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-- what the hell happened!?!? (http://www.elitetrader.com/vb/showthread.php?threadid=233378)

what the hell happened!?!?

I've been doing an automated strategy that has been profitable for 2 years and all of a sudden this month it has been catastrophic in losses. I did 4 years of backtesting with nothing that suggests this would happen. What the f*ck do I even do now? My account is destroyed. I'm not sure if I should just quit or attempt a new approach.

I followed my strategy to the letter and the backtesting was done in a precise and logical manner. How does a system all of a sudden do that?

happened to me few times in past decade..
пизда рулю..и седлу

http://www.youtube.com/watch?v=lx7VTE__uvs

It happened to me a few times, too.

To give myself some objectivity in assessing whether a drawdown is "reasonable" or catastrophic, I run MonteCarlo simulations using the trade distribution out of backtesting, take for "MADD" (Maximum Allowable DrawDown) the mean + N*std-dev of the MonteCarlo sim's max drawdown. I usually run the MonteCarlo sim for a number of trades corresponding to 1-year worth of trading, and typically use N=5 to define the MADD. If a system's drawdown gets to the MADD, I consider it dead and stop trading it.

If you wish so, provide the backtesting trade distribution, an approximate number of trades for 1-year worth of trading, and I will run the MonteCarlo sim for you.

You did only 4 years of backtesting, but maybe you should've done 14? Yep thats right, strategies need to work on the ancient data as well, and good ones do. On the other hand, some of the top systems have very bad months where they look broken, and one month later they start working again. This december i've seen more automated strats (futures) fail than other months historically. Not mine, but other people's. Maybe the market is really weird for some of the bots right now. Who knows. There's many ways to judge the robustness though. You can look at where the trades are falling within the distribution of the backtest and forward test and if the mean center of gravity starts going weird, or stddev is way off, it's a different problem and a warning.

Switch it off and paper trade it for 20 days, see what it does.

You silly thing OP. You brazenly assumed that past performance was a guarantee of future results. Not to mention you had no Plan B for what happens if your system stopped working.

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Quote from Bob111:

happened to me few times in past decade..
пизда рулю..и седлу

http://www.youtube.com/watch?v=lx7VTE__uvs

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__________________
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▲ ▲

It takes a whole lot of work to get to the bottom of what makes price move. You are omitting something from your thinking that is obviously an essential component vector of price moves...

I, and probably about anybody that designs systems, have seen strategies that were quite good at times but were "fragile". I had one based on volume bars that could backtest great on a days worth of data but if I changed the start time of the price data it would not work well at all!! That is very fragile!! Obviously it was not a strategy that was worth anything but it demonstrated very clearly to me just how much success can be simply built in by accident.

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Quote from braincell:

...This december i've seen more automated strats (futures) fail than other months historically. Not mine, but other people's. Maybe the market is really weird for some of the bots right now. Who knows. There's many ways to judge the robustness though. You can look at where the trades are falling within the distribution of the backtest and forward test and if the mean center of gravity starts going weird, or stddev is way off, it's a different problem and a warning.

Switch it off and paper trade it for 20 days, see what it does.

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__________________
If you're reading my profile...do not contact me nor reply to me if you're a troll, pretender, liar or believe nobody is profitable in trading.

Rather than be upset, you should be extremely thankful your system worked as long as it did.

The market is constantly evolving, your strategies need to as well.

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Quote from wrbtrader:

December is one big vacation month away from the markets for them.

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I have reduced size because it's gotten to the point where if I don't I will get a margin call. I've been through bad drawdowns before but nothing even close to this. I am currently down 35 points and normally I am down at most 25-30 (which happened once in all my data). Historically I have never been down this much in all the backtesting I've done.

Also historically speaking, December has not been a weak month. In fact, I do not have weak months that repeat annually. It's fairly random.

I am very disciplined as a result of learning from my past mistakes about the alternative but it is really hard to follow your rules when you lose almost every single trade...when you 80-20 win rate turns upside down and suddenly u lose 80 and win only 20.

I designed my leverage under the assumption that the worst drawdown in the backtested 4 years (prior to now) was the worst it could get so now since it's much worse, I am getting wiped out.

Very good thread here.

This illustrates what Intradaybill kept preaching - that you can never, ever know the odds until after the trades are tallied. "Path dependent", he kept saying.

This is where PHd mathematicians claim "the market shouldn't have done that" because it didn't match their model.

Hint: all systems are curve fits of past data.

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Quote from feng456:


I am very disciplined as a result of learning from my past mistakes about the alternative but it is really hard to follow your rules when you lose almost every single trade...when you 80-20 win rate turns upside down and suddenly u lose 80 and win only 20.

...I am getting wiped out.

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Why not looking at another 4 years in the past.
Or how about backtesting on another instrument/market?
And was your strategy fine tuned on all the backtest data or you had some out of sample years?

sweep your account and trade it untill it blows up. Same thing at a crap game. Put your wad on the table and everytime you are up put the profit in your pocket. Keep playing until the wad is blown. Then count how much you have in your pocket, and that is how profitable your system is.

Now that you've proven the system only blows up every four years, get some investors and trade huge size for the next 3 years and 11 months.

trading is a job. just like any job, you can get laid off or fired at anytime. The purpose of trading is to pay bills, not build wealth. If you are so fortunate as to make more than you need to meet your cost of living, then invest that money like normal people do.

They ought to have a website for traders and people who opened restaurants and went broke. They probably have a lot in common.

I don't get it. All my resaeach showed that people were buying more and more hamburgers. I even opened up right next to McDonalds and they have one of the most successful locations in town!

at anyrate, if you are sweeping on a regular basis, it won't matter if you blow up because you will still have a stash to start another account. And if that stash has been in stocks it hasn't been doing anything lately anyway. It may not be as much as the account you just blew up, but at least you will know not to trade the same stupid system that blew up your last account.

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Quote from feng456:

I designed my leverage under the assumption that the worst drawdown in the backtested 4 years (prior to now) was the worst it could get so now since it's much worse, I am getting wiped out.

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So far you've indicated you haven't tested enough (4 years isn't even often a full business cycle) and that you're over-leveraged.

These are valuable lessons to learn (ideally beforehand, but it happens), and that is OK.

