Interesting question. But this is a bad idea.... There isn't enough data in the backtest (at most 35 years, but on average about 15 years, and in some cases just 2 years) to prove statistically that instrument A is "probably" better than instrument B. Number of instruments with data, by year. From http://qoppac.blogspot.co.uk/2015/03/simulating-my-futures-system.html And this means one year of live trading data is wholly inadequate. This is because the differences in performance aren't sufficiently large to find a difference. From table 6 of my forthcoming book given an average correlation between instruments of 0.5 I'd only need 8 years of data if one instrument had a Sharpe Ratio (SR) that was 1.0 higher than another (say a SR of 1.5 compared to one of 0.5). However there just aren't any instruments with that kind of SR difference over 8 years or more. More commonly the difference in performance is perhaps 0.5 or 0.25 SR units. With that kind of 'advantage' I'd need 25 years and 40 years of data respectively. I just don't have it. GAT
Ha! Yes forgot that one. But one of the nice advantages of being an independent trader is to go on holiday whenever you feel like it..... GAT
But even 1 year data is like 250 trading days, that is a lots of data and statistically signifficant number. Also markets change over time, so just because the backtest worked in let's say 2006, that doesn't mean the strategy still works today with the same instrument. I am curious about the breakdown of the 40 instruments as P/L goes? Let's say 10-15 very well performing, 15-20 so-so, and 10-15 losers. What is the point of carrying the loser? Another question: How about correlated markets? Even if it is 2 futures, if they are strongly correlated, they can be treated as one. This is including inversely correlated markets too. Dollar/gold is such an example. The point here is that just because you have 40 instruments, you might only trade 25 uncorrelated markets or even less....
The point of 'carrying the loser' is that you don't know in future which markets will be the losers, and which will be the winners. For this to be the case three things would have to be true: - there would have to be some reason which explains why A is winning and B is losing (or it is just likely to be a statistical fluke). For the kind of trading I do, that's usually unlikely. For HFT stuff working on market microstructure with for example different priority rules and rebates it is more plausible. - there wouldn't be any changes in this relative structure; eg the future would be exactly like the past. Even for HFT this is a stretch, because different players come into the market and change the way it works. - there would have to be sufficient statistical evidence to show that market A was better than market B So we're back to statistics again. It's not true that using daily data rather than say monthly or annual data will give you more statistical significance. This is because when you go down to daily data you increase the amount of noise. This exactly compensates for the increase in the number of data points (to be technical, both effects scale at square root of time, ignoring auto-correlation effects which don't make that much difference to the result). As for 'it worked before but might not work today' I'm trading systems with a relatively slow holding period, at least by the febrile standards of this board. My base assumption is that they always work on all markets for