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Help With Evaulating Intra-Day Trading Systems

  1. Hello,

    So I have programmed and back test a few intra-day (5, 15, 30, and 60 minute charts) trading systems on my development platform.

    My problem is I do not know how to evaluate the performance of the trading system I am programming and back testing besides looking at the net profit.

    A few questions please:

    1. Is profitably across multiple instruments prove a strategy robustness? See the attachment please. Strategy shows profits for EMD and ES but not so much for other instruments.

    2. Why is Max Drawdown so important? I understand the meaning of it, but why important from a money simplicity understanding? Why would a client be interested in this so much and not annual profit?

    3. Can you please recommend a book for evaluating intra-day trading systems?

    4. When you evaluating a trading strategy performance what a few performance you look at for a quick review before moving forward to other validation methods?

    5. How do you know when you have a system that have high odds of profitability in the future?

    Thank you kindly.
     
  2. I looks like your backtest is from 2007 to 2010. That's way out of date. See if you can get more recent data.

    Yes, but it's highly unlikely that you'd find something that works well for multiple instruments.

    Because Max DD is a measure of risk. What the trading system should maximize is not annual profit, but the risk-adjusted annual profit.



    Sharpe ratio remains the golden standard in performance evaluation. There is a lot of (deserved) criticism of it, and eventually you may want to use your own performance metrics, but Sharpe ratio is a good start.
     
  3. re:max drawdowns
    a 50% move again you means that you now need a 100% move to break even.

    it is not going to happen.
     
  4. 1. Is profitably across multiple instruments prove a strategy robustness? See the attachment please. Strategy shows profits for EMD and ES but not so much for other instruments.

    System robustness should be measured by drawdown recovery time irrespective of what instrument it is running on. The two instruments that you are highlighting, ES & EMD, are highly correlated. Why would you demand your revert to the mean system to perform well on an instrument that is statistically proven to trend?

    2. Why is Max Drawdown so important? I understand the meaning of it, but why important from a money simplicity understanding? Why would a client be interested in this so much and not annual profit?

    It is important because clients with money don't want to lose it, clients with money are conservative, clients with money will not give you any if your models are exposed to high risk, no matter what the promised profit. You might find some ignorant relative or gambling friend to give you some funds but the first time they see a real drawdown they too will be demanding their funds back. Notional = emotional.

    3. Can you please recommend a book for evaluating intra-day trading systems?

    First develop a system that has low drawdowns and recovers quickly. (How to develop that system is another discussion) Some systems traders just put a moving average on their profits and turn the system on & off accordingly. Ultimately systems don't last forever, you need to know when to remove it from your basket of systems.

    4. When you evaluating a trading strategy performance what a few performance you look at for a quick review before moving forward to other validation methods?

    Is the signal or event trigger worth anything at all? Does the entrance signal give an immediate reaction? If yes, compare the MFE to MAE against time and volume, i.e., after X time or X volume where is price in relation to the original signal price. From this you can determine the strength of the signal/event.

    5. How do you know when you have a system that have high odds of profitability in the future?

    You don't!

    They
     

  5. It's among the things that collectively prove it; yes. It doesn't necessarily in itself prove it (for example, a strategy could theoretically be profitable across multiple instruments, but for only a limited and not adequately statistically significant time-period).

    I would say it's "evidential", rather than "probative".



    Because it speaks to security of funds - about the most significant aspect of investing.




    Because he's an experienced, perceptive, educated client? The less sophisticated a potential investor is, the more interested s/he will be in profit potential as the primary consideration, I think.



    Unless you're avoiding automation, I recommend the Kevin Davey book already mentioned above. In a world of questionable vendors and authors, he's unmistakably "one of the good guys". I also recommend Michael Harris (see below), and I'd say that the fact that you're asking specifically about intraday systems isn't necessarily terribly relevant, here: the principles are mostly (not entirely, granted) the same, regardless of the trade durations.



    Nowadays I have "our people" to do this, and they know far more about it than I do. In all my independent/retail-trading past, the first three things I ever looked at were - in this order - drawdown, drawdown and drawdown (I was trading my own limited funds, and wouldn't have been able to continue to make a living at all, if I'd risked losing significant chunks of it!).



    Well, "robustness" in its broadest sense ... but that's not much of an answer, is it? More a way of re-wording the question! I recommend Michael Harris's Profitability & Systematic Trading as a not-too-long and highly readable answer to this.

    But there's never certainty.