The real question is, out of a sample of say 1,000 trades, is what is happening right now statistically significant? Have you run a monte-carlo to see what the odds are of your current draw-down given your win ratio/profit factor (which is always an assumption for future use as others here have pointed out!).

What happens with high win-rate, low-margin systems, is that when they break, they really break dramatically, because that win-rate lures users into riding the edge of acceptable leverage, since the high "apparent" win-rate leads them to very liberal assumptions about potential draw-down.

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Quote from TD80:

So far you've indicated you haven't tested enough (4 years isn't even often a full business cycle) and that you're over-leveraged.

These are valuable lessons to learn (ideally beforehand, but it happens), and that is OK.

The real question is, out of a sample of say 1,000 trades, is what is happening right now statistically significant? Have you run a monte-carlo to see what the odds are of your current draw-down given your win ratio/profit factor (which is always an assumption for future use as others here have pointed out!).

What happens with high win-rate, low-margin systems, is that when they break, they really break dramatically, because that win-rate lures users into riding the edge of acceptable leverage, since the high "apparent" win-rate leads them to very liberal assumptions about potential draw-down.

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Thanks for all the support guys. The thing that was really frustrating was I didn't understand what I did wrong. I think now I know. I didn't do enough analysis.

While I did do my backtesting with worst case scenarios (so hit no fills etc.), I didn't do the Monte Carlo scenarios because I do not know how to do it. So if someone could point in the right direction to learn that would be great.

Also I realise that i was overleveraged and have taken steps to correct that in the future.

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Quote from feng456:

I didn't do the Monte Carlo scenarios because I do not know how to do it. So if someone could point in the right direction to learn that would be great.

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Quote from hkrahra:

https://sites.google.com/site/prosp.../released-tools

though i doubt it was the case,but anyway...

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There's a couple of papers on MC techniques posted on the reddit Algorithmic Trading group I moderate that you might find helpful:

http://www.reddit.com/r/algorithmictrading/

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Quote from feng456:

...Also I realise that i was overleveraged and have taken steps to correct that in the future.

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__________________
If you're reading my profile...do not contact me nor reply to me if you're a troll, pretender, liar or believe nobody is profitable in trading.

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Quote from wrbtrader:

Over Leveraged is amongst the most common reasons why most traders are losers or suddenly have a blowup or catastrophic losing duration. It should be on the every traders New Years Resolution list to have the discpline to not be over-leveraged.

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Been there.
The idea as mentioned before in this thread is to set your DD level, where you halt the system.
I too was running a system that backtested great for 4 years with relatively simplistic rules. As it went from flat to a loss, I tested it on a highly correlated instrument (the original didn't have long enough history), the results were not encouraging.
The number of trades and a long test sample (more than 5 years) is very important. You could also try different markets which have similar behavior, if the results are at least close - consider it confirmation.

I always knew I had to leverage more than most of the people on here basically because I had low funds. However, they were still based on what I thought was worst case scenario plus a bit more based on the numbers I got from my backtesting.

Also it is true that the results were pretty consistently positive other than June and now December...although so far December's losses are double of June's and June was my previous worst month. Results after June had improved to profitable, which is why I decided that I would finish trading December. My size has not changed however, as I try to keep the same size for the whole year to avoid losing more on more contracts, getting scared, then making less on fewer contracts when the losing streak ends.

I backtested as far back as 2007 because that was as much reliable data as I could my hands on. I was also told that I should not really expect something that worked 5 years ago to work now. Therefore, I didn't feel like something that would or would not have worked 10 years ago would be very relevant.

BTW, for my MonteCarlo simulations I use YASAI which is a free add-on for Excel ... A long time ago I had shared the attached sample spreadsheet on another forum ... My current spreadsheets also track the Peak P&L & Drawdown Duration (# of trades)

i'm looking at those excel files and i really don't understand what's going on. please help?

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Quote from feng456:

i'm looking at those excel files and i really don't understand what's going on. please help?

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my data was backtested manually. what i have is basically on list of 4 years of trades on excel done manually (yes it took a long time). it's a list consisting the following format:

June 2011
1st 5
2nd -5
3rd 5
.
.
.
Total for month: 10
etc.etc.


how do i do a monte carlo analysis on this? i have absolutely no idea because i never learned how to do it so thats why i was asking for a site where i could learn it. i looked it up on google and so far the tutorials ive gotten have no connection to my dataset.

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Quote from feng456:
how do i do a monte carlo analysis on this? i have absolutely no idea because i never learned how to do it so thats why i was asking for a site where i could learn it. i looked it up on google and so far the tutorials ive gotten have no connection to my dataset.

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Thanks jazzy. An explanation I understand!

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Quote from jazzguysoca:

There are many variations of MC techniques, but the basic idea is to generate synthetic equity curves by resampling the equity curve generated from running your system on historical data.

Here's one simple way you might do this:

1) Run your system on historical data and compute your daily returns. For a four year run this generates ~1000 samples.

2) Generate a synthetic 12mos equity curve by randomly chosing 252 samples from your historical returns in step #1. Compute the yield and max drawdown and save it.

3) Repeat #2 many times (>1,000). This generates a distribution of synthetic 12mo returns and drawdowns that you can use to calculate confidence intervals and the like.

Note that this method will scramble out any serial correlations that might exist, which will make your drawdowns look less severe than they might actually be. But you get the idea.

Here's a paper from the group I mentioned that describes the technique in more detail:

http://www.tradingblox.com/Files/MC...pling_Nbars.pdf

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Sorry to hear. And somewhat frightening. But I'm sure it will never happen to me.

I'm curious about the frequency of trades. How many per month?



Happy Solstice Holidays everyone.

__________________

The future chaos is determined by the current chaos, in a chaotic manner.

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Quote from feng456:

Thanks jazzy. An explanation I understand!

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Quote from total_keops:

What is this? A CEO talking to a quant about his CDO pricing pre-2008?

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Quote from 377OHMS:

Excellent post. Really great stuff, I hope folks realize what your post contains. I've been working on serial correlation as well (random sampling, lag etc). Data that is serially correlated and is not randomly sampled will always yield optimistic results compared with results that have been randomly sampled with sufficient space between samples (lag) to achieve reasonable independence.