all time. I will never have enough data to prove otherwise. I will never have enough data to prove that I should be trading something else. I will never have enough data to prove that they only work for certain markets. You are correct that there is no point having 100% correlated markets. However it depends on how much capital you have as to whether you would bother with markets that are 75% correlated, or 99% correlated. All things being equal I'd rather have more markets than less. And with more capital I will be adding markets where the correlation is higher, than for someone with less capital (see http://www.elitetrader.com/et/index.php?threads/a-tale-of-two-positions.292751/#post-4147857 for more explanation on this point). With enough capital to trade 40 markets, that's what I should do. If I went down to 15 markets by dropping the most correlated pairs I'd reduce my expected Sharpe Ratio by about 15%, or in money terms about £13,000 a year. Why would I voluntarily want to give that up? (A minor point to make is that what matters is not the correlation between prices that matters, but between the returns of the trading subsystems. The correlation of the latter is lower, so the diversification effect of adding more instruments is higher than you might think) GAT
There's a new post in my current series here: http://www.elitetrader.com/et/index...atic-trading-system-part-5-accounting.293403/ Please leave any constructive discussion at that thread GAT
It's been about a month since my last update; I've actually been back from holiday a few days but a month is an easier reporting period to deal with. I discussed in a previous post what action I should take whilst away. In the end I didn't do anything... and for nearly all the time I didn't have internet or even read a newspaper... I can hear you gasping.... why did I miss anything?! For most of the holiday not very much probably happened, but then with about a week to go apparently things got a little interesting. Net-Net on the moves of the last couple of weeks I'm flat or slightly up, but it has been a wild ride. I hit a new HWM when the equity market fell of a cliff, but gave most of it back on the recovery: Anyway as of this morning my profit since the last update was around £20K. Current drawdown (off the new, higher HWM don't forget) is 6.9% Gainers: KOSPI £5400 MXP £3400 EDOLLAR £3700 PALLAD £3200 AUD £2900 KR3 £2500 Losers: AEX -£2300 CAC -£2300 JPY -£5400 PLAT -£6900 GOLD -£7600 VIX -£12700 That big VIX loss wasn't really a surprise – I'd sold 3 contracts at a price of 16 or less, then it spiked above 20 very rapidly. Though I cut my position by then the damage was done. There is a similar story with Gold and everything else you can see here. This is why diversification is so important... even within the metals bucket I had radically different p&l. Referencing the discussion on here before, which of the metals should I choose to trade? Anyway as of this morning my profit since the last update was around £20K. Current drawdown (off the new, higher HWM don't forget) is 6.9% Gainers: KOSPI £5400 MXP £3400 EDOLLAR £3700 PALLAD £3200 AUD £2900 KR3 £2500 Losers: AEX -£2300 CAC -£2300 JPY -£5400 PLAT -£6900 GOLD -£7600 VIX -£12700 That big VIX loss wasn't really a surprise – I'd sold 3 contracts at a price of 16 or less, then it spiked above 20 very rapidly. Though I cut my position by then the damage was done. There is a similar story with Gold and everything else you can