2.62% & 6.67%) and question if the strategies are worth the time and effort?

I agree, those percentages are very low. They are based on $100,000 account size, which is the Tradestation default for strategy Performance reports.

IMO, there are a lot of numbers in strategy reports that are useless, meaningless, or in this case, very misleading. "Account Size Required" is another misleading one.

You'll see, later on, that when the account is properly sized, and position sizing is added in the mix, the returns are more enticing.

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  #9 (permalink)
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kevinkdog View Post
I agree, those percentages are very low. They are based on $100,000 account size, which is the Tradestation default for strategy Performance reports.

IMO, there are a lot of numbers in strategy reports that are useless, meaningless, or in this case, very misleading. "Account Size Required" is another misleading one.

You'll see, later on, that when the account is properly sized, and position sizing is added in the mix, the returns are more enticing.

OK I think I see. The return calculated is for one contract with a 100K account.

By trading more contracts or a smaller account the returns would increase.

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  #10 (permalink)
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When To Quit


Now that I have decided to start trading my NGEC ("Not Good Enough for the Combine") strategy live starting on Monday, I have to address the question that everyone likes to avoid when starting to trade a new strategy: If things go bad, when do I quit trading the strategy?

There are probably a million different conditions you could use as a basis for quitting a trading system. You could set a dollar amount, or possibly wait until you get a margin call, or wait until you run out of money. You could stop after X losers in a row, or X losing months. There is no "one" right or wrong answer.

But, there are 3 keys to setting a quitting point:

1. It should be based on the system you are trading. It makes no sense, for example, to quit after a 10% drawdown, if historically the system had 25% drawdowns before. This seems obvious, but you'd be amazed at how many people make arbitrary decisions like this, without taking the characteristics of the actual system into account.

2. Write it down. Refer to it often. Remember it. This may save you from disaster one day.

3. Follow it. If/when the written criteria is (unfortunately) met, STOP TRADING. This is a simple, but VERY difficult, step to follow.


I don't always use the same criteria for finding my quitting point, but here is how I am doing it for the NGEC system:

A. Look at walkforward history, and find the worst drawdown that occurred (daily basis). Multiply it by 1.5, since the worst drawdown is always in the future. For my system, that worst drawdown comes out to be $3,265. Multiply this by 1.5 to get $4,898.

B. Use Monte Carlo simulation to find the 95% level max drawdown. That means, in a years worth of trading, 95% of the time my maximum drawdown will be less than this amount. This turns out to be $5,082. (If I wanted to be more conservative, I could use the 99% level. That drawdown is $6,512.)

I should point out those drawdown figures assume 1 contract being traded the whole time. Yet, I will hopefully be trading more than 1 contract as time goes on. This could get confusing - my actual drawdown (with multiple contracts) could be a lot bigger than my drawdown limit (based on one contract). I just have to remember to calculate the 1 contract drawdown, and compare than to the $5K limit. This will be clearer later, when I set up my monitoring system.


Using results from points A and B above, I will take the average, and stop trading when the single contract drawdown reaches $5,000 (slightly rounded).

So, I have followed points 1 and 2 above. Time will tell if I follow point 3 -- I better if I need to!!!!!


Next post: How much money should I have to fund this trading system?

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