I ran into this when I was working on some radar tracking data for a client. Closed-loop tracking system errors are not independent or are any outputs from a Kalman filter.

Maybe the best post I've seen on ET, certainly in the Top-10. Thanks.

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Quote from feng456:

I designed my leverage under the assumption that the worst drawdown in the backtested 4 years (prior to now) was the worst it could get so now since it's much worse, I am getting wiped out.

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Re: what the hell happened!?!?

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Quote from feng456:
How does a system all of a sudden do that?

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__________________
I'm spending a year dead for tax reasons.

I have the same thing. A system which profits 50% less on the dow compared to the es. very weird. on the other hands, every index is profitable.

Re: what the hell happened!?!?

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Quote from feng456:

I've been doing an automated strategy that has been profitable for 2 years and all of a sudden this month it has been catastrophic in losses. I did 4 years of backtesting with nothing that suggests this would happen. What the f*ck do I even do now? My account is destroyed. I'm not sure if I should just quit or attempt a new approach.

I followed my strategy to the letter and the backtesting was done in a precise and logical manner. How does a system all of a sudden do that?

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Re: Re: what the hell happened!?!?

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Quote from Hook N. Sinker:

Since the system is a loser will you share it with us? What are the trading rules?

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Quote from total_keops:

What is this? A CEO talking to a quant about his CDO pricing pre-2008?

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Quote from feng456:

I have reduced size because it's gotten to the point where if I don't I will get a margin call. I've been through bad drawdowns before but nothing even close to this. I am currently down 35 points and normally I am down at most 25-30 (which happened once in all my data). Historically I have never been down this much in all the backtesting I've done.

Also historically speaking, December has not been a weak month. In fact, I do not have weak months that repeat annually. It's fairly random.

I am very disciplined as a result of learning from my past mistakes about the alternative but it is really hard to follow your rules when you lose almost every single trade...when you 80-20 win rate turns upside down and suddenly u lose 80 and win only 20.

I designed my leverage under the assumption that the worst drawdown in the backtested 4 years (prior to now) was the worst it could get so now since it's much worse, I am getting wiped out.

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Quote from sprstpd:

But it feels so good when it's working. It's the crack-cocaine of trading.

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Quote from feng456:

I was also told that I should not really expect something that worked 5 years ago to work now. Therefore, I didn't feel like something that would or would not have worked 10 years ago would be very relevant.

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Quote from HurricaneUS:

Well I guess you learned a lesson. The past is not indicative of the future.

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Quote from Ghost of Cutten:

You made a few mistakes:

1. You didn't backtest long enough. 4 years is not enough. 1 market is not enough. Back test for many years across multiple markets.

2. You didn't do an out-of sample test. If you use 2005-2010 to backtest and work out your strategy, you need to then test a different time period - if you system doesn't work in the out-of sample period, it's probably not a profitable system, but just a data-mined fluke.

3. You assumed the strategy would go on working. You had no method for noticing when the strategy had stopped working. Thus, when it happened, you got caught by surprise. The fact is, markets change, systems degrade and stop working, so you have to be prepared for that eventuality, and have a plan to notice it and respond in timely fashion. Another poster (dom993) already gave a good example of how you can use standard deviation and monte carlo analysis to detect when a strategy is busted.

4. You didn't reduce your size after having a larger than expected drawdown. Any drawdown is one of two things - either a bad run in a still-working system, or the start of a system degrading and no longer working. The longer and bigger the drawdown, the more likely it's the latter (strategy failure) rather than the former (bad luck). Thus, the more you lose, the less you should risk per trade - you must follow a reverse martingale approach once your drawdown exceeds the normal level anticipated by your system's prior results.

I must say, as a discretionary trader, I see systems traders make these flawed assumptions and mistakes very often. There is something about systems trading that attracts rigid logical thinkers. And rigid logical thinkers (engineer/scientist/quant types) usually tend to overlook the importance of getting assumptions right. They concentrate mostly on deriving accurate conclusions from a given set of assumptions, but pay too little attention to the critical importance of making sure those assumptions were correct in the first place. A bit of lateral and creative thinking, and healthy scepticism about initial axioms, would go a long way to avoiding this mistaken approach. The best solution is to find a creative discretionary trader with plenty of market experience, and ask him to double-check your system for mistaken assumptions, risk blindness, rigid and close-minded design & thinking etc.

Unlike engineering, trading requires flexibility and the ability to detect when the 'rules of the game' have shifted. Markets are not a fixed and static system like bridge-building or unbiased roulette wheel statistics.

There are some general risk-control maxims you should consider, they should make your trading approach more robust:

1. Murphy's Law - if something can go wrong, eventually it will

2. Real-world results are usually worse than results in testing. Sometimes, they are much worse.

3. Thus, always plan for the worst case, not for the best.

4. A system is only as good as its assumptions. If you haven't analysed the robustness and validity of the assumptions, then you haven't analysed the system.

5. If you haven't considered every possible future outcome, and developed a plan to respond appropriately, then when one of those possibilities you didn't plan for comes to pass, you will not respond appropriately.

Good luck.

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Quote from MBC:

Ever notice when volatility is really high lots of "systems" make a decent profit?

Ever notice discretionary traders make a decent profit when volatility is high ?

Ever notice discretion lose more when volatility is low ? Despite selling volatility- because they sell low Vol. when Vol. is low and they ultimatley get chopped and buy it a little higher, or Vol. plain explodes for a week and they lose.
Result, Volatility is usually the one filter that drives this whole business and ET board

OR

pure trend trader/investor, entire different game 6 months to years outlook.

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Quote from Ghost of Cutten:

Can't say I have noticed that, no. I've seen systems that work well and then blow up in high volatility environments, ditto for discretionary traders.

If your approach is critically dependent on what's happening with volatility, then you need either a way to forecast future volatility to some extent, or you need multiple approaches that are inversely correlated to each other with respect to volatility (i.e. one that does well in high/rising vol, and one that does well in low/falling vol) to smooth things out. Better still, find a method that is not correlated with volatility.

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Quote from Ghost of Cutten:

So, if someone had told you that nothing would work, you wouldn't have tried trading at all? What if someone said the moon is made of blue cheese? I must say, the idea of assuming something to be true, *just because one person said so*, is a bit strange.