see here. This is why diversification is so important... even within the metals bucket I had radically different p&l. Referencing the discussion on here before, which of the metals should I choose to trade? Same question for currencies? Current positions Code: code contractid positions Lock WrongContract InFwdNotRoll 1 AUD 201509 -3 False False False 5 BOBL 201512 3 False False False 23 BTP 201512 1 False False False 17 COPPER 201512 -2 False False False 18 CORN 201512 -3 False False False 11 CRUDE_W 201512 -1 False False False 21 EDOLLAR 201812 11 False False False 12 EUROSTX 201509 -13 False False False (HEDGE) 3 GAS_US 201511 -4 False False False 7 GBP 201509 -3 False False False 10 KR10 201509 2 False False False 6 KR3 201509 11 False False False 0 LEANHOG 201606 1 False False False 19 LIVECOW 201610 -1 False False False 8 MXP 201509 -6 False False False 16 NZD 201509 -2 False False False 22 PALLAD 201512 -1 False False False 13 PLAT 201510 -2 False False False 14 SOYBEAN 201511 -2 False False False 2 US10 201512 1 False False False 4 US2 201512 3 False False False 20 US5 201512 1 False False False 15 V2X 201510 1 False False False 24 V2X 201511 1 False False False 25 VIX 201510 -1 False False False 9 WHEAT 201512 -3 False False False Current risk Code: Expected annual risk more than GBP6400 per year, GBP400 per day code multisignal expected_annual_risk expected_annual_risk_per_contract position expected_annual_risk_rounded_pos 17 VIX -20.1 13098 9846 -1 9846 0 CORN -16.0 10411 3469 -3 10406 29 NZD -19.3 12562 6168 -2 12337 28 MXP -17.7 11499 2104 -6 12624 4 WHEAT -18.0 11695 4237 -3 12710 26 GBP -21.4 13921 4737 -3 14210 34 CRUDE_W -26.0 16928 14271 -1 14271 33 PLAT -16.7 10837 7345 -2 14691 3 SOYBEAN -22.3 14538 8074 -2 16147 24 AUD -22.6 14719 5384 -3 16152 32 PALLAD -21.6 14078 16835 -1 16835 30 COPPER -29.6 19257 9453 -2 18907 35 GAS_US -33.8 21973 5215 -4 20860 36 EDOLLAR 24.2 15720 1294 11 14229 Although I have fewer, and smaller, positions due to higher market vol the current expected portfolio risk as of last night was virtually unchanged @ 120% of average; on 90% of maximum capital (due to the drawdown) or in money terms £6768 a day or £108K a year. Due to a smaller number of positions I am no longer hitting any risk limits (to put it another way, my exposure to correlation risk has fallen). Trades Code: code contractid filled_datetime filledtrade filledprice 4741 AEX 201509 2015-08-06 13:17:37 1 500.200000 4777 AEX 201509 2015-08-13 07:56:45 -1 483.700000 4990 AUD 201509 2015-08-26 01:28:57 -1 0.710400 5086 AUD 201509 2015-09-03 03:31:48 -1 0.702000 4843 BOBL 201509 2015-08-17 07:28:42 1 130.510000 4927 BOBL 201509 2015-08-25 10:02:17 -3 130.470000 4930 BOBL 201512 2015-08-25 10:02:17 3 128.620000 4846 BTP 201509 2015-08-17 08:29:10 1 136.880000 4867 BTP 201509 2015-08-18 14:54:13 -1 136.480000 4912 BTP 201509 2015-08-25 09:36:09 -1 135.330000 5008 BTP 201509 2015-08-27 09:41:02 -1 134.880000 5011 BTP 201512 2015-08-27 09:41:02 1 133.200000 5014 BTP 201512 2015-08-27 09:45:49 -1 133.280000 5035 BTP 201512 2015-08-28 10:49:52 1 133.750000 5077 BTP 201512 2015-09-02 15:25:36 -1 132.710000 5113 BTP 201512 2015-09-03 15:24:02 1 133.640000 4822 BUND 201509 2015-08-14 07:30:53 1 155.040000 4957 BUND 201509 2015-08-25 13:02:24 -1 154.020000 4960 BUND 201512 2015-08-25 13:02:24 1 154.210000 4996 BUND 201512 2015-08-26 07:26:07 -1 153.980000 4783 CAC 201509 2015-08-13 07:59:42 -1 5005.500000 4999 CAC 201509 2015-08-26 