Wednesday, August 13, 2014

Evaluating Robustness of A Trading System


How long will our trading strategy exist until there is a massive drawdown that takes it out of the market. If we can answer that one we have fooled the trading gods and are on our way to fabulous wealth.

There are many methods of verifying robustness, we can apply some stress tests and we can vary some inputs for comparisons, we can also apply the strategy to more than one instrument at a time.

We can use Monte Carlo methods to great advantage by randomizing a few different inputs.

The main item that we have to know is that our trading strategy when first developed can look great and when it first starts to trade and then it can deteriorate rapidly as the market shows something different. Hence the need for several methods of testing.







Each testing method can show some aspects that need to be improved, several methods may show that the strategy has to be reworked completely or even scrapped.

It used to be that traders would attempt to use backtest results only, by backtesting over long periods to determine the success of their system. Some even went as far as to use walk forward methods.

And system failures still appear.

I have gathered some interesting articles about trading system metrics for you to review. There are some excellent nuggets in these articles.










Performance captured with notes: Aug returns hit a new high 15.5 ...
http://jazzforex.com Wed, 06 Aug 2014 14:22:31 GMT
It is no secret that we give a high degree of stress on maintaining system quality. While return is important, we always teach our clients to keep a watch on a trader metrics. That is why we use a trading metric called the TSS ...
Read more ...


Overview of the popular metrics that traders look at | Forex Trading ...
http://forextradingstrategiesguide.com Tue, 22 Apr 2014 10:09:59 GMT
I would never trade a system that makes its money over a short period of time or over a very small number of trades. These outlier trades may not happen again. A volatile currency pair or stock will also reduce the amount of ...
Read more ...


Backtesting Basics: Part 3 « TraderHacks
http://traderhacks.com Sun, 20 Jul 2014 00:38:19 GMT
We stressed the importance of using reasonable values for trading system parameters, finding legitimate tendencies, and avoiding overfitting. We stated that the trading system rules must be general enough and the data set ... Unfortunately at the same time we are tightening our filter and getting better trades we are getting fewer of them, decreasing our confidence in the metrics themselves. Usually a trading system is designed for one or more specific markets. Stocks ...
Read more ...


Measuring Success: Key Performance Metrics | System Trader ...
http://systemtradersuccess.com Mon, 26 Nov 2012 13:00:00 GMT
When comparing trading systems during the development process or when comparing systems before making a purchase, it is nice to have a few metrics on hand that will allow you to compare the system either to a ...
Read more ...




Trading System Metrics Moneyshow Interview – Backtesting Blog: A ...
http://backtestingblog.com Fri, 11 May 2012 15:35:24 GMT
The MoneyShow Network interviewed me about trading metrics — what to look for if you are starting from scratch or if you are buying a system. Click the graphic above to watch.
Read more ...


Rank Your Trading System With Expectancy Score | System Trader ...
http://systemtradersuccess.com Mon, 24 Sep 2012 10:00:41 GMT
How do you compare two trading systems' performances? If two trading systems are both profitable and both seem like good systems, is there a single metric that can be used to compare the profitability between each?
Read more ...


Smart Optimization - Traders' Library Blog
http://blog.traderslibrary.com Mon, 03 Aug 2009 13:13:06 GMT
An important first step is understanding the performance metrics by which we can assess a trading system, and how they interact. Here are several metrics that I use in system evaluations: Maximum Drawdown Maximum ...
Read more ...

No comments:

Post a Comment