FORUMS BROKERS SOFTWARE
Home
 
    Forums > Trading for a Living > Journals > Activate/Deactivate System?


Reply
 
Thread Tools
Old Jul 29th, 2004, 10:42 AM   #1
EricP
Registered User
 
Join Date: Dec 2001
Posts: 895
When reseaching a trading system, at some point you must make a decision about whether your new pet system is 'worthy' of activation. Similarly, once activated most trading systems will, at some point, go through one or more periods of poor performance and you must determine whether this is just an inevitable minor drawdown, or whether this system is now 'broken' and must be deactivated to preserve your capital.

Over the years, I have developed some methods that have worked very well for me, addressing these issues. In the spirit of education, and in memory of acrary's useful posts on this board, I will share my methods for managing system activation/deactivation.

As with acrary, I will no reply to every post if I have nothing to say. In addition, I trade fulltime every day (although automated) and may or may not have time to respond to questions. Please avoid petty bickering on this thread, as it just ruins the thread for everyone.

I'll post some of my initial thoughts on this topic as the day goes on, and after I've posted 3-5 posts would welcome questions if there are any.

-Eric
    Quote
Old Jul 29th, 2004, 10:52 AM   #2
EricP
Registered User
 
Join Date: Dec 2001
Posts: 895
First, before I forget, let me address one of the biggest mistakes people make when developing a system: optimization.

Typical traders will take a program like TradeStation or WealthLab or the equivalent, and create a spectacular trading system with clever and creative ideas, which has a near-linear P&L curve, and with very few minor drawdowns... They are excited and can't wait to start making the 'easy money' with live trading.

Will they actually make money with their new methods? Actually, we don't have a clue, as they've never tested whether their new method will make money in the future on not. All they have actually done is prove that their new system does any excellent job of being optimized to fit the past data, which in and of itself, is worthless.

How do we improve upon this? Test your system in the future! Hmmm... the future, you ask, how would we do that?

Let's assume that you are doing your backtesting on 5 years of data, and the system generates 150 trades per year, for a total of 750 trades. In order to tell how well the system performs in the future, you must withhold all of your data from the optimization tests. Instead, for example, only optimize on the first two years of data (300 trades, pretty decent number). Then, use your optimized system to now test on the 'future' => i.e. test year 3 of data with the system optimized on years 1 and 2.

Next, reoptimize your system on the data from years 2 and 3, and give it a future test with the data from year 4. Similarly, optimize your system with the data from year 3 and 4, giving it a 'real-time' test against the data from year 5. In this way, you can see how your system will perform in the 'future' based upon whatever optimization methods you are using.

This sort of method should give you increased confidence when you go to live activation that it should work well in the 'future'.

-Eric
    Quote
Old Jul 29th, 2004, 11:00 AM   #3
B_Wayne
 
 
Join Date: Jul 2004
Posts: 20
Excellent reminder, Eric, and not repeated often enough.
    Quote
Old Jul 29th, 2004, 11:00 AM   #4
abogdan
 
 
Join Date: Dec 2003
Location: Bolton, Ontario, Canada
Posts: 872
activating/Deactivating any system is a system on its own. Example:
Switching between a trending system (MA, LinReg, MACD, etc) and counter trent system (RSI, Bol. bends, Chalkin etc.) is a Nobel Prize challenge.
    Quote
Old Jul 29th, 2004, 11:07 AM   #5
EricP
Registered User
 
Join Date: Dec 2001
Posts: 895
For me, the question of system activation really depends on answering the question of "Is this system profitable?"

Obviously, once activated, money management can be used to determine the best trade size in order to minimize drawdown on your overall account.

So, how do we know if our system is 'profitable'? Obviously, the average P&L of the trades must be above zero. But, that alone should not give us confidence. For example, the following sequence of trades has an average above zero:

+$2000
+$350
($300)
+$1400
($3000)
+$750

Avg = +$200

=> But I certainly would have little confidence that the system was net profitable. The next trade could be ($2200) and then we would be seeing a net losing system.

We would get better confidence that we have a profitable system if the trades were more consistent (i.e. lower standard deviation). For example, the following six trades also average +$200, but provide greater confidence that the system is likely profitable over a long term:

+$500
($300)
+$400
($50)
+$950
($100)

Avg = +$200

While not ideal, the smaller spread of the P&L results increases our confidence that this system MAY be profitable over the long haul.

How else might we generate increased confidence of a systems long term performance? One key is certainly the number of trades that are in your sample being assessed. Assuming you have got 100 trades that show an average profit of $200 per trade, versus on 6 trades showing an average profit of $200 per trade => you will have much greater confidence in your system based upon the 100 trade analysis.

Fortunately, statistics offers us some tools that we can use to scientifically answer these questions a little more accurately.

What is the likelihood that my system is profitable? What is my confidence level?

(continued)

-Eric
    Quote
Old Jul 29th, 2004, 11:11 AM   #6
EricP
Registered User
 
Join Date: Dec 2001
Posts: 895
Quote:
Quote from abogdan:

activating/Deactivating any system is a system on its own. Example:
Switching between a trending system (MA, LinReg, MACD, etc) and counter trent system (RSI, Bol. bends, Chalkin etc.) is a Nobel Prize challenge.
I completely agree, abogdan. That is why (for me), it is critical to have a structured approach in place that is completely free of any emotion or judgment. Instead, my systems automatically turn themselves on and off as appropriate based upon my system activation/deactivation 'system'. A system within itself, as you say. Very true.

Welcome to the thread, by the way. I have long valued your contributions on ET, and felt that thoughts from you and acrary have been the most helpful for me as any on ET. I am hopeful that you will find something useful in my posts as well.

-Eric
    Quote
 
Reply
Thread Tools

Forum Jump



   Conduct Rules   Privacy Policy   Sitemap Copyright © 2014, Elite Trader. All rights reserved.   

WHILE YOU'RE HERE, TAKE A MINUTE TO VISIT SOME OF OUR SPONSORS:
Advantage Futures
Futures Trading & Clearing
AMP Global Clearing
Futures and FX Trading
Collective2
Automated Trading Services
CTS
Futures Trading Software
dom993trading.com
NinjaTrader Consulting
eSignal
Trading Software Provider
FXCM
Forex Trading Services
Global Futures
Futures, Options & FX Trading
Interactive Brokers
Pro Gateway to World Markets
JC Trading Group
Direct Access Trading
MB Trading
Direct Access Trading
NinjaTrader
Trading Software Provider
optionshouse
Option Trading & Education
Rithmic
Futures Trade Execution Platform
SpeedTrader
Direct Access Trading
SpreadProfessor
Spread Trading Instruction
thenut-trader.com
FX, Gold, & Stock Signals
TradersStudio
System Building & Backtesting
Tradier
Equity and Options Trading
Trading Technologies
Trading Software Provider