07:59:04 -1 4494.000000 5017 CAC 201509 2015-08-27 10:00:17 1 4640.500000 4756 COPPER 201512 2015-08-10 13:07:10 -1 2.348000 4762 COPPER 201512 2015-08-10 16:15:42 1 2.398500 4810 COPPER 201512 2015-08-13 12:10:50 -1 2.347000 5029 COPPER 201512 2015-08-27 16:55:39 1 2.334500 4852 CORN 201512 2015-08-17 15:15:26 -1 375.250000 5074 CORN 201512 2015-09-02 14:30:00 -1 368.750000 4798 CRUDE_W 201512 2015-08-13 11:57:17 -1 46.150000 5032 CRUDE_W 201512 2015-08-27 17:00:54 1 43.400000 5071 CRUDE_W 201512 2015-09-02 14:12:30 1 47.020000 4807 EDOLLAR 201812 2015-08-13 12:04:23 1 97.705000 4831 EDOLLAR 201812 2015-08-14 12:03:57 1 97.710000 4873 EDOLLAR 201812 2015-08-19 12:00:30 1 97.700000 4945 EDOLLAR 201809 2015-08-25 11:58:50 -2 97.985000 4948 EDOLLAR 201812 2015-08-25 11:58:50 2 97.885000 5005 EDOLLAR 201812 2015-08-26 17:55:45 1 97.875000 4744 EUR 201509 2015-08-06 13:59:49 -1 1.088900 4753 EUR 201509 2015-08-10 01:28:17 1 1.096000 4801 GAS_US 201510 2015-08-13 11:59:15 1 2.934000 4849 GAS_US 201511 2015-08-17 12:14:52 -1 2.903000 4864 GAS_US 201511 2015-08-18 12:11:41 -1 2.847000 4882 GAS_US 201511 2015-08-19 17:52:57 -1 2.824000 4951 GAS_US 201510 2015-08-25 12:02:37 1 2.690000 4954 GAS_US 201511 2015-08-25 12:02:37 -1 2.768000 4750 GBP 201509 2015-08-07 01:46:12 -1 1.551000 4774 GBP 201509 2015-08-13 00:59:57 1 1.560800 4918 GBP 201509 2015-08-25 09:39:34 1 1.578900 4987 GBP 201509 2015-08-25 19:26:17 -1 1.568500 5023 GBP 201509 2015-08-27 15:52:25 -1 1.538500 5041 GBP 201509 2015-08-31 01:35:03 -1 1.542000 5083 GBP 201509 2015-09-03 01:34:12 -1 1.530000 4768 GOLD 201512 2015-08-11 12:07:07 1 1111.500000 4834 GOLD 201512 2015-08-14 12:14:54 1 1120.000000 4891 GOLD 201512 2015-08-20 12:14:06 1 1138.200000 4885 JPY 201509 2015-08-20 01:40:06 1 0.008076 4903 JPY 201509 2015-08-24 00:57:14 1 0.008216 4909 JPY 201509 2015-08-25 00:57:57 1 0.008411 4870 KOSPI 201509 2015-08-19 02:58:19 -1 233.850000 5038 KOSPI 201509 2015-08-31 01:01:27 1 230.350000 5131 KOSPI 201509 2015-09-04 02:36:39 1 229.200000 4894 KR10 201509 2015-08-21 01:40:29 1 124.320000 4840 KR3 201509 2015-08-17 01:47:50 1 109.340000 4897 KR3 201509 2015-08-21 02:00:22 1 109.450000 5128 KR3 201509 2015-09-04 01:46:33 1 109.610000 5116 LIVECOW 201510 2015-09-03 16:55:29 1 142.450000 5119 LIVECOW 201610 2015-09-03 16:55:29 -1 135.100000 4765 MXP 201509 2015-08-10 18:11:37 1 0.061870 4792 MXP 201509 2015-08-13 09:59:07 -1 0.061240 4855 MXP 201509 2015-08-18 02:24:11 -1 0.060690 4921 MXP 201509 2015-08-25 09:40:38 1 0.058530 4936 MXP 201509 2015-08-25 11:26:57 1 0.059000 4993 MXP 201509 2015-08-26 01:39:01 -1 0.057770 5026 MXP 201509 2015-08-27 16:17:41 1 0.059320 4858 OAT 201509 2015-08-18 07:32:41 1 149.860000 4876 OAT 201509 2015-08-19 15:21:25 -1 149.340000 4888 OAT 201509 2015-08-20 07:31:50 1 150.020000 4915 OAT 201509 2015-08-25 09:37:06 -1 149.010000 4963 OAT 201509 2015-08-25 13:08:30 -1 148.380000 4939 PALLAD 201509 2015-08-25 11:57:25 1 559.850000 5065 PALLAD 201509 2015-09-02 13:25:09 1 574.300000 5068 PALLAD 201512 2015-09-02 13:25:09 -1 574.900000 4879 PLAT 201510 2015-08-19 15:48:20 1 1008.400000 4942 PLAT 201510 2015-08-25 11:57:55 1 991.400000 4780 SMI 201509 2015-08-13 07:57:51 -1 9297.000000 4759 SOYBEAN 201511 2015-08-10 15:46:16 1 981.500000 4819 SOYBEAN 201511 2015-08-13 16:22:26 -1 913.500000 5002 SOYBEAN 201511 2015-08-26 12:21:49 -1 874.500000 4747 SP500 201509 2015-08-07 08:56:52 -1 2073.500000 4813 US10 201509 2015-08-13 15:33:12 1 127.671875 