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This is a cross posting from another board where a member was asking me
about a 1 minute NASDAQ futures trading system. I'm including it below for
interest, or to see if any members here have further comments they would
add.
Dave Nadeau
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Andy,
I wanted to elaborate a bit on the system that you are looking at. As you
probably know, moving average systems such as this are trend following.
When you catch a trend, the profits just keep rolling in.
These can be viable systems, but it's good to understand them before you put
you money on the line.
--------------(For anyone reading this posting: I neither endorse nor
disclaim the following system, all results are based on simulated
backtesting of actual contract data. Everything below is stated for
informational and demonstration purposes only.)-------------------
So as an example, I've written a system to backtest in Metastock on the NQ
(NASDAQ Mini's). I think you mentioned 1 minute charts, but I don't
remember for certain. For this example, I'll use it anyway. I've chosen a
5 minute simple moving average compared with a 30 minute simple moving
average. No overnight positions and I'm trading it only between 10 am and
4pm. All positions are entered at the open of the bar following the signal.
The only stops I'm using are at the end of the trading day. All other exits
are based on a reversal of the moving averages, so you remain in the market
all day, either long or short.
For an out of sample backtest, I'll use the NAZ Mini, Dec00 contract (NQ00Z
in QCharts). From Sept to Dec, the system generated 248 trades (103 winners
and 145 losers). Winning long trades were 51 of 124 total long trades and
winning short trades were 52 of 124 total short trades.
The net Points profit for those three months was 808 points with no
allowance for slippage or commission. So, if you were trading 1 contract of
the NQ, you would have generated (808*20)=$16,160 in profit per contract.
Sounds great so far, $16,160 in profit and you put up only $11K or so in
margin. Nice return in three months. I ran the same test on an out of
sample set of data: the most recent NQ for Dec to March (NQ01H in QCharts),
these results were similar, with about half the profits per contract at 431
points. Using the same analysis of the t-statistic that I posted a while
back, it shows slightly better than an 81% probability of continuing to
perform in the future.
Now for the bad stuff, and this is where someone really has to understand a
system in order to trade it. The maximum open trade drawdown was 31.5
points (over $600 per contract). The maximum open system drawdown was 57
points ($1140 per contract) which means that at some point during your
trading, your net account balance was negative by $1140 per contract traded.
The low win to loss ratio produces another trader psychology question: the
greatest consectuive wins is 4 and the greatest consecutive losses was 6.
Can you trade this through 6 losses in a row and still take the next trade?
Oftentimes, in trend following systems that next trade could be the biggie
that makes 3 times what you've just lost.
I'd start to worry that this system is broken if I were to get 10 losses in
a row, although there's a lot written that says this could happen
statistically. These are personal decisions that have to be considered by
each trader contemplating this sort of a system--before any money gets
traded in the system.
Also consider that I've set up the backtest with the assumption that a
trader would enter on the open of the following bar. That's pretty quick,
considering you got the signal just one second ago. Consider some slippage
and staring at your computer screen pretty intently when the moving averages
start to come together. For comparisons sake, if you were to enter on the
CLOSE of the following bar, the net system profit is just 401 points in
sample, approximately half of your profits are made in the first minute
after the crossover. (That in itself may be worth looking at in another
system...a very fast system).
So, Andy, those are some hard questions for your consideration. It also
gives you an idea of just some of the things you can do with some of this
software.
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