The curse of systems trading/Why does this happen

Discussion in 'Technical Analysis' started by Robertwiz, Nov 10, 2011.

  1. Hello,

    I am a systems trader that has experienced the following curse: Mysteriously systems seem to work the worse once I start using them and when I get tired of the lackluster results, and cut down on trading the system works beautifully again.

    A case study: In 2008, I developed a intraday momentum trading system for Forex to catch the strong and powerful 200 pip moves that seemed to occur every day in the Euro and Pound. For a single mini contract, that would mean 200 dollars a day. For about six months, I saved capital and continued to check charts each day. It seemed that there were around two or three tripple digit moves in the Euro each and every week. For reasons related to my day job, and to save capital I waited about six months to the summer of 2009 to start. In the summer of 2009, I started and low and behold, I ended up experiencing one choppy day after another with a few token good days and some mediocre days. I would get up in the middle of the night for four hours and did nothing but break even for three whole months. Mysteriously, the good moves that I saw every week from September 2008 to June 2009 were gone. Even when I had some good days, they were eaten up by three choppy days in a row!!!

    It was so frusturating.

    I actually did not lose much money trading. I just kind of bounched around breaking even.

    I was compared by some good friend of mine to some guy that we knew that I shall call Martin.

    Marty was a friend of ours who had the pathological nature of constantly persisting at one real estate venture after another despite real estate not working out for him.

    This friend asked me, "If your system is not making you money, you should quit doing it. Don't do something that stops working."

    For those of you that understand trend following dynamics, you can understand why trend following does not work like the real world: Sometimes the long a system stops working,the better the chance of a very profitable megatrend.

    In Febuary 2009, the good 100 pip moves returned and I started making some decent money. I even caught a 300 point move on March 1st in the pound!!

    However, I shut down having been so burned out and being to tired to continue staying up all night to trade.

    Recently , I developed a second momentum based system, checked charts and saw it print out several hundred point intraday moves in Forex. However, recently I have started to demo trade it and my luck is during my very first two weeks of demo trading, I have to sit through chop shops and spike reversals!!

    My questions are the following:

    1. Why does this happen: I develop a good system, watch it for several months "print money" to the extent that it could create 50 percent returns monthly. However, when I start trading it, either for real or by official demo trading, the system suddenly ends up being losing, break even or profitable by only a few dollars!!

    After a few months of getting tired of the system, I leave and then see it go back to "printing money."

    2. How can I explain to the lay person that does not understand how trend following/ system development is different from the real world that in some cases trading a system that produces fruitless returns for an extended time period is actually the correct thing to do. Based on real world common sense a person who trades a system every day that does not make them money and does not realize "this is not working" is lacking something, based on trend following ideology, remaining with your trend following system during a six month drawdown and adding money to a system that is not working is what you should do?

    I would appreciate any thoughts on this matter.
  2. Why does this happen?
    Possibly because you weren’t the only trader to spot the opportunity; and as more and more traders started to take advantage of it, the edge eroded. After several months it was gone. Then the traders following it stopped following. After some time, there were again few enough traders following the opportunity for the edge to come back. And so on …

    How do you convince a lay person?
    In my experience, best not to try. But if you have to… Even edges that rely on some persistent aspect of market structure wax and wane (in performance terms) depending on how many traders follow them simultaneously. The majority of traders’ enthusiasm for the edge will ebb and flow too in relation to the edge’s performance. However, as the edge is based on a persistent aspect of market structure, good performance ought to return at some point, but you don’t know when that will be. So, as long as you can trade the low performance period without too much pain, and without a drawdown that would be irrational in comparison with what you expect to make when the sun shines once again, you should continue to trade the edge to be sure you reap full benefit when it works again. I’ve run out of metaphors to mix …
  3. gmst


    Answer to 1.:

    You need to use longer historical data something like 8-10 yrs to develop your systems. Longer data will mean you would look at different market regimes which will give you an idea of for how long your systems might remain in drawdown or might not make any money. That is my advice to you. It will surely help you.
  4. The Curse of Induction

    by intradaybill

    Induction is a powerful logical process for obtaining general rules from observations. It has been used in science since the days of Galileo and Newton to derive laws of nature.

    The curse of induction is that some people use just a couple of observations of everyday life to reach general conclusions. An example is an inexperienced but aspiring trading system developer who after curve-fitting a momentum system to a specific time period expected it to work after the economic conditions changed. After two failures and by using induction in a horrible and appalling way he was convinced of a "Curse of System Trading".

    No, it was the curse of induction that hit him.
  5. Monetary policy never sits still!
  6. J.P.


    Nice clever and perceptive reply, intradaybill.
  7. At first blush, it sounds like you aren't properly "validating" your systems against enough kinds of historical markets. Any kind of momentum/trending approach had better show significant periods of churn or outright loss, otherwise you aren't testing right.
  8. In currency trading, your broker is trading against you!

    So get that into your head first, you idiot!

    Then ask yourself: Does your broker has a better computer than you? Does your broker has better computer skills?

    If you still have no clue of what I am talking about, ask yourself: Why does a casino exist?

    If you still have no clue of what I am telling you, just die! You are an idiot, the planet doesn't need you.
  9. NoDoji


    You developed an intraday momentum trading system and tested it during what are considered, even under "normal" market conditions, the best months of the year to trade (September through May). 2008/2009 had the added benefit of offering the most powerful price swings the market had seen in a long time.

    You then decided to trade live during the weakest months of the year for momentum traders: "Sell in May and go away."

    Your particular trading system required testing over a long time period that encompassed varying market conditions - strong trend/strong volatility as well as narrow range/low volatility.

    Accordingly, you have to trade it over a long period of time to reap the rewards of net profitability in the long run, enduring drawdowns at times, but trusting that in the long run, your system will be net profitable.

    How did your system do between early June and late October, when volatility was decent?
  10. I'm a trend trader, what I never understood was, why does any trend trader needs a system. When the market is trending, all you need is a coin to toss to make money. The system we need is a chop survival system. The market chops most of the time, longer than we think it can.
    #10     Nov 10, 2011