    Trying to read between the lines of your post above, I suspect that Ralph Vince's excellent book The Mathematics of Money Management: Risk Analysis Techniques for Traders will perhaps be particularly helpful to you (and he posts here sometimes).
     
  6. Thank you They,



    Good point on "System robustness should be measured by drawdown recovery time "


    I am developing intraday systems, no more then 2 trades per day.

    How many years of back test do you consider? I am seeing when I back test for many years like the performance report I attached above, I see really big drawdowns.

    If systems don't last forever, does it makes sense to back test for +5 years or over 1000 trades of back testing data. Maybe it depends on the type of system, swing trading or intraday. I am confused about the statement of systems don't last forever
     
  7. Thank you nonlinear5
     
  8. The significance of your back test is proportional to the square root of time covered by that back test. The overall shape of the performance evaluation equation typically looks like this:

    Performance score = (Reward / Risk) * sqrt(time)
     
  9. Thank you so much Xela and thanks for the resources you provided. I saved them.

    Now I am understanding the drawdown concept. If a client needs the money for income purposes then no matter how much profit s/he is made if a really big drawdown occurs then technically they are losing money.

    The drawdown will be very bad if soon as start trading the system a big drawdown occurs. So yes, I see drawdown should be low. How low, I am not sure.
     
  10. Not sure if that is correct. Daytrading or trading in longer timeframes should, according to your statement, have the same significance as they cover the same time period of the backtest. But daytrading will generate much more trades, and to me number of trades influence significance. This leads me to the conclusion that not time but number of trades are important.
    In a 1 month time daytrading 100 times cannot have the same significance as trading 4 trades that are held several days.

    What is the error in my logic?
     
  11. I test robustness by changing the parameters that are used in my system. The smaller the impact of these changes on the performance the better. It proves that the basis of the system is good and stable, and confirms that the parameters are not by accident optimized for the tested period. By changing the parameters you "de-optimize" the system, you decrease the possibility that your system works well only for that period.
     
  12. What works on one instrument, OFTEN does not work on another, or at least in the exact same way.

    SOES Bandits was NASDAQ
    NYSE Fishing Orders were NYSE
    Trend following in the Turtle Trader days worked much better with commodities than stocks
    Etc.. and so on...

    However, the general guidelines of what to look for are often similar:

    Trends
    Mean Reversion
    Scalping
    Arbitrage
    Informational Advantage
    Executional Advantage
    Cost of Playing Advantage
    Regulatory/ Exchange / Counterparty Inefficiency
    Etc.. and so on....

    ___

    Also:

    The Candy Store Often Closes

    Edges end. The market becomes too hip. Loopholes close... especially for purely manual traders.
    ___

    And:

    Positive Expectation (edge)
    Risk Management
    Enough Volume

    --are pretty much key ideas everywhere.
     
  13. Try to evaluate/trade/time/gauge/predict only the obvious major intra-day moves.
    I personally like to call them 'inflection points'. and ignore all the other relatively meaningless gyrations along the way.
    (scalping or automating a system to capture crumbs is a waste of time)

    All trading books are hilarious and meaningless, as far as I'm concerned. A great majority of them are written by squares, for squares.

    Make Trading Great Again 2018...High-Five`, ET extraterrestrials
     
  14. Besides everything already mentioned, another thing is getting used to looking at equity curves. Yours looks terrible and combined with a profit factor of 1.10, you shouldn't trade that strategy (appears random). A profit factor of 1.5 or better for systems that trade frequently and over 2 for anything less frequent is a good standard.

    Max drawdown is important as is drawdown averaged over months/years. It describes the risk because as already mentioned if you hit a 80% drawdown from the moment you start trading, you might as well give up because now you need a 400% return. There's also an emotional aspect to it because I seriously doubt anyone can remain very calm operating in a disastrous drawdown. You don't want to be in an emotionally strained situation because that will make you add to the mistakes already made.
     
  15. The problem is that different instruments behave differently.
    There is no such thing as ONE SIZE FITS ALL.
    eg corn hardly move at all, and NQ movement could be quite violent.

    even for gold, its behaviour/personality/characteristics change over time.

    So I wonder how your program cater to all these differences.
     
  16. The right way to think about it is to understand how the reward/risk ratio is expressed. If it is expressed in units per time, then the multiplier should be sqrt(time). If it is expressed in units per trade, then the multiplier should be sqrt(trades). Hope this makes sense.
     
