how much live trading is relevant?

Flatron,

I started programming as a professional in 1973 and have been writing my own trading strategy systems for about 12 years (retired to trade full time for the last 4 years). IMHO I find the answers to your question “how much live trading is relevant?” to be way off the mark of the real issues with building systems. I would instead go through a checklist and do system trading differently. Here are some of the questions on that system building checklist.

The first question I would ask myself is “What are the trading characteristics of your system?” For example you might reply your system is: 1) Trend following 2) Trades low to medium volatility 3) A 36% to 47% win percentage with a high Win/Loss ratio …

The second question I would ask is “Did I back test this system extensively with historical price data that matched the characteristics of the system?” If I had built your system this testing would be a lot more than 4 days (60 trades/15 trades) to provide statistical significance. The idea is to determine how well a system trades a period of time where market conditions are the same as the system required and in this process the number of trades should be statistically significant.

The third question I would ask is “Under what type of conditions such as changes in price direction or volatility did the system no longer work?” A few traders build general purpose systems that work under any conditions but not me. The vast majority of systems I have seen are not general purpose and shut down under changing market conditions.

The last question I would ask is “If the system has parameters - did a back tested system set of parameters work with forward tested data?” This is just as relevant as live trading because it confirms that the system is trading with in the specifications it was designed to and is performing.

With the questions all answered and with a successful forward test I would be live trading if market conditions are what the system requires. Or in some cases I would be paper trading the system (which appears to be what you are doing). Then at prescribed times I do performance reviews during live trading. If the actual performance of the system in live trading is in-line with the expected performance from testing I continue trading or I shut the system down. In-line means the statistical relationships stay in-line but not the profit expectation which is almost always less than testing.

This is the type of testing and live trading scenario I perform when trading stocks using systems in the daily and intraday time frame. It works well. So to summarize my answer to your question “IMHO if your testing is designed correctly there is no need to use live trading as a testing arena.”

Thanks

 

Nobody mentioned this but...

If you make 15 trades a day, 10+ pips profit a trade with 10 pip stop, and 550 pip profit after a few months, so more than 55 days.. isnt this a terrible system?

You're making less than 0,7 pip profit a trade, especially with spreadbetting where commissions are already 2 pip a trade. Is this feasible?

 

Hi.
For starters I said it was 550 pips in ONE month since ive been keeping records so that changes your maths.
(maybe my 2nd opening paragraph confused you. Ive been trading it for 2 months but only keeping propper records for the first month or so)

I actually completed my 5th week whilst keeping records yesterday (101 pips for the week)

Having said all of that, even if you were right and it only made 550 pips in 55 days, does it even matter what the average pips per trade is? If your making 20pips per day, your making 20 pips per day, No?

 

Rabbitone

Thanks for this.

Lot's of good stuff in here.

Quote from Rabbitone:
... have been writing my own trading strategy systems for about 12 years (retired to trade full time for the last 4 years)...

I bow to your experience (you could probably write "the textbook", if you haven't already) ...

I would value more info/your views, on the following:

...at prescribed times I do performance reviews during live trading. If the actual performance of the system in live trading is in-line with the expected performance from testing I continue trading or I shut the system down.

Q1: What triggers you putting a system "on watch", and what triggers you then shutting it down? You wrote that you ignore the profit, and focus on the statistical relationships established in your tests. Could you explain this further, please?

Q2: How many systems do you run at any one time, and is this different from the "ideal" number you would like to run? In your view, what considerations would determine the ideal number of systems that a trader might run in the markets at any one time.

Thank you

PS - There are 50 marks for each question, for a total score of 100 ...

 

i dont know if you are using a system or just trading ,but you have made a loy of good calls lately, heres a link in the next post about how methods work in some markets and not others

 

http://www.quantifiableedges.com/kirk-hanna.html

 

Thanks Ammo, although the ES calls to which I assume you are reffering to is in total contrast to my 'regular trading' - which these results are linked to.