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Quote from Ghost of Cutten:

That's really interesting, I've never felt good about taking big risks, even when they paid off. How can you not feel bad about the potential big drawdowns and even blowup that you are risking?

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Re: Re: Re: what the hell happened!?!?

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Quote from MBC:
Part of the problem with trading, nobody sticks together forms organizations. Just a few people sit around and tell others that they are wrong all the time and they cant do it etc etc.

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__________________
I'm spending a year dead for tax reasons.

Re: Re: Re: Re: what the hell happened!?!?

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Quote from sle:

It is a problem with doing anything as an individual. If you do not have a community to critique your actions and ideas, you are most probably going to make the same mistakes other people have made. ET, unfortunately, can not be considered a true community - too many people here are either leeches or testosterone-intoxicated egomaniacs. And the fear of "you gonna steal my lunch" usually overshadows the fact that most of the ideas to be shared are common sense.

I wish someone would create a smallish, selective trading community online - the ability to bounce ideas off each other and to leverage on other peoples skills/knowledge (e.g. one person is a discretionary oil trader, another is a stat arb trader) would make a place like that invaluable.

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Re: what the hell happened!?!?

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Quote from feng456:

I've been doing an automated strategy ... How does a system all of a sudden do that?

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Quote from Ghost of Cutten:

No, that's not the lesson. If that was the lesson, you wouldn't have made this post, because you would have no expectation that the post would be made, the internet would still be here, the world would not have exploded, the universe would not have ended etc.

The past is very indicative of the future. But flawed understandings of the past are not very good at predicting the future.

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Quote from HurricaneUS:

You're being academic as if this is philosophy 101 but I'm being practical. As I said....the past is not indicative of the future when it comes to trading. All trading systems ultimately fail....ALL

Whether you have ever traded successfully will dictate your response.

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Quote from HurricaneUS:

You're being academic as if this is philosophy 101 but I'm being practical. As I said....the past is not indicative of the future when it comes to trading. All trading systems ultimately fail....ALL

Whether you have ever traded successfully will dictate your response.

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__________________
------------------------
The things people believe in are usually just what they instinctively feel is right; the justifications and arguments are the least important part of the belief.
That's why you can win the argument, prove them wrong, and still they believe what they did in the first place. You've attacked the wrong thing.
So what do you do? Agree to disagree. Or fight. - C. Zakalwe.

ok im trying to figure out how to do monte carlo analysis...

lets say i have the following:

Jan 2011
5 pts
-5
5
-5
5
5
Total: 10 pts

Feb 2011
5 pts
-5
5
5
Total: 10 pts

March 2011

5
-5
-5
-5
-5
Total: -15 pts

how would i use YASAI to run monte carlo on this?

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Quote from jazzguysoca:

... Here's a paper from the group I mentioned that describes the technique in more detail:
http://www.tradingblox.com/Files/MC...pling_Nbars.pdf

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Quote from HurricaneUS:

All trading systems ultimately fail....ALL

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Quote from kut2k2:

Unless you're just another one of his sockpuppets, it looks like intradaybill's crackpot meme has successfully infected ET.

This place gets worse every year.

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Quote from oldtime:

show us the system that doesn't ultimately fail.

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Quote from kut2k2:

http://www.elitetrader.com/vb/showt...threadid=231633

As long as the expectation is positive, there's no reason for the system to just go belly up.

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Quote from oldtime:

well hell, any system I design on a Saturday morning isn't going to go belly up unless I trade it too long.

Show me that system with positive expectancy. They only exist on chalkboards. Where are all the traders who own the world because they figured out a way to beat the market?

You keep doing what you're doing and you're going to end up with average results or go broke, over time.

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Quote from kut2k2:

WTF! Nobody with a system that works is just going to hand it over to you.

If you don't believe there are any successful traders, why are you here?

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Money/risk management is the most important key to successful trading. The one who loses the least, wins.--- Prudent money management never goes out of style.


Thank you for your time.

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Quote from Buy1Sell2:

Money/risk management is the key one of the keys to successful trading.

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Quote from oldtime:

you don't need a successful system to be a succesful trader

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Quote from kut2k2:

If you're arguing for discretionary trading, I'd argue that this forum (Strategy Design) is hardly the place to do it.

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Quote from oldtime:

buying when I feel like it and selling when I feel like it is a strategy

if you want to argue whether or not my feelings were designed, take it to the religion forum

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Discretionary trading can be intuition or rule base. Simply, if its not a mechanical or automated trading system...it's discretionary trading. Further, intuition trading implies you're not following your trading plan or intentionally took a trade without a trading plan for whatever reason.

System trading (something that has been coded) is usually associated with mechanical systems or automation trading.

__________________
If you're reading my profile...do not contact me nor reply to me if you're a troll, pretender, liar or believe nobody is profitable in trading.

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Quote from wrbtrader:

Discretionary trading can be intuition or rule base. Simply, if its not a mechanical or automated trading system...it's discretionary trading. Further, intuition trading implies you're not following your trading plan or intentionally took a trade without a trading plan for whatever reason.

System trading (something that has been coded) is usually associated with mechanical systems or automation trading.

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Quote from oldtime:

if I always take a trade everytime I feel this way, it gets pretty mechanical after a while

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__________________
If you're reading my profile...do not contact me nor reply to me if you're a troll, pretender, liar or believe nobody is profitable in trading.

well, I probably couldn't train a novice how to trade my system, but I'm pretty sure I could train a monkey to do it. Maybe someday when technology improves I could even teach a computer how to do it.

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Quote from Buy1Sell2:

Money/risk management is the most important key to successful trading. The one who loses the least, wins.--- Prudent money management never goes out of style.


Thank you for your time.

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Quote from Lucrum:

Sound wisdom, and a topic only occasionally discussed here amid the plethora of entry, exit, top and bottom predictions.

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Quote from kut2k2:

Edited for accuracy.

MM won't turn a negative into a positive. You still have to figure out when to enter and when to exit your trades so that you win more than you lose. Then you can apply MM to maximize that gain.

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Quote from Buy1Sell2:

FALSE

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Quote from Buy1Sell2:

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Quote from kut2k2:

Money management (MM) won't turn a negative into a positive. You still have to figure out when to enter and when to exit your trades so that you win more than you lose. Then you can apply MM to maximize that gain.

