A Trading Systems Worst Case Analysis

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<h1>A Trading Systems Worst Case Analysis</h1><strong> Author: <a href='http://www.articleseen.com/profile_Mark Soltys.aspx'>Mark Soltys</a></strong><br /><p>Somebody once asked me “if there were only one performance report I could look at to decide about a <a rel="nofollow" href="http://www.relativitytradingsystem.com">trading system</a> what would it be?” My first reaction was that this was a silly question. There are many factors that must be considered when choosing trading systems. There are numerous performance indicators and ratios. Things such as average annual return, maximum drawdown, Sharpe ratio, margin requirements, robustness, the lists are long, but, there has indeed been one report that I have come to rely on more than any other report. It is a report that has given me more comfort and confidence as a system trader than any other report. If I knew a system was properly created, I could almost use this report alone to decide about trading it! So what is this report? It is a “Start Trade Report”. A Trading Systems Start Trade Report In my opinion, the start trade report gives the most robust three dimensional view of trading systems possible. It cuts through so much of the pitfalls in traditional analysis. It even cuts through the nonsense involved in looking at real-time performance. I can hear it now “wait a minute, how can you argue with real-time performance?” Let me give an example with one of my systems Synergy. In May of 2003 Synergy started a trade in London Copper. The trade became the most successful trade of the year. As of this writing, (March 7th 2004) the trade has profits of over $25,000 a contract. If a trader were using position sizing, he might have had on 2 or 3 (or more) of these contracts, but had they started a week or even a day after this trade they would have missed it! Two investors trading the same system with the same amount of money and the same money management rules could show a $25,000 or $50,000 or $75,000 (or more) difference in their account! They might have only started one day apart! This can create tremendous confusion, because one broker’s real time accounts could be far different from other broker’s real time accounts with the same trading systems. Misleading Trading Systems Reporting This phenomenon can also be used for disingenuous purposes. It is possible for a trading systems vendor to cherry picked the best historical starting date. He can choose a date right before a huge winner (or series of winners). This can cause it to look as though the system needed little original starting capital and that the return on invested funds was enormous. The first winners financed trading. However, what if trading had started on a different date? What if a trader had started on a date that was right before a series of losers? They might have needed 2 or 3 or 4 times the starting capital than they would have had they started on a different date. The return on invested capital would be much less, or, they might have lost all their investment before earning the profits shown. Even if a broker or vendor shows an average of several accounts this can still be a meager view. They could still cherry pick the 3 or 4 accounts and their different starting dates, or they could have so few accounts to average from that the data suffers from what statisticians call a small sample size (This means not enough data to draw any valid conclusions.) The worst offender would be if a disingenuous brokerage or vendor were pushing day trading systems because of the high frequency of trades and commissions it generated and then used some cherry picked “real time” accounts to “prove” that it worked. The point I am making is that there are countless ways that start dates can impact performance, both in hypothetical reports and real-time performances. Traders need to have something robust. A Trading Systems Solution What’s the answer? Well, in my opinion it is the start trade report. What the start trade report does is tests various systems hundreds or thousands of times over the given period. Each test it starts on a new date that coincides with a date that a trader could have taken a new trade. If there were 2000 trades over a 10 year period, then it will retest the system 2000 times starting on the date of each new trade every time. It also resets the equity back to the original starting amount with each test. This is crucial because when using position sizing a trader may skip some trades in the beginning when the equity is small. It is not correct to look at the results of trades that a trader would not have taken. I have sometimes seen brokerage firms report on trades my system generated that many of my clients would not have taken (based on their account size.) For example, a $3,500 losing trade in a system where most clients would have skipped any trades with risk above $2,000. The start trade report knows to skip trades at the right time based on the traders starting amount. This report can also let a trader evaluate performance based off of the margin required. What this allows a trader to do is see ALL the outcomes, rather than just one. Trading Systems Start Trade Report Summary A few things a Start Trade Report can show traders are: 1. What percentage of the first 12 months were profitable over 2000 different starting dates? 2. What was the average first year performance when averaged over 2000 different starting dates? 3. How much money did my account need if I started on the worst possible date? 4. What was the average account size I needed to trade the system over 2000 different starting periods? 5. What were the average and the most I ever went under my original starting amount? (This is different from maximum drawdown) This report allows a trader to filter out so much of the garbage seen in typical performance reporting. It filters out so many errors in reporting “real time” performance based on a small sample size or “cherry picked” starting dates and accounts. I hope traders can see that this information is invaluable. I honestly do not know how a trader could ever trade any <a rel="nofollow" href="http://www.relativitytradingsystem.com">trading systems</a> without it. Traders can see how much comfort and confidence this can build when they have looked at a system in this much detail. When I started trading, this is he report that gave me incredible peace of mind. It was the only report that comforted me when there were drawdowns. It allowed me to know whether we were in the normal ranges of the bell curve. It also gave me a realistic range of outcomes to expect in the first year of trading. We believe that providing traders these reports gives them an incredible edge and builds confidence. A trader needs this confidence when the inevitable drawdown comes. In my own personal case, I’m able to remain calm during those times because of these reports. To get a copy of the start trade reports please email us. Dean Hoffman DH Trading Systems</p><strong>About the Author:</strong><br />This <a rel="nofollow" href="http://www.relativitytradingsystem.com">trading system</a> article was written by <a rel="nofollow" href="http://www.relativitytradingsystem.com/">trading systems</a> expert Dean Hoffman. For more information, visit <a rel="nofollow" href="http://www.relativitytradingsystem.com">http://www.relativitytradingsystem.com</a><p> Article Source: <a href='http://www.articleseen.com/Article_A-Trading-Systems-Worst-Case-Analysis_33990.aspx'> http://www.articleseen.com/Article_A Trading Systems Worst Case Analysis_33990.aspx</a></p>

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Category : Finance : Investing