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fullautotrading
Registered: Mar 2010
Posts: 593 |
07-09-10 11:02 PM
ROUGH CASH RESERVE ESTIMATE
In any case, even with the most (consistently) profitable strategy i have personally ever seen (tested) the ratio R = (AvgDailyProfit / Max Drawdown) does have "upper limit" beyond which it cannot be pushed further, due to the natural volatility of markets.
In case of futures, to be safe, for what i know, one should assume that this ratio AvgDailyProfit/ Max Drawdown might be less than 2% (if the data were more like "random walk" the ratio could get near 8% - 10%, and beyond).
That is, for instance, if you are calibrating your strategy to yield an average daily profit of 1K, you must consider perfectly "normal" the possibility of seeing a max drawdown of 50K. (Make it 100K, to be more conservative).
As to margins, we must consider the max number of contracts (say max 50-70 contracts), based on the max position historically seen in backtesting. Multiply this figure for a max value for the margin of 1 contract (say for instance 10K) and there you are with a preliminary estimate of the cash reserve necessary to trade relatively safe, and with a systematic avg daily profit. (Clearly we are talking about average profit. Usually especially at beginning there will be drawdowns, according to the algorithm logic)
WHEN TO QUIT
The algo can run continuously but clearly we can quit anytime see a profit we like.
It does not make much sense (according to the algorithm logic) to quit when the Unrealized component is high (visually when the realized green dotted line is much above the blue PNL line), even if a nice profit is showing, because we would "waste" a potential profit.
In fact the "Unrealized" component can intuitively be interpreted as what we profit on price reversal.
So for instance in this specific case i should not close the trading session.
I will make an exception because i realized i had a small bug in the code (can see on the EUR an unwanted sell order of -7) which should have been instead distributed way up (this has caused a larger drawdown too).
So i am going to (hopefully) fix the bug and restart our test with another fresh session.
Tom
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fullautotrading
Registered: Mar 2010
Posts: 593 |
07-10-10 01:20 AM
CHOICE OF THE FOLIO
As we proceed expounding and testing the general idea and algorithm, it becomes evident that the ideal porfolio would be one containing instruments which are moderately volatile.
So for instance, one should be careful with commodities.
Correlation does not really help too. So another good idea is to choose instruments keeping that in mind.
In general, the ideal performances would be with a folio of "randomly walking" independent instruments (in which case running the algorithm is actually like printing money!).
It would also be nice to test a folio of ETFs.
I welcome suggestions on this and other topics.
Any question is welcome, as usual.
Tom
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fullautotrading
Registered: Mar 2010
Posts: 593 |
07-14-10 11:52 PM
Ok have restarted. The main parameter (minimum order distance) is 260$
Chart update
(have added a couple of vertical lines to charts, to visually delimit RTH)
The overall return so far has been very good.
Here is what happened the first 3 days, until now (detail of trades in in the link above):
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PocketChange
Registered: Jul 2008
Posts: 2037 |
07-15-10 11:56 AM
Nice results...
Few questions:
What is the purpose of the folio? If there is no correlation then do they not all trade independently?
How do you scale size from 1 to 50 contracts? Is this a martingale or anti-martingale strategy?
Can you determine a price range for the algo to operate in with a fixed draw down? ie. ES trading robot covers +/-100 points = max contracts 25 max draw down 100K etc... What about assigning set range / risk / contracts / draw down per instrument? Similar to Mutual fund allocations in a 401K.
What time frame are you holding contracts open?
What is the criteria for taking profits?
How are you hedging the runaway risk? ie. strong and long directional moves?
Would this longer term strategy be better suited to trade future options? Appears you are waiting for the position to get "in the money" Options would appear to significantly lower the required capital.
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fullautotrading
Registered: Mar 2010
Posts: 593 |
07-15-10 10:19 PM
Tough questions PocketChange ! ;-)
Will try to answer one at a time.
Feel free to break in any time ...
Quote from PocketChange:
Nice results...
Few questions:
What is the purpose of the folio? If there is no correlation then do they not all trade independently?
The most obvious purpose of a folio is investment diversification.
As this approach never "realizes losses", a diversified and incorrelated set of instrument would mitigate drawdowns.
This specific algorithms infact has drawdown (it "invests") in presence of directional moves.
A well diversified folio should distribute the "investment" across multiple instruments catching directional moves at different times. This way, the less volatile instruments can mitigate the drawdowns due to the "investment" in one or more instrument and continue to "realize".
From the testing so far, it is quite evident that the "realize force" (how i call it) of this algo and parameter set is good.
Such continuous "scalping action", pulls the PNL up, and a folio helps keeping this increase constant in time, so that after a period (weeks) there should be no price moves (=investment) capable to decrease the PNL under negative values.
In other words, having a diversified folio, we will be "investing" on some instruments and realizing on others, and this would hopefully happen at different times, contributing to hedging.
The above should be the most obvious reason. There are other technical reasons, though. Another, more "algorithmic-specific", reason for using a folio is the following.
The ideal situation would be the one of a folio of independent "random walkers". (This would generate very small drawdown and large returns on actually used capital). In the real word however instruments are correlated. Trading appropriately a folio we can neutralize some correlation or use it in our favor.
First of all, normalizing the scalp size, helps "breaking" some correlations of obviously correlated instruments.
Second, if correlations are computed dinamically, this information can be used for hedging purposes. Infact, if we detect that a given instrument is being volatile and it is "absorbing" much of the capital, we can reduce temporarily new investment on correlated instruments.
(This is pretty much the rule I anticipated when answering kxvid's questions.)
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fullautotrading
Registered: Mar 2010
Posts: 593 |
07-16-10 09:51 PM
Still doing ok: 12K realized, positive PNL
and max drawdown -3.8K, almost 5 days running.
As to the second question from PocketChange:
Quote from PocketChange:
Nice results...
Few questions:
...
How do you scale size from 1 to 50 contracts? Is this a martingale or anti-martingale strategy?
...
Let's, first of all, say that "martingale" is one of the words I have removed from my vocabulary :-))
I have removed a few other words, but will not tell which one... I bet you may guess ;-)
Investopedia defines an "Anti-martingale" as: "A system of position sizing that correlates the levels of investment with the risk and portfolio size"
I think this definition is probably closer to what this algorithm does most of the time. In fact, as volatility increases, the distance between the orders increases too (because we are attempting, at any time, to "embrace" the price curve). Besides, the correlation rule mentioned above reduces temporarily new investments when volatility increases.
(The algo does have, among the parameters, a factor to sligthly increase order size, but that requires moves so deep that it is practically negligible in most situations.)
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