4966 US10 201509 2015-08-25 13:55:42 -1 128.656250 4969 US10 201512 2015-08-25 13:55:42 1 128.101562 4816 US2 201509 2015-08-13 15:38:40 1 109.476562 4972 US2 201509 2015-08-25 13:56:17 -3 109.687500 4975 US2 201512 2015-08-25 13:56:17 3 109.468750 4978 US5 201509 2015-08-25 13:57:13 -1 120.570312 4981 US5 201512 2015-08-25 13:57:13 1 120.179688 4984 US5 201512 2015-08-25 14:04:00 1 120.171875 5020 US5 201512 2015-08-27 14:07:59 -1 119.609375 4708 V2X 201509 2015-08-05 11:02:38 -1 19.500000 4711 V2X 201510 2015-08-05 11:02:38 1 19.900000 4738 V2X 201510 2015-08-06 08:11:06 -1 20.000000 4789 V2X 201510 2015-08-13 08:14:17 -1 20.700000 4933 V2X 201510 2015-08-25 10:38:30 1 23.850000 5047 V2X 201510 2015-08-31 09:08:46 1 26.000000 5137 V2X 201511 2015-09-04 08:22:25 1 27.300000 4714 VIX 201510 2015-08-05 11:04:33 -2 15.800000 4720 VIX 201509 2015-08-05 14:02:19 2 15.000000 4795 VIX 201510 2015-08-13 10:05:07 -1 16.000000 4924 VIX 201510 2015-08-25 10:02:31 1 20.550000 5062 VIX 201510 2015-08-31 11:00:07 1 22.800000 4861 WHEAT 201512 2015-08-18 12:02:26 -1 503.750000 5080 WHEAT 201512 2015-09-02 16:24:15 -1 477.000000 Slippage – expected £648, actual £421 A lot of rolls, but also just a lot of trading because of the markets wild swings. Even profitable positions like MXP had to be traded to adjust my risk as the turmoil affected it. In other news I've published my final blog post on system construction, any discussion here please http://www.elitetrader.com/et/index...ed-trading-system-checks-and-balances.294024/ And for those who don't follow me on social media, you might not have seen the first review of my new book: "A remarkable look inside systematic trading never seen before, spanning the range from small to institutional traders. This isn't only for algorithmic traders, it's valuable for anyone needing a structure - which is all of us. Carver explains how to properly test, apply constant risk, size positions and portfolios, and my favorite, his "no rule" trading rule, all explained with scenarios. Reading this will benefit all traders." Perry Kaufman, author of Trading Systems and Methods. I'm a massive fan of Perry, and very grateful for this endorsement. The official release of the book is September 15th, but some of the people who pre-ordered the ebook have received their copies already. Happy trading GAT
A quiet couple of weeks after all the excitement in August. As of this morning my loss since the last update was around £7K. Current draw down is 8.7%. Gainers: Crude oil £6K Platinum £3.2K Palladium £2.2K KOSPI £1.4K Yen £1.2K Losers: KR3 £1.2K Live cow £1K S&P 500 1.8K Current positions: Code: code contractid positions Lock WrongContract InFwdNotRoll 4 BOBL 201512 3 False False False 20 BTP 201512 2 False False False 14 COPPER 201512 -1 False False False 13 CORN 201612 -3 False False False 7 CRUDE_W 201512 -1 False False False 12 EDOLLAR 201903 3 False False False 17 EDOLLAR 201812 10 False False False 19 EUROSTX 201512 -13 False False False (hedge) 1 GAS_US 201512 -1 False False False 2 GAS_US 201511 -4 False False False 11 KR10 201512 2 False False False 9 KR3 201512 9 False False False 0 LEANHOG 201606 2 False False False 15 LIVECOW 201610 -2 False False False 6 MXP 201512 -5 False False False 10 NZD 201512 -2 False False False 18 PALLAD 201512 -1 False False False 8 PLAT 201510 -2 False False False 3 US2 201512 2 False False False 16 US5 201512 1 False False False 21 V2X 201511 3 False False False 5 WHEAT 201612 -2 False False False Current risk: Code: code multisignal expected_annual_risk expected_annual_risk_per_contract position expected_annual_risk_rounded_pos 4 WHEAT -12.8 8245 4182 -2 8363 28 MXP -14.3 9268 1854 -5 9268 0 CORN -11.8 7618 3105 -3 9315 2 LIVECOW -14.4 9323 5256 -2 10511 30 COPPER -23.1 14902 10651 -1 10651 29 NZD -16.2 10470 6157 -2 12314 32 PALLAD -12.9 8317 13331 -1 13331 33 PLAT -23.5 15199 6668 -2 13335 34 CRUDE_W -19.8 12799 14363 -1 14363 35 GAS_US -35.9 23175 4853 -5 24267 7 BOBL 9.9 6421 1859 3 5576 1 LEANHOG 10.6 6823 3006 2 6011 5 KR10 7.9 5119 3042 2 6084 6 KR3 9.2 5953 705 9 6349 8 BTP 20.9 13506 7393 2 14786 36 EDOLLAR 27.0 17431 1446 13 18799 My risk has fallen with the weakening of many trends; the current expected portfolio risk as of last night was virtually unchanged @ 90% of average; on 91% of maximum capital or in money terms £5162 a day or £83K a year. Trades: Code: code contractid filled_datetime filledtrade filledprice 5164 AUD 201509 2015-09-08 16:23:20 1 0.701700 5218 AUD 201509 2015-09-10 06:56:38 1 0.701800 5221 AUD 201512 2015-09-10 06:56:38 -1 0.698450 5248 AUD 201509 2015-09-10 07:06:08 1 0.701800 5251 AUD 201512 2015-09-10 07:06:08 -1 0.698450 5323 AUD 201512 2015-09-14 01:29:59 1 0.707700 5437 AUD 201512 2015-09-16 07:41:01 1 0.712900 5113 BTP 201512 2015-09-03 15:24:02 1 133.640000 5152 BTP 201512 2015-09-07 07:34:06 1 134.390000 5371 BTP 201512 2015-09-15 11:40:02 1 134.780000 5428 BTP 201512 2015-09-15 15:58:34 -1 134.140000 5470 COPPER 201512 2015-09-18 16:07:57 1 2.383500 5404 CORN 201512 2015-09-15 14:35:56 3 393.500000 5407 CORN 201612 2015-09-15 14:35:56 -3 414.000000 5146 EDOLLAR 201812 2015-09-04 12:18:57 1 97.880000 5278 EDOLLAR 201903 2015-09-10 12:00:18 1 97.760000 5377 EDOLLAR 201903 2015-09-15 12:04:39 1 97.820000 5386 EDOLLAR 201903 2015-09-15 12:20:43 1 97.810000 5434 EDOLLAR 201812 2015-09-15 18:35:47 -1 97.810000 5461 EDOLLAR 201812 2015-09-18 12:13:41 -1 97.970000 5365 EUROSTX 201509 2015-09-15 08:02:02 13 3188.000000 5368 EUROSTX 201512 2015-09-15 08:02:02 -13 3175.000000 5473 GAS_US 201512 2015-09-18 18:18:02 -1 2.842000 5161 GBP 201509 2015-09-08 13:18:02 1 1.540400 5224 GBP 201509 2015-09-10 07:01:47 1 1.536500 5227 GBP 201512 2015-09-10 07:01:47 -1 1.535700 5266 GBP 201509 2015-09-10 07:58:28 1 1.536500 5269 GBP 201512 2015-09-10 07:58:28 -1 1.535700 5329 GBP 201512 2015-09-14 02:38:06 1 1.544800 5452 GBP 201512 2015-09-18 01:52:52 1 1.556400 5149 GOLD 201512 2015-09-04 14:20:48 -1 1117.100000 5281 GOLD 201512 2015-09-10 12:05:39 -1 1106.300000 5458 GOLD 201512 2015-09-18 12:05:03 1 1136.500000 5476 GOLD 201512 2015-09-21 12:04:49 1 1137.100000 5131 KOSPI 201509 2015-09-04 02:36:39 1 229.200000 5290 KR10 201512 2015-09-14 01:11:27 2 124.670000 5305 KR10 201512 2015-09-14 01:12:08 2 124.670000 5311 KR10 201512 2015-09-14 01:14:19 2 124.680000 5314 KR10 201512 2015-09-14 01:16:48 2 124.650000 5317 KR10 201512 2015-09-14 01:18:12 2 124.640000 5320 KR10 201509 2015-09-14 01:19:54 -2 124.790000 5335 KR10 201512 2015-09-14 06:30:13 -8 124.420000 5128 KR3 201509 2015-09-04 01:46:33 1 109.610000 5158 KR3 201509 2015-09-08 04:31:46 -1 109.580000 5215 KR3 201509 2015-09-10 02:30:37 1 109.630000 5296 KR3 201512 2015-09-14 01:03:19 11 109.570000 5299 KR3 201512 2015-09-14 01:07:45 11 109.570000 5302 KR3 201512 2015-09-14 01:10:46 11 109.570000 5308 KR3 201509 2015-09-14 01:12:30 -11 109.620000 5338 KR3 201512 2015-09-14 06:30:52 -21 109.520000 5449 KR3 201512 