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FALSE

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Entering randomly and exiting randomly employing proper money management will yield a positive result. --It will not be superior, but will yield a positive. --Basic math.

Thank you for your time.

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Quote from Buy1Sell2:

Entering randomly and exiting randomly employing proper money management

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It probably would be money management, but his point is still a true and valid!

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Quote from kut2k2:

FALSE

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If MM could turn a negative into a positive, then there'd be career profitable craps and roulette players. The casinos can count on gamblers (people who take zero- and negative-expectation bets) to make the houses rich in the long run, regardless of what manner of MM is employed.

Dude, this is basic probability math.

Regarding MM in trading, that's just one leg of a three-legged stool. The other two legs are entry strategy and exit strategy. To say that only one leg counts or that it counts the most is to simply not understand the physics of a three-legged stool.

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Quote from kut2k2:

If MM could turn a negative into a positive, then there'd be career profitable craps and roulette players. The casinos can count on gamblers (people who take zero- and negative-expectation bets) to make the houses rich in the long run, regardless of what manner of MM is employed.

Dude, this is basic probability math.

Regarding MM in trading, that's just one leg of a three-legged stool. The other two legs are entry strategy and exit strategy. To say that only one leg counts or that it counts the most is to simply not understand the physics of a three-legged stool.

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Quote from Hugin:

Generally I agree with this. Money management is important but it is inferior to having an edge. If you do not have an edge and participate in a real market you will most likely lose money. IF you have an edge money management will help you exploiting your edge in an optimal way (given the risk you are willing to take).

That said there exist some toy/academic problems that actually contradict this. The practical application of these examples are definitely questionable but it illustrates some of the illogical aspects of money management math. The one below is from Maslov/Zhang:

“Let us illustrate these results using an example of a risky asset, the price of which with equal probability p = 1/2 goes up by 30% or down by -24.4%. The stock itself is doomed: its price is going down by roughly 1% every time step (typically at each time step the price is multiplied by sqrt(1.30 • 0.756) ≈ 0.99). On the other hand, since average return of 2.8% of this stock is positive, following the Kelly optimal fixed investment fraction strategy with f∗ ≃ 0.3825 results in a positive growth rate of investor’s capital of some 0.53%.”

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Money management can be a great edge which is why there are some professional Craps players. And Craps as we all know comes with no edge.....

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Quote from AK100:

Money management can be a great edge which is why there are some professional Craps players. And Craps as we all know comes with no edge.....

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Quote from AK100:

Money management can be a great edge which is why there are some professional Craps players. And Craps as we all know comes with no edge.....

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I'll post it again - this is a GREAT thread.

Here are some things a casino has that gamblers don't:

1. Rules of engagement that have a positive expectancy

2. Discipline to follow these rules

3. Bet size limits to keep from blowing up on that one big jackpot payout

4. Lots of shining lights, alcohol, and hot women to distract you from making rational decisions

5. An environment of "entertainment" rather than business, so the gambler gets something for the money they lose.....


Hopefully the inference to retail traderz compared to professionals will be obvious.......

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Quote from Wide Tailz:

I'll post it again - this is a GREAT thread.

Here are some things a casino has that gamblers don't:

1. Rules of engagement that have a positive expectancy

2. Discipline to follow these rules

3. Bet size limits to keep from blowing up on that one big jackpot payout

4. Lots of shining lights, alcohol, and hot women to distract you from making rational decisions

5. An environment of "entertainment" rather than business, so the gambler gets something for the money they lose.....


Hopefully the inference to retail traderz compared to professionals will be obvious.......

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I don't know who you guys are, but unless you are the broker nobody has positive expectation

expecting positive results is not the same as positive expectation

I don't like to admit it, but I am required by law to tell you (in very fine print) past results are not indicative....yeah, yeah, yeah, you know how it goes

I'm not a mathmatician, I don't even know how to compute x+y=z, but I know there is no such thing as positive expectancy or a win rate.

If you are talking about betting on what it's done it will keep doing what kind of system is that? It's just common sense. What the heck else are you going to bet on? It will suddenly start doing something different at any moment? What kind of system is that?

The only difference between the markets and craps is in the markets the numbers come up based on how much everybody bets on them.

So you don't think there is any set-up/price action that has a higher probability of going a certain way than another?

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Quote from oldtime:

I don't know who you guys are, but unless you are the broker nobody has positive expectation

expecting positive results is not the same as positive expectation

I don't like to admit it, but I am required by law to tell you (in very fine print) past results are not indicative....yeah, yeah, yeah, you know how it goes

I'm not a mathmatician, I don't even know how to compute x+y=z, but I know there is no such thing as positive expectancy or a win rate.

If you are talking about betting on what it's done it will keep doing what kind of system is that? It's just common sense. What the heck else are you going to bet on? It will suddenly start doing something different at any moment? What kind of system is that?

The only difference between the markets and craps is in the markets the numbers come up based on how much everybody bets on them.

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Quote from dom993:

BTW, for my MonteCarlo simulations I use YASAI which is a free add-on for Excel ... A long time ago I had shared the attached sample spreadsheet on another forum ... My current spreadsheets also track the Peak P&L & Drawdown Duration (# of trades)

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Quote from dom993:

To the person who asked me how to "bucket" a list of historical (or backtested) trades to use the MonteCarlo spreadsheet ... here is the spreadsheet that I use ... input your trade list (P&L only, 1 line per trade) in the "Data" worksheet, then in the "Buckets" worksheet play with figures in the yellow-background cells to get buckets that you like. The columns "# trades" & "Avg/trade" define each bucket.

The 3rd worksheet "Stats" computes a number of performance figures.


Happy New Year!

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Quote from futurecurrents:

So you don't think there is any set-up/price action that has a higher probability of going a certain way than another?

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Quote from oldtime:

like I said, the only way I know how to do it is bet what has happened will keep happening. Now how scientific is that? I'd hardly call it positive expectation. So far so good is a better description.

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Quote from dwpeters:

Possibly very scientific. If something has happened 700 times out of 1000, and is based on a sound strategy and not just data mining, then it is reasonable to expect a roughly 70% chance of it happening the next time. That is a positive expectation.