  17. Thanks d08

    Lol, my strategy looks horrible? Lol that was funny. Yes, it has a big drawdown on that EMD and ES. I will try a few things and see if I can reduce losses and increase wins with that strategy. I just test whatever comes to mind and keep it simple.
     
  18. Thanks maxinger. It does not cater to any differences I just add all the instruments just to see which ones will make some money.
     
  19. Better to be harsh but honest rather than sweet and deceitful, I suppose.
     
  20. Your best strategy (the ES) produces a profit of $11 per trade. Assuming the ES is the futures contract, this amounts to a profit of less than 1 tick per trade. Did you account for slippage and commissions? If not, the strategy looks unattractive (a consistent loser, in fact). If yes, it looks borderline unattractive.
     
  21. Since it's an obvious variation on T-stat, this automatically assumes some degree of trading frequency. I'd say for a strategy with occasional presence in the market, you should do it per trade instance (using the same T-stat logic). Also, if the strategy has a dominant direction (e.g. you keep buying SPX in a predominantly bull market), some form of dual-population test (like a student T-test) is smart to do to establish if you are just up-playing a selective bias.
     
  22. Thanks nonlinear5,

    I did not account for slippage and commission. I now account for slippage and commission, and I get more recent trading data from 1/1/2017 to 11/1/2017.

    Please see attached. /GC instrument looks good and ready for some real money. It has low drawdown as well.

    My only worry is if 318 enough trades to make decision or should I test for more trades? But if I do this, drawdown will go up.


    Screenshot_42.png Screenshot_44.png Screenshot_43.png
     
  23. 2017 has been pretty steady bull market.

    Take your data from 2007 all the way through to now. Compare your equity chart to SnP 500 chart and see if it provided a better risk/reward then a simple buy and hold.

    That’s a good first start to figuring out if it’s a strategy that you’d be willing to put your money in.
     
  24. Thanks Metamega,

    That's a good comment by first comparing strategy to Vanguard S&P 500 Index Fund. I can compare profits of strategy to profits of index fund, beginning each with $10K capital.
     
  25. That's GC (gold) and he's mostly going long, I don't see any bias here in that sense. 2017 alone doesn't mean anything though. It's so easy to come up with something that performs astronomically for 4-5 years but before that, completely fails. The profit factor is on the low side as well.
     
  26. Really need much more years of testing than 11 months, am surprised it lost in crude oil as this seems to be tailored for intermittent running markets? Gold very tough to consistently scalp, it does have several months a system can do well then... Gold has slippage as I have had as much as 5 ticks in recent time, so real time you might find it no where near back testing.
     
  27. Thank you Handle123,

    @d08 and @Metamega

    I now run back test from 2007 til Present time. Below are the results. This is an Intraday System, all trades close at end of market session and 1 contract. I believe this strategy with /GC is ready for real time and make the money now.

    1. I do not understand when people say "the system will not last long". If that's the case why back test for over 10 years of data if no system will last long?
    2. If starting with 1 contract and using /GC results as example, when do I scale up to 2 contracts?
     
  28. Handle123 makes a great point as usual. To the OP, you MUST factor in if you were filled with a Market Order or a Limit Order in your backtest.

    I have had countless systems die and never make it to live trading after I factor in the effects of how I got filled. You can't just take the Close of a Bar and call that your fill. It will absolutely destroy most intraday systems. I am not saying that you cannot be a successful intraday trader but if you want to be an intraday system trader then you must factor this in.

    How do you factor it in?:
    To assume a Limit Order Fill you must see price exceed where you took profit by the width of the spread. For example for CL it would be price+1 tick (-1 tick for shorts).

    If you don't want to do that then subtract the bid/ask spread from each entry and exit price. For example, on you CL backtest you have 974 trades. You will need to subtract (974*10)=-$9740.(Number_Of_Market_Orders*(1 Tick Dollar Value*(Ask-Bid))) If that was 974 round turns then multiply that by 2.

    This is still an assumption but it is better than assuming you got a fill at the price of each bar close.

    People often wonder what makes intraday trading so hard. The main challenge is the artificial time stop that we place on ourselves. To be a daytrader it means that you will be flat by the end of the day. You can't truly "let winners run" because you will have to close them out by the end of the day. The costs (commissions & bid/ask spread) combined with this time-stop make it a rough game to play.

    When I look back at my old trading stats from when I traded Stocks with a prop firm I can see that most of my money came from ECN Rebates (unintentionally). I switched to Futures (rebates not possible, at least for retail) and what I can say without a doubt is that you must factor in the cost of Hitting Bids and Lifting Offers.

