trading my equity curve

Discussion in 'Risk Management' started by esminifuture, Nov 5, 2001.

  1. Hallo trader.

    Does anny one of you have experience or know further information on the topic: Trading your own equity curve?

    I have done a lot backtesting over the last 2 weeks and found out regardless which system I use it works over a while and then does not work? But very trendy.

    Lets see an example of a simple moving average cross over system over the last 200 days

    the blue marked time frame I trade longtrend and on the red ones I stay on the sideline with this system.

    So it seems to be the holy grail :).


    Thanks a lot

  2. WarEagle

    WarEagle Moderator

    I think the problem you may have is the same when trading the actual price chart, that is, knowing when its going to trend up and when its going to trend down. How are you drawing the blue and red bands? After its already happened? How can you know ahead of time? As a result, I think its better to focus on finding systems that you can take all the trades, win or lose, and still expect good results.

    I don't know if your example is of an actual system you plan on trading, but even if you could predict the equity swings, there are problems with that system during the "good" periods. Besides, isn't the reason system traders use systems is to keep the discretionary part out of the equation? If you can predict the trend in your equity curve, why not just predict the market trend and forget the system?

  3. just test it out. I've tried the same and generally found that it hurts my overall performance. Depending on system characteristics that may or may not be the case.
  4. Hi,

    thanks for your opinion.

    I can't find a bether system. No system make money all the time. Look at a CTA Ranking or all the Hedgefunds out there they have much more resources, programmer, data then we have but 40% of them are losing money...........

    If they can't do it with all the power why should a student from Austria can do it?

    So my thought is stop trading if my system isn't working and trade when it makes money.

    Corse it's hard to determen but maybe ther is a way?
  5. Vishnu


    try this:

    a. each month start from scratch. set your equity line at 0 and your buy and hold line at 0.

    b. add the profits/losses of your system to your equity line, add the profits and losses of buy and hold (assume you buy the QQQs with your entire account) to your buy and hold line.

    c. Everytime the BH line is above the EQ line for 2 consecutive days, go long the market and forget about your system. (if you have a countertrend system).

    I don't know if this works but I've been debating this myself. Its hard to test.
  6. For the systems I use I tend to have fewer larger winners. By filtering by the equity curve I would in essence filter out some of the large trades. If you have a high winning percentage with lots of equal sized wins, it would probably work very well.

    Jurik's book has a good chapter on Equity curve filtering, FYI.
  7. WarEagle

    WarEagle Moderator


    There are better systems, I can attest to that, and I'm sure guys like tntneo and vikana could too. They are difficult to find and I don't claim that its easy. I have always wondered why the CTAs do so poorly as a whole, given that they should have the best tools at their disposal. I don't have the answer to that. Perhaps when you are moving $10 or 100 million around, the systems don't perform as well, I don't know.

    Keep in mind though, that drawdown is unavoidable, but can be limited to much less than a moving average crossover system will cause. Perhaps the Jurik book mentioned above might help you with the equity curve analysis, but I'm with vikana, you would probably miss some of the best trades.

    Don't give up,

  8. There is some merit to trading the equity curve for a longer term system. When you introduce this concept, you are adding an additional lag into the system however, so performance can be degraded even more. In effect, you are overriding the system during a period with either high noise to signal ratio or a cyclic component that is out of phase with your system. For a trend following system, that usually means a trading range. There is no guarantee however that the equity filter you use will be optimal either. Often the move out of a trading range is explosive and you run the risk of missing it if you try to optimize your quity curve too much. Another approach is a variation of the gambler's paradox. Simply stop trading after your system has produced "n" consecutive winners and resume after "n" consecutive losers, or some variation. It is the consecutive runs of losers that produces huge drawdown.

    I have read that CTA's and commodity pool operators tend to experience withdrawals of funds at equity lows and additions at peaks. If you are investing with one of them there is a lot of merit to following their equity curve before commiting funds.
  9. this thread needs to be i'm doing it now. :)
  10. here's a reason i like this thread.

    say you looked at a chart of your equity curve and it started to look like the nasdaq when it peaked in 2000. would you or should you do anything about it? if so, what?
    #10     Jul 17, 2002