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Hello omega-list,
The discussion about when you decide a system is broke and stop
trading reminded me of a couple of techniques which I employ to help
me decide whether a system is tradable by me. I trade intraday so
with back testing over a couple of years I usually have at least a
couple hundred trades to look at. I load those trades from the system report
of listing of trades into excel and then do a Monte Carlo sort of
the trades to see how many losses in a row a random Monte Carlo sort
will come up with. As a rule of thumb (which probably is
statistically meaningless) I have found that the maximum number of
losses in a row per the back testing grows by at least 50%. So if I have a
system which back tested over a couple hundred trades and shows
maximum losses in a row of six, I assume that in real time trading
it will be at least nine and I won't begin to think the system is
broke until it exceeds this number.
I also have found that on a real time trading basis, I can expect
the largest draw down to be twice the largest shown by back testing.
If either of these numbers is not within my "trading personality" I
don't trade the system.
--
Best regards,
Roger mailto:mailrs@xxxxxxxxxx
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