That does not mean that this expectation should hold for the next 1000 trials, and that is why I carefully monitor my actual results. As this thread has shown, things change. Any strategy that has the potential for large gains, has the potential for large losses, even if that was not seen in the backtest.

Don

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Quote from dwpeters:

Possibly very scientific. If something has happened 700 times out of 1000, and is based on a sound strategy and not just data mining, then it is reasonable to expect a roughly 70% chance of it happening the next time. That is a positive expectation. ...

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Mathematical induction is a method of mathematical proof typically used to establish that a given statement is true of all natural numbers (positive integers). It is done by proving that the first statement in the infinite sequence of statements is true, and then proving that if any one statement in the infinite sequence of statements is true, then so is the next one.

The method can be extended to prove statements about more general well-founded structures, such as trees; this generalization, known as structural induction, is used in mathematical logic and computer science. Mathematical induction in this extended sense is closely related to recursion.

Mathematical induction should not be misconstrued as a form of inductive reasoning, which is considered non-rigorous in mathematics (see Problem of induction for more information). In fact, mathematical induction is a form of rigorous deductive reasoning.[1]

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Inductive reasoning, also known as induction or inductive logic, is a kind of reasoning that constructs or evaluates propositions that are abstractions of observations of individual instances of members of the same class. It is commonly construed as a form of reasoning that makes generalizations based on individual instances. In this sense it is often contrasted with deductive reasoning.

However, philosophically the definition is much more nuanced than simple progression from particular / individual instances to wider generalizations. Rather, the premises of an inductive logical argument indicate some degree of support (inductive probability) for the conclusion but do not entail it; that is, they suggest truth but do not ensure it. In this manner, there is the possibility of moving from generalizations to individual instances.

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Quote from baro-san:

No, it's not. Check wikipedia:

Mathematical induction

Inductive reasoning

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I think science is not always so rigorous. My approach fits this criteria:

From Wikipedia:

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Scientific method refers to a body of techniques for investigating phenomena, acquiring new knowledge, or correcting and integrating previous knowledge.[1] To be termed scientific, a method of inquiry must be based on gathering empirical and measurable evidence subject to specific principles of reasoning.[2] The Oxford English Dictionary says that scientific method is: "a method or procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses."[3]

The chief thing which separates a scientific method of inquiry from other methods of acquiring knowledge is that scientists seek to let reality speak for itself, and contradict their theories about it when those theories are incorrect.[4]

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Quote from dwpeters:

I think science is not always so rigorous. My approach fits this criteria:

From Wikipedia:

Certainly I let results speak for themselves, and when they contradict my expectations in a significant way, as happened to the OP, I change my expectations, and my approach.

Don

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Quote from oldtime:

Almost any system you designed when you were of sound mind and body before you went into a drawdown will eventually get you back at least close to even.

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Quote from oldtime:

Abandoning a system in the depths of drawdown is the surest way I know of to ruin.

Let it get you back to even then get flat and think about it.

No system is so bad that it can ruin you, if it was, all you would have to do is trade it backwards and you'd be rich.

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Quote from dom993:

I have to disagree with this ... at a minimum, a system's edge must overcome the cost of commissions, bid/ask spread and market/stop orders slippage ... a system can lose its edge and bleed money to ruin just because of these factors.

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Quote from oldtime:

maybe so, things change all the time on paper, but once you are trading it live the sure way to destruction is to change when things are not going your way. Almost any system you designed when you were of sound mind and body before you went into a drawdown will eventually get you back at least close to even.

Abandoning a system in the depths of drawdown is the surest way I know of to ruin.

Let it get you back to even then get flat and think about it.

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Quote from Occam:

That sounds a lot like the Monte Carlo fallacy, held at one time even by significant mathematicians of an earlier period: a fair coin that has flipped to heads 10 times in a row is now more likely to hit tails on the next flip. (It turns out, it's a fallacy.)

If I were in the OP's position, I would devote a few weeks or even months do doing a significant analysis of what went wrong, whether in the backtesting, the slippage, or whatever. At that point, it may become clear that continuing trading is a waste of time, not to mention money; but the OP needs to make that decision him/her self, and will no doubt learn something in the process.

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Quote from oldtime:

well, good point, sounds like you thought it through, but if I am betting on a coin flip to eventually come out 50/50 heads to tails, what kind of sense does it make to quit betting when it comes out 70/30 against me?

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Quote from Occam:

I think I see your point and you're right, as long as a 50/50 is what you really want -- in the long run, you'll get it.

I also think that the OP wanted something better than 50/50, so it's up to him/her to figure out whether he/she made some mistake in backtesting, slippage, etc., in concluding that something that "should have" been profitable in fact is not. That is where the hard work comes in for the OP, if he/she is up to the task.

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Quote from oldtime:

If hard work had anything to do with it I should be the richest man alive.

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Quote from oldtime:

agreed, you sound like a good human being and I don't want to get into it with you, but I have gotten into it before when anybody mentions "hard work." If hard work had anything to do with it I should be the richest man alive.

The discussion of luck is more interesting to me, especially as how it seems to have no correaltion to how hard I work. I've heard all the sayings about luck being related to preperation and so forth, but I can never make the connection.

I believe luck is a force which can momentarily be harnessed.

otherwise, I agree with you, except for the part about "hard work."

ok, I've said enough about something I know nothing about. It doesn't sound like you need it, but if you ever do, good luck.

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__________________
It's only risky when you stop thinking it's risky.

Hard rock is not necessary but i am the richest man alive!

ok to the guy who told me to have faith it wont ruin me blah blah...

it did ruin me.

my previous experience was also that sticking with the system in the end works...but the problem is the monthly net turned out to be twice as bad as the worst on record. it is as if everything turned upside down without a warning.

my leverage was probably too high but even if i was at 1 contract this is not sustainable.

i will be observing as well as doing some analysis in the coming weeks. most of my account is wiped out anyway.

also when i was testing out other systems, there have been many instances where a system suddenly went completely upside down...so it does happen and itWILL ruin you...unless you are trading 1 contract with 100,000 like certain people...