    If this has already been accounted for then congrats. Also congrats on advancing beyond pen & paper backtesting.
     
  29. OK let's look at this

    your largest winner and largest loser are steady
    average loser does not fall far from largest loser,but average winner does differ substantially from largest winner
    you have 16 consecutive losses if they were same as largest loser would be 16 X 404.28 =$ 6468.5,but your max drawdown is twice that amount plus change
    with that your profit chart looks smooth which makes me believe the results were tweaked with imho

    and you would run out of margin to trade this system
    from your earlier post

    "That's a good comment by first comparing strategy to Vanguard S&P 500 Index Fund. I can compare profits of strategy to profits of index fund, beginning each with $10K capital."

    OK so you have 16 consecutive days of losses
    You state that you trade one contract per session,but you have total number of trades 3767 and with given number of trading days as i looked at 252(2018) that gives me on average 1.5 contracts a trading day,not 1 contract per day

    It may not be enough in real market conditions ,bad fills ,slippage etc.in general it looks near random system with some money mgmt keeping it just above loss(that part could be curve fitted here as your earlier posts indicate different results in profit chart)

    there are some things that i can not discuss that tell me straight away at first glance that there is no legit edge in this system
     
  30. He also needs maxdd Peak to Valley otherwise the dd risk is curve fitted by definition. The (consecutive losses*largest loss) could be looked at as a worst case short cut of doing monte carlo analysis. The P2V DrawDown is based on the actual historic data.
     
  31. Thanks MoneyMatthew for the advice.

    What attracts me to IntraDay trading is the low margins and all trades by end of the day. I would love to trail a winner for as much profit as possible. Once my capital increases, I will move to overnight margin and I can hold winners accordingly.

    I use Market Orders to enter trades and Stop Market Orders and Profit Limit order to exit. I use a 2 tick slippage for market orders.

    I also like trading with Reward: Risk ratio greater then 2. But I agree with you trailing a winner is a good thing.

    Thanks, yes its like I see the light by programming a strategy and clicking back test, I quickly see how well my ideas plays out.
     
  32. Hello Van_der_Voort_4, Thanks for the response.

    I am still learning as I go. I am not that good in evaluating systems yet, hopefully I get better soon.

    The strategy is only allowed to take 2 trades per day. stop loss is 40 ticks and profit target is 80 ticks. Only 1 contract. I did not tweak anything except the stop loss and profit target. I just tried different numbers. Is this considered curve fitting?

    Yes, it does seems a bit odd the /GC looks decent while the strategy performs bad on other instruments. Also, I am using 60 min chart for the strategy. If I go down to 30 min or less, the performance is bad. So, yes maybe is random. I do not know.
     
  33. Don't give up, intraday trading with a system is possible. I started years ago by looking at shorter term time frames because I was restricted with a low-bankroll. I get where you are coming from buddy. It is possible.

    It is just important to understand that it is "easier" to build profitable longer term time frame systems. Of course, you will need a bigger bankroll to see it through. Just remember, that with system trading approach that you cannot always pull out profits even with a higher predictive accuracy due to how the futures contracts are constructed.

    Take a look at Corn or the 2-Year Treasury Note. The bid/ask and tick value in relation to daily trading range is poor. Any stops based on chart patterns will chew your money up. This is the exact opposite with Crude Oil and the mini-Dow. Don't think of how the exchanges designed these Futures contracts as "one size fits all". They built them for hedgers and spreaders...not day traders.

    One last bit of advice, try to build a system that does not take a pre-determined Profit. You can't always super impose your Risk/Reward wishes and overlay them over the realities of volatility. If you have a mean-reversion system then fine, I understand that you will need pre-determined places to take a profit. Try to build one also that can also catch profits unrestricted (does not have to be trend following). Try a wider stop also.

    Congrats on the programming advancement as well.
     
  34. MoneyMatthew,

    You have far more knowledge then me, i am not sure what monte carlo analysis means yet. Hopefully, my new book will explain to me and give me a more structured and logic approach to proven if a trading strategy is worth trading live. I really just enjoy programming strategies and clicking back test. Also, I am not sure what curve fitting means, but I do know (from what I read somewhere that makes sense to me) is I want to back test on 50% of total available back testing data. Then I use the other 50% as out of sample data for testing. Like I said, still learning. But for this example strategy, I didn't do nothing special.

    Everyone here at ET is very help and its much appreciated.
     