2015-09-18 01:45:36 -2 109.620000 5455 KR3 201512 2015-09-18 04:49:37 -1 109.650000 5176 LEANHOG 201606 2015-09-09 15:00:11 1 80.150000 5116 LIVECOW 201510 2015-09-03 16:55:29 1 142.450000 5119 LIVECOW 201610 2015-09-03 16:55:29 -1 135.100000 5479 LIVECOW 201610 2015-09-21 16:14:37 -1 131.375000 5167 MXP 201509 2015-09-08 16:54:46 1 0.059580 5236 MXP 201509 2015-09-10 07:04:38 2 0.059370 5239 MXP 201512 2015-09-10 07:04:38 -2 0.058970 5254 MXP 201509 2015-09-10 07:10:37 2 0.059370 5257 MXP 201512 2015-09-10 07:10:37 -2 0.058970 5260 MXP 201509 2015-09-10 07:15:41 1 0.059370 5263 MXP 201512 2015-09-10 07:15:41 -1 0.058970 5230 NZD 201509 2015-09-10 07:02:48 1 0.639200 5233 NZD 201512 2015-09-10 07:02:48 -1 0.635050 5242 NZD 201509 2015-09-10 07:05:07 1 0.639200 5245 NZD 201512 2015-09-10 07:05:07 -1 0.635050 5347 OAT 201512 2015-09-14 09:39:00 1 150.670000 5431 OAT 201512 2015-09-15 16:01:47 -1 149.600000 5389 SOYBEAN 201511 2015-09-15 12:33:19 1 886.000000 5392 SOYBEAN 201611 2015-09-15 12:33:19 -1 879.000000 5395 SOYBEAN 201511 2015-09-15 12:38:34 1 885.750000 5398 SOYBEAN 201611 2015-09-15 12:38:34 -1 878.750000 5401 SOYBEAN 201611 2015-09-15 12:48:31 1 878.500000 5464 SOYBEAN 201611 2015-09-18 12:30:07 1 882.000000 5446 US10 201512 2015-09-17 14:11:42 -1 126.640625 5467 US2 201512 2015-09-18 15:54:06 -1 109.382812 5137 V2X 201511 2015-09-04 08:22:25 1 27.300000 5275 V2X 201511 2015-09-10 08:12:02 1 27.500000 5341 V2X 201510 2015-09-14 08:35:17 -1 27.800000 5344 V2X 201511 2015-09-14 08:35:17 1 26.750000 5362 VIX 201510 2015-09-15 06:47:25 1 22.850000 5410 WHEAT 201512 2015-09-15 15:28:37 1 494.750000 5413 WHEAT 201612 2015-09-15 15:28:37 -1 533.000000 5416 WHEAT 201512 2015-09-15 15:43:22 1 495.500000 5419 WHEAT 201612 2015-09-15 15:43:22 -1 533.500000 5422 WHEAT 201512 2015-09-15 15:46:48 1 496.000000 5425 WHEAT 201612 2015-09-15 15:46:48 -1 534.000000 5440 WHEAT 201612 2015-09-16 15:59:10 1 526.250000 5443 WHEAT 201612 2015-09-16 16:04:28 -1 526.000000 A lot of rolls. Slippage £349 vs expected £473 GAT
GAT, Great post and great blog. I have a few questions as I'm digesting all the info: 1. the 25% capital at risk is at 95% confidence (I believe I read that in one of your posts), and therefore 2 times the standard deviation of annual returns, correct? If I'm following correctly, then this means that the standard deviation of annual returns is 12.5% -- is this based on your backtesting results? 2. if my understanding in #1 above is correct, why do you not include the expected annual return in the equation of capital at risk? What I mean is, why is not capital at risk equal to expected maximum draw-down at 95% confidence -- in other words -- maximum_draw_down = mean_annual_return - 2 * annual_std_dev ? 3. I'm amazed by your graph (in prior post) showing the expected and actual risk. You mentioned that your "risk" calculations are based on standard deviation of the daily returns. I assume that the calculation of expected and actual risk is a measure of standard deviation of returns based on some look-back period, is that correct? If so, what is the duration of the look-back that you use? BTW, I'm new to futures trading, actually never traded a single futures contract yet I found your blog when I was looking for some info on the IB Gateway API -- it seemed amazing to me that there was no way to log in without the GUI -- I guess there isn't. I'm working on a futures trading system now, and I've been trading a tactical asset