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Quote from feng456:

ok to the guy who told me to have faith it wont ruin me blah blah...

it did ruin me.

my previous experience was also that sticking with the system in the end works...but the problem is the monthly net turned out to be twice as bad as the worst on record. it is as if everything turned upside down without a warning.

my leverage was probably too high but even if i was at 1 contract this is not sustainable.

i will be observing as well as doing some analysis in the coming weeks. most of my account is wiped out anyway.

also when i was testing out other systems, there have been many instances where a system suddenly went completely upside down...so it does happen and itWILL ruin you...unless you are trading 1 contract with 100,000 like certain people...

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Quote from oldtime:

well, good point, sounds like you thought it through, but if I am betting on a coin flip to eventually come out 50/50 heads to tails, what kind of sense does it make to quit betting when it comes out 70/30 against me?

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Quote from oldtime:

agreed, you sound like a good human being and I don't want to get into it with you, but I have gotten into it before when anybody mentions "hard work." If hard work had anything to do with it I should be the richest man alive.

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theres an old saying, no one looks at hearth(system) while poking the fire(market),make sure you have priorities in order,to avoid getting burnt

hey i havent given up at all guys. actually im trying to figure out how to do a Monte Carlo sim to see whats likely the worst drawdown I would experience. basically have it randomly pick trades in no particular order and see whats the tenth percentile of drawdown per month.

i am using YASAI to do this and so far i dont really understand most of how it works. i have had some help from abattia but he/shes probably tired of me bothering them so if anyone could tell me how to do it that would be great.

an example sample of my data would be:

5
3
-5
-5
-5
2
-5

thanks in advance.

I haven't done Monte Carlo so I can't advise on that, but an alternative approach is to try to mitigate the extent of the worst drawdown. This can be done through equity curve timing (for example scale back or stop trading when your equity curve is below it's moving average) or simply reducing your exposure as you enter an excessive drawdown. The latter approach is highly recommended in the book Trading Risk by Kenneth Grant. It's all about controlling portfolio risk by a professional risk manager.

I'll tell you up front that scaling back in a drawdown is not the way to achieve the highest returns. More likely than not it will hurt your returns, but it can help you avoid a very significant drawdown and that is more important.

Go back in the thread, I posted lately 1 spreadsheet to do the bucketing from your backtesting results, and in the beginning 1 spreadsheet for MonteCarlo sim using YASAI.

As an alternate, post all you trade results (backtest + live) here, 1 trade per line, and I will do the bucketing & MonteCarlo sim for you (will post the 2 spreadheets updated with your data). In that case, let me know the average number of trades per year, as I always do ! sim for the total number of trades in the history, and 1 sim for 1 year worth of trading.

if i did it right, my worst drawdown is supposed to be 48.25 points :O

operative word being *if

ok dom993 i did it your way. however, i am lookin for a distribution of possible worst drawdowns and all im getting right now is a single value. i tried runnin yasai simulation on it but came up empty. am i doing something wrong or is it not possible with your setup?

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Quote from feng456:

ok dom993 i did it your way. however, i am lookin for a distribution of possible worst drawdowns and all im getting right now is a single value. i tried runnin yasai simulation on it but came up empty. am i doing something wrong or is it not possible with your setup?

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Column K:
-5
5
2
3
4

Column L:
50%
10%
10%
10%
20%

Column C:
Line 1: 0
Line 2: =genTable(K$1:K$5, L$1:L$5)
Line 3: =genTable(K$1:K$5, L$1:L$5)
.
.
.
Line 100: =genTable(K$1:K$5, L$1:L$5)

Column D:
Line 1: 0
Line 2: =SUM(C$2:C2)
Line 3: =SUM(C$2:C3)
Line 4: =SUM(C$2:C4)
.
.
.
Line 100: =SUM(C$2:C100)

Column E:
Line 1: 0
Line 2: =MIN(E1,-(MAX(D$1: D2)-D2))
Line 3: =MIN(E2,-(MAX(D$1: D3)-D3))
Line 4: =MIN(E3,-(MAX(D$1: D4)-D4))
.
.
.
Line 100: =MIN(E99,-(MAX(D$1: D100)-D100))

Something is wrong with the logic of your model. Something is wrong with the logic of your model. Something is wrong with the logic of your model.

Would be nice to know

What you are trading?
Frequency of trade?
Size of trade?
Logic of system?
How fast was the draw down?

All the sims in the world will not fixed a system with inconsistencies.

If you can't figure out how/why you lost a lot of money - quickly - don't trade.

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Quote from HurricaneUS:

You're being academic as if this is philosophy 101 but I'm being practical. As I said....the past is not indicative of the future when it comes to trading. All trading systems ultimately fail....ALL

Whether you have ever traded successfully will dictate your response.

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Quote from Wide Tailz:

+++

The market changes with respect to your system's performance because speculators, seeking the same as you, keep changing their own strategies when they wear out. Their behavior makes up much of the market's behavior.

Take comfort in the Japanese manufacturing model of continuous improvement. If you continually look for incremental benefits and branch out with variety, you stand a chance of being where no one else is, before they realize they want to take your position, via your cash register.............

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I was watching Through the Wormhole last night. Mathmeticians have proved time doesn't exist. But another scientist claimed, "They just think it doesn't exist because they don't realize math is also changing."

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Quote from feng456:

Column K:
-5
5
2
3
4

Column L:
50%
10%
10%
10%
20%

Column C:
Line 1: 0
Line 2: =genTable(K$1:K$5, L$1:L$5)
Line 3: =genTable(K$1:K$5, L$1:L$5)
.
.
.
Line 100: =genTable(K$1:K$5, L$1:L$5)

Column D:
Line 1: 0
Line 2: =SUM(C$2:C2)
Line 3: =SUM(C$2:C3)
Line 4: =SUM(C$2:C4)
.
.
.
Line 100: =SUM(C$2:C100)

Column E:
Line 1: 0
Line 2: =MIN(E1,-(MAX(D$1: D2)-D2))
Line 3: =MIN(E2,-(MAX(D$1: D3)-D3))
Line 4: =MIN(E3,-(MAX(D$1: D4)-D4))
.
.
.
Line 100: =MIN(E99,-(MAX(D$1: D100)-D100))

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Quote from oldtime:

I was watching Through the Wormhole last night. Mathmeticians have proved time doesn't exist. But another scientist claimed, "They just think it doesn't exist because they don't realize math is also changing."

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most of that is copy paste...it would literally take less than 5 minutes.

also it is basically an exact copy of the excel you posted other than different numbers.