  35. This is an example of "data mining" or "curve fitting". You adapt your trading strategy to get the best result out of the available historical prices of the instrument which you use for your backtest.
     
  36. Thank you HobbyTrading.

    I also played with the stop loss and profit target parameters til I found something to get best results so far.

    Is this considered curve fitting ? And is this a bad thing?
     
  37. Curve fitting is when you adapt a trading performance to available historical price data. For example: your GC strategy works best if it is reviewed every 60 minutes. It could be that for CL (crude oil) the optimum timing would be a review every 45 minutes. So you decide to run your GC strategy every 60 minutes and your CL strategy every 45 minutes.
    This is risky because the way how an instrument behaved in the past may change in the future. And your system does not adapt itself to it. Then suddenly your GC (and/or CL) strategy becomes loss-making.
    The same applies to other parameters you mentioned, such as stop loss and profit target parameters.
     
  38. Thank you HobbyTrading for the lesson

    I understand what you mean.

    I do this changing of parameters (stop loss and profit target and timeframe) for every strategy I build and click back test. So I have been curve fitting alot for optimal performance and not knowing. I do this alot. Very interesting!!

    This why I was thinking to only use maybe 3 years of total 10 year historical data for playing with the parameters to find good performance, then use the other 7 years (one year at a time) to see how well the optimized parameters performed year to year. Just my opinion

    What do you mean by "system does not adapt itself"?

    Thanks
     
  39. Well, it's your money, but I don't think it's ready. Your stats show the Sharpe ratio of 0.22, which is way too low. They also indicate that the average profit per trade is just 2 ticks, as if it's a scalping system, yet you said that you use 60-minute charts. Scalping 2 ticks from the 60-minute chart does not make sense to me. Too many red flags!
     
  40. Using at first some portion of available historical data (e.g. 3 years) to curve-fit and then check on the remainder of the data (e.g. 7 years) whether the chosen parameter combinations works well is one way to become aware of curve (over)fitting. Another way of checking your fitting is using a set of parameters, determined based on one instrument (e.g. GC), and applying it on another instrument (e.g. CL) and see what happens. That also gives you a warning that the combination of parameters is very specific to the one instrument it was fitted for.

    With "system does not adapt itself" I mean: you have selected values for the set of parameters, based on the price history. This set is now fixed, does not change. Now consider the case where not you, but your software determines the optimum set of values. And the software adapts this as new prices become available. So when time passes by and your historical price data gets longer. It is still considered curve-fitting, but it is now based on an ever changing price curve.
     
  41. Morning nonlinear5,

    Thanks for the advice. I will keep on going and learning as I go. I will not be applying money to any strategy yet. i am low on capital anyway.
     
  42. Just going back to draw down for a minute.
    I try for under 10%.
    Over 20% is completely unacceptable.
     
  43. The markets tend not to care whether you find your loss "acceptable" or not.
     

  44. True, but that wasn't actually the context of the "acceptability" being discussed, here: the frames of reference mentioned/discussed above were more like "someone assessing his own system with a view to deciding whether to trade it" and "what other individuals would find acceptable". ;)
     
  45. Thanks Humpy,

    What do you mean 20%?

    20% of what?

    Thanks
     
  46. Thanks HobbyTrading for the explanation. Very interesting and good learning:

    Just to make sure I understand your comments, I have some questions.

    So after I check the curve fit parameters (from testing on 3 year data) on the out of sample (e.g. 7 years) data, and the results are bad, does the mean the curve-fit parameters from 3 year data was over fitted? Just trying to get the terminology correct.

    Thanks
     
  47. %%
    Another thing about drawdowns; fine when you are a young turtle. but once you turn 50or even 49, you may not have as much time to recover?? See??,????? Drawdowns to 50 day moving average are fine, juts make sure its not 50%. 5 minute chart is one of the most hated least profitable, but suit yourself. Wisdom is profitable to direct........
     
  48. That's exactly correct Xela! Thanks
     
  49. Yes.
     
  50. To me it means losing 20% of one's account.
     
  51. The drawdown is defined as the difference between your current account value and the account's all time high. Often is this expressed as a percentage. So if you have a drawdown of 20% it means that your current account value is 20% lower than the highest value it ever reached.
     
  52. Thanks HobbyTrading,

    I understand what the % means now. Good learning.
     
  53. I try to read most threads here and on other venues, I'm just often several days behind. If I don't respond, oftentimes it's because I jsut don't want to get drawn into an argument, it's exhausting to me and the markets are exhausting enough to an old mutt like me. But this is a very interesting, very thought provoking thread.