allocation system (using ETFs) for about 6 months. But that system is automated only up to the point of execution, it sends me emails of what to buy/sell and I do that part manually. The average holding period is about a month, so the burden is not big. Anyhow, I hope my questions make sense -- meaning that I've not misunderstood or misread your blog and this thread. Please keep in mind that I'm not questioning your methods in #2, I simply would like to understand why this is your approach and perhaps why the approach I mention in the question is not appropriate. Now that I think about it, I am probably missing something. You mentioned that your Sharpe (or information ration since it does not include the risk-free rate) is roughly 0.9. If std. dev. of annual returns is 12.5%, then average annual return is roughly 11%. But I remember reading that you expect your system to produce about 16% annually. Sorry, I probably need to go back through some of your posts. Thanks for your time and for making all this information available. --Maciej
It's absolutely fine to ask these questions, and hopefully I can clear up your confusion. The long run target expected average standard deviation of my annual returns is 25% - that is what I mean by 'risk'. The amount of capital I have at risk is £400,000; so the long run expected blah blah is £100K a year. I should get slightly less than this in my backtest, as I have an exogenous risk overlay that reduces my risk when it is particularly vunerable to tail events. However over short periods of my backtest I will obviously have expected risk different from the target; eithier because my forecasts are weak or strong, or because correlations are different from their long run average. I'm trying to remember where I used a 95% confidence interval; perhaps relating to a t-test around what the distribution of my returns should be, but I don't think I've ever used it in the context of risk. If so apologies. More likely I've mentioned VAR in passing - but to be clear I don't use VAR and in any case VAR would normally be quoted as a daily measure. The maximum drawdown at 95% confidence is path dependent and so can't just be calculated from the expected annual standard deviation. I think your equation would give the 95% confidence interval for expected annual loss if targeted risk was constant (i.e. it wouldn't make sense for trend following or for someone using the kelly criteria to scale capital at risk). Still for fun, if we assume my SR is 0.9 as in the backtest, then we get 0.9 x 25% - 2 * 25% or perhaps if we factor out the expected standard deviation 25% x (0.9 - 2) = 28%. That is probably a little conservative but worth bearing in mind. FWIW the DAILY equivalent of that formula makes a lot more sense; daily 1.5625% x (0.05625 - 2); or about 3%. Note this is the same as a 95% VAR if you assume gaussian returns. If you put a gun to my head then I'd say my 95% VAR was probably about 4% on average. Due to jump effects and so on I'd say that 3% isn't sufficiently conservative and the 95% daily loss is probably a little worse than that in reality. I use a lookback of about one month for measuring standard deviations, and a longer lookback of about 6 month for correlations (and using weekly returns). Yes to reiterate my std. dev of annual returns is 25% (or a little lower in backtest), as I'm a little conservative I don't expect to see a SR of 0.9, so 16% is probably a reasonable figure for expectations. GAT