"I dont know if you are using a system or just trading"...

Well, thats partly what inspired this thread. What is the difference, and does it affect how the amount of time you are able to profit from the market?

I would say that i am 'just trading' as opposed to using a system. There are good traders i've come across in the ES journal for example, like Saliva, Startraitor,yourself, JSS etc.
They dont seem to worry about their methods suddenly stopping working soon. Why? Is that the distinction? Either you are a 'system trader' and your method is gonna stop working within a year or so, or you are a'just trading' and you have developed the skillset to take money from the market indefinitely..?....

thanks for the link. Will give it a read.
Good trading

 

i'm still and always will be learning,the thing i use the most is a divergence,and i assume they will always be around, the biggest one at present is the state of the economy and a bull market

 

Yes, I treat trading the same way I did Computer Science when I was an IT professional - A never ending study. Yes I did write short text books in computer science. And, yes my trading systems have their own detailed documentation.

The answer to Q1 is simple and yet very complex. The simple answer is your trading plan had better have a pre-defined contingency section it in to tell you under what conditions you will take an automated system offline for fine tuning or discontinue its use. In my plan I call this part of contingency planning the exit plan. The exit plan has risk control exit points for the triggers that are specific to my trading style.

Risk control would take a volume to write about. So, I will give you a few simple examples. Some of the risk control measures I have put in my plan now and in the past are:
- Expectancy of trades must be in-line with realistic performance. Traders are never going to match a testing optimizations performance figures. But the trader must have some guidelines as to what is realistic. I will shut the system down and fine tune if performance goes out of line.
- Statistics Management guides risk control exit points. This is a broad area. It means the optimization the trader produced in testing was loaded with standard deviations. The question is how many deviations are you going to allow in your trading plan for the various outliers, back swans and draw downs your system produces.
- Account Management. What are the maximum risks this system can place on your account in a per of time. For example will you allow the system to take more than 3 or 4 hits of 2% in a month?

The answer to Q2 is tied up in several aspects. The most important of these for me is account management. Think about 2 systems running at the same time. When both of the trading systems are doing great you can make great profits trading them. If one system is doing great and the other bad they cancelled each other out. But if both are doing bad and are in drawdown your account can take quite a hit and you may be forced to shut one or both of the systems down because they break my account management rules.

The number of systems for me to trade is tied to account size, position size and my shut down rule of no more that 6% account loss allowed per month. If I’m running 3 systems my position sizes are ½% to ¾% of account size so that multiple consecutive loses (5 on average) from 2 systems does not in affect invoke my 6% max loss allowed per month rule.

There is no such thing as “ideal number” of systems to run or ideal risk control exit points. It is about how bad you will allow you trading business to go down the tubes before you do something about it.

Thanks

P.S. Yes, the way the Dollar is going I will accept all of the Marks I can get.

 

The other question you asked is “When is a trading system put on watch?” This has to do with the notes I make at the end of each performance review. These relate to my method of trading my strategy. Some of the factors I note are that would put a system “on watch”:
- Market, sector or financial instruments warnings. For example if I’m trading one my trend trading strategies I note the trend of the market, sector and financial instrument using ADX. For example If ADX starts to fall below 35 the trend may be over.
- Condition Change warning. My strategies perform under specific conditions. For example if volatility goes high and I’m trading a medium volatility strategy I put the strategy on warning. Ignoring this can lead to large losses.
- Draw down warning if the strategy was two trades into a draw down at the end of the review.
- Trading Plan goal warning. If the strategy failed to meet a goal I set up for it statistically I note this on the performance review.
- Statistical warning. The system performed but one or more stats is out of wack. This may lead to a fine tuning session if it still happens in the next performance review.
The idea with ‘on watch’ is to be my memory of what was going on at the beginning of the next trading session. That way at the next performance review I can make clear decisions about shutting a system down