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This is a post I made to the ATI list a while back. It's LONG (hope it
makes it past the list limit.) It shows some results for (test) trading
more contracts in the past to get an idea of max drawdowns in today's
dollars. The tests were on 27+ years of SPX data. The particular systems
aren't the important. Rather, the point is to find the max drawdown for
the systems in today's dollars so you have a better idea of how big an
account you would need if you started trading them today.
Executive summary...
Tests 1 and 2 are the same system except #2 trades multiple contracts.
Same for 4 and 5. #5 trades multiples.
All $$ figures are SP points.
ROA (profit/maxdd) didn't change much with multiples.
Max drawdown was about 3 times as big trading multiples.
What that tells me is the biggest "real" drawdown happened far enough in
the past that it didn't show up in the TS system report testing just 1
contract. This is because the value of SPX was so low back then. And it
tells me that I would probably need 3 times more money in my account
than I would have thought by just testing 1 contract.
--
DennisMessage-ID: <35417E99.23BC675F@xxxxxxxxxx>
Date: Fri, 24 Apr 1998 23:11:37 -0700
From: Dennis Holverstott <dennis@xxxxxxxxxx>
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To: ATI List <ati@xxxxxxxxxx>
Subject: More backtesting - the myth of buy and hold
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Thanks to Jim McConnon for opening my eyes to how to make TS
backtests mean something. His idea of trading more contracts
in the past when volatility was lower is brilliant.
The idea is to do more size when volatility was lower so the
historical profits and losses are expressed in today's dollars.
I ran 5 tests on the SP and found the results interesting. The
system reports are below.
---------
Testing methodology:
I used the daily SP cash index from 1970 - present.
Big point value was set to 1 so the $$ figures are really
index points, not dollars.
No slippage or commissions.
With these settings, ROA = (net profit)/(max drawdown).
Due to some code and maxbarsback differences, not all the systems
were tested on exactly the same number of days, but it's close.
------------
Test 1:
This is an EOD system that I've been evaluating. I let it trade
1 ct. for the whole period. MaxDD was 41.31 points and ROA was
2785%
------------
Test 2:
This is the same EOD system but it traded a max of 9 ct in the
past down to 1 ct currently. I used the following code to calculate
how many ct to trade. cur_rng was set at 12. The point of this is
to express historical drawdowns in today's dollars.
cts = round(cur_rng/xaverage(truerange,300),0);
if cts < 1 then cts = 1;
ROA was about the same at 2649% but the MaxDD went *way* up to
133.08 points. This tells me that there was a big % drawdown in the
past that I hadn't found by testing just 1 ct. Caution is in order.
---------------
Test 3:
I decided to test the old buy and hold myth. What they never tell
you about is the huge drawdowns you will have to suffer through with
buy and hold. For the first test, I just bought in 1970 and sold today.
TS obliged by telling me my MaxDD was 27.21 and my ROA 3748%. Dang
hard to beat but of course it's a total lie. TS doesn't count a
drawdown from an equity peak as long as the trade is still in the
money.
------------
Test 4:
I tried to make the report from buy and hold a little more realistic.
I traded 1 ct again but I exited and re-entered once a week so TS would
report the drawdowns. This time, I got a MaxDD of 116.65 and an ROA of
840%. Suddenly, my system is looking better.