    For a long time, I sought this as being the spectrum of parameters, with respect to a criteria (be it Sharpe ratio, drawdown, whatever) as being ideally, a jagged, uniform distribution, and worst-case, a very peaked, or multi, sharp-peaked distribution shape across parameter values.

    I'm reminded in this type of thinking however, i.e. robustness as an indication of the reliability of future profitability of the Second Arc Sine Law (2AL for short), which pertains to random walks. (And in terms of trading, I prefer to think of price as a sort of perverted random walk, one that is constantly trying to fake me out, with all kinds of overlays of trend, cycle, seasonality, surprises mixed in, to further try to fake me out. I think it;s a good starting point in thinking of price).

    The 2AL tells us that for the equity curve of a random walk (and a trading program's equity curve is simply prices, transformed by the trading rules), wheres we would expect the extreme of high and low in the equity curve to appear towards the center, this is the least likely place for these extremes to occur. In fact, the most likely points for the high or low of an equity curve comprised of random-walk data is towards the endpoints.

    So it is very likely, in looking at the equity curve of a random walk, for the low pint to occur at the far left point in time and high point to occur at the far right endpoint ("Yes, this is a very profitable system") or vice versa ("This system is so bad, I wonder if I could flip it upside down?").

    But 2AL is a natural law occurring on random data. It's very insidious, and I think, based on personal experience, visits us routinely.

    Over the years, I finally came to the conclusion that the only type of trading approach I could count on that would work in the future (and "the future" is something which, however you define it, you should multiply that time by, say, 5, if you want to be a realist) was something that I could see, intuitively, had to work. It wouldn't require any backtesting (though I would backtest it anyhow. On one occasion, with my primary system, Dow Jones Indexes wanted to license it to use on their various indexes. It was a interesting conversation where I explained to them that, despite being a programmer, I had never backtested it but had traded it for over a decade to that time. Of course, they put together the crew to backtest it, as they were entirely thorough.)

    Take, for example, a simple trend-following system of a moving average crossover (yes, there are better trend following mechanisms, but just using this to illustrate the point). Now you know, intuitively, it is going to make money, it;s just a matter of time. And yes, you could optimize it all up for the optimal MA length over a given time window with respect to a given criterion, etc., and all the various rubrics that go with all that. Nevertheless, you know a moving average on price will make money. It's simply a matter of time and nerve.

    And that's exactly it - "Time and nerve," that distinguishes these types of reliable approaches. There is no "luck," or "if the markets behave as they have," or other dependencies. I know of several such approaches - they are out there, where you can be certain they will work if you apply the necessary "time & nerve."

    And it is exhausting.

    The problem with "time" is that, the size of the expected drawdown approaches 100% as the length of time an approach is traded gets ever-greater. This is as much a natural fact as the 2AL. (A recent health issue drove me to conjure the expression, "If you live long enough, you get to experience everything. Twice." And given that, I thank God I wont live long enough to experience certain things!).

    Drawdown is something I prefer to truncate at a certain percentage with certainty by using a hedge. The construction of proper hedges is a very rich topic, often overlooked, but as expressed in this thread, is the difference between life and death in trading. I like to truncate things worst-case.

    But a hedge allows you to do a lot more. Not only does it allow you to proscribe your risk, but it's possible to bookend performance such that if things go against you far enough, your drawdown is less, and, in some cases, if you get very good at your hedge construction (and maintenance) becomes profitable with a market move that otherwise would have been terminal.

    Here is an example of the risk profile of one of the hedge funds I manage created by hedge:

    [​IMG]

    Looking at SPY as a proxy for large-cap stocks here,which comprise the portfolio. The red line shows the drawdown with respect to moves downward with this SPY as proxy. The hedge, however, allows me to prosribe risk on the portfolio to about 13% around SPY 177 (about 33% drawdown otherwise). The extreme curvature appears to the far right, however unrealistic it may be by some people's standards), but the point is, at SPY 176 and lower, the drawdown gets ever less than 13%.

    All hedges cost money, detracting from performance. But as is visible on the enclosed graph, it helps on the downside, and diminishes return to a degree on the upside. It is a price well-worth it however, as the end result is not only survival, but a diminishment in variance - a broad topic altogether, and a criteria to be pursued by all serious traders.
     
  54. Hello rvince99,

    Thank you very much for contributing to thread. I read your comments two times and appreciate your well written story and advice.

    "Time and Nerve" very well described.

    Thanks,