*i figured out why....there was no simOutput.

If I may ask, where does your December drawdown stand vs the MonteCarlo mean (that is, how many std-dev away from the mean) ?
(using a MonteCarlo run of approximately 1 year worth of trades)

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Quote from Hugin:

Generally I agree with this. Money management is important but it is inferior to having an edge.

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Quote from Buy1Sell2:

Folks--Prudent Money Management IS the edge.

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Quote from oldtime:

they are both the same, they are both based on the assumption what has happened will keep happening.

I have to laugh when someone calls anything and "edge" like just because something always happens and I have identified that gives me an edge.

All that gives you is a time tested assumption.

If you can prove to me things are not changing I will admit you have an edge.

otherwise, money management is for me much more reliable than guessing what it's going to do. If it were not so, why do so many smart people disaagree about what it's going to do?

There is very little disagreement about sound money management.

If the opie had it he would not be blown up.

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Quote from ssrrkk:

If you have a positive expectation but large draw downs, then money management can indeed save you from blowing up during those draw downs.

If you have a negative expectation however, no amount of money management will save you. It will merely slow down your inevitable march to complete ruin.

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Wow this thread has gotten off track and then back on track like 10x so far.

I spoke to the OP a few times over Skype and PM. I'm by far no expert and I still am not 100% sure that I understand his system or his results but he did email me a spreadsheet with a lot of info (no I won't share it).

I still say to feng - I'm not 100% sure I understand what you sent me. I don't trade futures so maybe its something stupid I'm missing or overlooking? I honestly have looked at it over & over 1-2 hours each time, every few days - and I still don't 100% understand or get it.


OP is manually trading based on rules. I believe that the reason why he experienced such a drawdown is because he was doing exactly what he says and was trading based on his rules and signals without discretion or emotion. Pretty much an automated system but not 100% coded and able to execute on its own.


I only own 7 years of tick data and would probably only backtest for a max of 3ish years at most. Then, if I think in the initial design of a strategy **might** work then it gets the full (time consuming) tick database and then various shorter-runs for optimization.

The only reason why it helps to backtest more than 3 years (in my opinion) is that it might include something catastrophic or a rogue event (like a flash-crash or massive gap up/down or limit up/down on a stock or index) that could be telling on the extreme ends of the cycle. Most of my focus has been always very short-term (short holding periods) so for longer term I expect that the backtesting and optimization data would need to go back farther.

I think the OP's system may be a fluke. His backtest results are very accurate to the real-world trades - winners and losers.

Because I don't fully understand it I can't say for sure "look at this date/time when market conditions changed and here is why it stopped working" but it did pretty much fall off a cliff.

Feng - i sent you a few questions via skype. not sure if you got them. I don't trade futures so I think i'm missing something basic. I also don't have ANY futures data (historical) so I'm not really able to pull together much outside of simple data from Bloomberg - but I don't know when you switch or roll contracts, start looking at the back month vs. trading the front, etc. I just don't know enough info to tie your data points back to historical that I know to be good. I'm happy to (we aren't supposed to but this isn't that much data) share with you some of the data I might be able to get from Bloomberg - if it'll help.

Without knowing more it may be as simple as you got lucky, or it could be something simple like your data is off a day or who knows.

Cheers, lots of good (and some bad) info in this thread so hopefully you'll come out of this experience a better & stronger trader.

Re: what the hell happened!?!?

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Quote from feng456:

I've been doing an automated strategy that has been profitable for 2 years and all of a sudden this month it has been catastrophic in losses. I did 4 years of backtesting with nothing that suggests this would happen. What the f*ck do I even do now? My account is destroyed. I'm not sure if I should just quit or attempt a new approach.

I followed my strategy to the letter and the backtesting was done in a precise and logical manner. How does a system all of a sudden do that?

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Re: Re: what the hell happened!?!?

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Quote from HATEtheRisk:

Sorry for you man,

but i love to hear when automatic traders lose money, because i hate them.

Thats why i be a manual trader. Manual, WTF ? How you do this, do you have a brain, amazing, could i borrow it ?
No sorry my friend.........

Automatic traders are not real traders in my opinion, they are just gamblers........but there is a clear difference between a gambler and a trader.

the one is a hard working brain using mastermind, while the other is a lazy ass bastard gambler.......

LOL

sorry for you

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Re: Re: Re: what the hell happened!?!?

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Quote from tenthousandmen:

Lol... automation has it's place, especially for the hft firms where manual isn't quite an option - similar to how an axe and chisel isn't an option for Intel when they etch their processors. I bet you've used a blackbox at some point, or do right now! At least backtest, opto, mc and resilience test systems...

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Re: Re: Re: Re: what the hell happened!?!?

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Quote from HATEtheRisk:

YEah, but he is not a HFT Firm, is he ?No.

He is just another guy who realizes that automatic systems must fail at some time, because the HFT fuckers only scalp, and the big money is not in scalping, the big dollars are managed manually.

I hate the HFT too, that little thievs lazy ass bastards........

I never used a blackbox. I learned it from the ground up, of course with backtesting - optimzing - real time testing - what else.

But i never ever thought about doing one trade automatically, it makes me sick. Then i would be independent of such an fucking system computer programm - how bad is this, only because i would be to lazy to work out something useful.

Not my way, sorry.

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Re: Re: Re: Re: what the hell happened!?!?

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Quote from HATEtheRisk:

YEah, but he is not a HFT Firm, is he ?No.

He is just another guy who realizes that automatic systems must fail at some time, because the HFT fuckers only scalp, and the big money is not in scalping, the big dollars are managed manually.

I hate the HFT too, that little thievs lazy ass bastards........

I never used a blackbox. I learned it from the ground up, of course with backtesting - optimzing - real time testing - what else.

But i never ever thought about doing one trade automatically, it makes me sick. Then i would be independent of such an fucking system computer programm - how bad is this, only because i would be to lazy to work out something useful.

Not my way, sorry.

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Re: Re: Re: Re: Re: what the hell happened!?!?

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Quote from WinstonTJ:

Are you the new Stock777? Why even post in a thread like this?

You clearly have no idea how much work and dedication it takes to build an automated system. Saying that HFT or automated traders are lazy is a very plain & open testimony of how much you know about the space.

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