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As cocoa system testing have been the topic lately, I'll place my 2 cents
worth.
I always backtest a trading system on markets without including commission
or slippage first. Although this test produces unrealistic results, what it
does show me is whether the actual trading system is VALID as a trading
concept. I'll then worry about slip and comm later.
When it comes to Cocoa, short term trading models do work and are valid
trading methods. I can not speak for trend following or long term systems.
When you add slippage and commision, trading systems produce marginal to
negative returns on Cocoa.
The underlying problem with Cocoa is that the contract size is too small
relative to the normal price movement of the market.
Because of its small tick value movement, slippage assumptions will blow
any profitable cocoa system out of the water. Again, this is the problem
with small contracts.
People may begin to see the same problem with Cocoa with other contracts
that have been split lately. Examples that come to mind are the LIFFE FTSE
100 and the SOFFEX Swiss SMI Index. Only time will tell. Although I do not
trade the S&P500 contract, perhaps it may suffer the same problem. I hear
that since the S&P500 split in half, slippage HAS NOT split in half. This
makes the S&P500 contract less profitable than when it used to be $500 per
point.
I hope this helps.
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