------------
Test 5:
The whopper! Just like test 4 (buy and hold with an exit and re-entry
once a week) except I used the same formula as test 2 to trade more ct
when volatility was lower. In today's dollars the MaxDD was a whopping
368.45 points and ROA was only 695%. So much for the myth of buy and
hold. :-)
-----------------------
-----------------------
test1 SPX-Daily 01/05/70 - 04/24/98 {My system, 1 ct}
Performance Summary: All Trades
Total net profit $ 1150.30 Open position P/L $ 0.00
Gross profit $ 2254.08 Gross loss $ -1103.78
Total # of trades 1082 Percent profitable 57%
Number winning trades 618 Number losing trades 464
Largest winning trade $ 37.73 Largest losing trade $ -36.19
Average winning trade $ 3.65 Average losing trade $ -2.38
Ratio avg win/avg loss 1.53 Avg trade(win & loss) $ 1.06
Max consec. winners 13 Max consec. losers 6
Avg # bars in winners 4 Avg # bars in losers 3
Max intraday drawdown $ -41.31
Profit factor 2.04 Max # contracts held 1
Account size required $ 41.31 Return on account 2785%
-----------------------
test2 SPX-Daily 01/05/70 - 04/24/98 {My system, cts. weighted for
true range}
Performance Summary: All Trades
Total net profit $ 3524.93 Open position P/L $ 0.00
Gross profit $ 7746.16 Gross loss $ -4221.23
Total # of trades 1082 Percent profitable 57%
Number winning trades 618 Number losing trades 464
Largest winning trade $ 61.95 Largest losing trade $ -72.60
Average winning trade $ 12.53 Average losing trade $ -9.10
Ratio avg win/avg loss 1.38 Avg trade(win & loss) $ 3.26
Max consec. winners 13 Max consec. losers 6
Avg # bars in winners 4 Avg # bars in losers 3
Max intraday drawdown $ -133.08
Profit factor 1.84 Max # contracts held 9
Account size required $ 133.08 Return on account 2649%
-----------------------
test3 SPX-Daily 01/05/70 - 04/24/98 {Buy and hold, 1 ct,
1 entry and exit}
Performance Summary: All Trades
Total net profit $ 1019.73 Open position P/L $ 0.00
Gross profit $ 1019.73 Gross loss $ 0.00
Total # of trades 1 Percent profitable 100%
Number winning trades 1 Number losing trades 0
Largest winning trade $ 1019.73 Largest losing trade $ 0.00
Average winning trade $ 1019.73 Average losing trade $ 0.00
Ratio avg win/avg loss 100.00 Avg trade(win & loss) $ 1019.73
Max consec. winners 1 Max consec. losers 0
Avg # bars in winners 7152 Avg # bars in losers 0
Max intraday drawdown $ -27.21
Profit factor 100.00 Max # contracts held 1
Account size required $ 27.21 Return on account 3748%
-----------------------
test4 SPX-Daily 01/05/70 - 04/24/98 {Buy and hold, 1 ct, enter
and exit weekly}
Performance Summary: All Trades
Total net profit $ 980.14 Open position P/L $ -22.64
Gross profit $ 3205.48 Gross loss $ -2225.34
Total # of trades 1462 Percent profitable 55%
Number winning trades 804 Number losing trades 658
Largest winning trade $ 37.58 Largest losing trade $ -47.26
Average winning trade $ 3.99 Average losing trade $ -3.38
Ratio avg win/avg loss 1.18 Avg trade(win & loss) $ 0.67
Max consec. winners 11 Max consec. losers 14
Avg # bars in winners 4 Avg # bars in losers 4
Max intraday drawdown $ -116.65
Profit factor 1.44 Max # contracts held 1
Account size required $ 116.65 Return on account 840%
-----------------------
test5 SPX-Daily 01/05/70 - 04/24/98 {Buy and hold, weighted ct,
enter and exit weekly}
Performance Summary: All Trades
Total net profit $ 2560.15 Open position P/L $ -22.64
Gross profit $ 10936.99 Gross loss $ -8376.84
Total # of trades 1462 Percent profitable 55%
Number winning trades 804 Number losing trades 658
Largest winning trade $ 103.92 Largest losing trade $ -119.10
Average winning trade $ 13.60 Average losing trade $ -12.73
Ratio avg win/avg loss 1.07 Avg trade(win & loss) $ 1.75
Max consec. winners 11 Max consec. losers 14
Avg # bars in winners 4 Avg # bars in losers 4
Max intraday drawdown $ -368.45
Profit factor 1.31 Max # contracts held 9
Account size required $ 368.45 Return on account 695%
--
Dennis
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