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Mark,
I am surprised that you trade a system that can show 40% drawdowns
since such a system must have a huge expected profitability in order
to stack up sharpe-wise. I personally would never dream to trade such
system - but thats a matter of taste.
Since you elaborated on the drawdown I would like to know what the
actual max drawdown was (from any given point) and how that compared
to your previous assumptions in respect of the total and the
indvidual markets. Furthemore I would like to know what the drawdown
would have been if all drawdowns had happened at the same time.
thx for your time.
Gerrit Jacobsen
> As those of you who have read Club 3000 News issue
> #99.02 know, I trade a 100% mechanical system that
> I bought from a vendor, called "Aberration". In
> the 2.5 years from 1/1/1997 to 5/13/1999, I have
> made $+421,000 in net profits using this system,
> including commissions, slippage, rollovers,
> human blunders, etc.
>
> I trade the system on a portfolio of >20 commodity
> futures markets, using the exact same system code
> and the exact same parameter values ("ndays=80",
> "b_signal=2.00") on all markets. These are the
> only parameter values I have used when trading my
> real-money account.
>
> I bought the system in the summer of 1995. The
> manual I received says "Copyright 1993". This
> manual suggests using the parameter settings
> "80" and "2" for all markets, and indeed
> (after my own testing), that's what I do.
>
> If you have read issue #99.02 you also know that
> I bought the system and spent a year testing it
> before I began trading it with my own money.
> That's not a misprint: a year. Twelve months.
> 260+ trading days.
>
> How on earth could I take so long? What tests could
> I do that required a whole year?
>
> First, I programmed the system four different ways
> so I could run it through four different test
> packages. (If you care: <1> System Writer Plus;
> <2> AWK; <3> Trading Recipes; <4> C). I kept
> testing and debugging until all four implementations
> gave the exact same trades on the same days at
> the same prices. This took a while :-).
>
> Next, I tested the system on two different and
> independent data streams. I wanted to be sure that
> it worked well on *MY* data, not just on the vendor's.
> (If you care: <1> Omega Research Historical Database;
> <2> Technical Tools historical data). It didn't
> take long to satisfy myself that the good results
> I was seeing weren't the result of data anomalies.
>
> Next, I explored different settings for the two
> parameter values. I did a huge number of tests
> on this, some of which I reported in a message
> I'm still kinda proud of, and you can find it
> on dejanews in the archives for misc.invest.futures.
> It's from December 95 or Jan 96. After all of
> that, I settled on "80" and "2.00", because these
> gave a large margin of safety on either side.
>
> Next, I chose a portfolio of markets. After doing
> a lot of testing and a lot of thinking, I came to
> a decision that I expect will be controversial:
> I decided to include or exclude entire commodity
> GROUPS, rather than individual commodity MARKETS.
> Remember, this is *my* choice based on *my* research,
> and it makes *me* happy. *You* don't have to
> like it, agree with it, or find it sensible.
>
> The groups I include in my trading are:
> Energies (Heating Oil, Natural Gas, etc)
> Interest Rates (30Yr Bonds, 5Yr Notes, etc)
> Softs (Cotton, Lumber, Coffee, OJ, etc)
> Currencies (Canadian $, Swiss Franc, USDX, etc)
>
> The groups I don't trade are:
> Grains, Meats, Stock Indexes, Precious Metals
>
>
> Next, I settled upon Trading Recipes as my test vehicle.
> Although it is a lowly DOS program, and although it
> is not "Y2K compliant", it does perform portfolio level
> testing (trading multiple commodity markets out of the
> same account) and it even lets you trade several
> DIFFERENT systems simultaneously, out of the same account.
> I programmed up Aberration and gingerly began to tinker
> with betsize selection.
>
> (aside remark: I really dislike the phrase "money management".
> That's what trust departments and insurance companies do.
> What futures traders do is size their bets. So this is the
> final time you'll find the words "money management" in my
> note.)
>
> It took me a while to figure out what I wanted.
> I struggled with fear and greed, and ultimately,
> fear won out. I decided that there was a great
> danger that if my drawdown ever exceeded 40% ,
> I might become emotionally unstable and deviate
> from the mechanical system or even shut down the
> account. So I decided my goal was: Maximize
> returns with the constraint that (historical!)
> drawdown is less than 40%.
>
> I read lots of books, fooled around with differential
>
> equations* on the blackboard, and started to program
> up some geometric betting algorithms into Trading
> Recipes.
>
> *WARNING: MATH FOLLOWS, THIS IS SCARY AND INTIMIDATING
> Suppose Profit is proportional to risk, delta$/deltaT = kR
> Suppose we decide we'll take Risks proportional to equity, R = c$
> Then Profit will be proportional to equity, delta$/deltaT = kc$
> Separate the variables, delta$ / $ = kcdeltaT
> Integrate, log($) = const*T
> Thus $ = exp(const*T)
> Thus our equity ($) will be an EXPONENTIAL function of time, woo hoo
>
>
> As those of you who have read the other Club 3000
> issue (#99.04) know, I finally settled upon a betsize
> algorithm that includes dollar-distance-to-my-stoploss
> (which I define as my risk per contract, "R1"),
> semi-fixed-fractional betting, and variable
> aggressiveness which depends upon equity.
>
>
> THIS IS THE "SECRET" OF HOW I WAS ABLE TO MAKE MONEY
> USING A VENDOR-SUPPLIED MECHANICAL SYSTEM: BETSIZE
> SELECTION.
>
> In fact, about 18 months ago I wrote a message on the
> omega-list that showed test results for three different
> mechanical systems, but using identical geometric
> betsize selection. All three made huge profits!
> One was a good system (Aberration), one was average
> (Market Annihilator), and one was below average
> but profitable (Virtuoso). The size of the profits
> varied a bit, but all of them did very well, handily
> beating "buy and hold the S&P 500" by a substantial
> margin.
>
> The "magic", if there is any, isn't in the entries
> and exits. The magic is in the betsizes. Robert
> Hodge said the same thing.
>
>
> Doing all of the tests detailed above took a year
> because not only did I perform the foregoing tests
> on Aberration, I also tested several other systems
> too. It was kind of a bake-off, and the winner was
> Aberration plus the variable-aggressiveness
> betsize algorithm.
>
> A side-benefit of all the testing was, that it
> produced several notebooks full of test results.
> These turn out to be INCREDIBLY VALUABLE. Now
> I have a giant database of prior test results,
> so if I try out a new betsize algorithm (often)
> or a new entry/exit system (seldom), I have a
> bunch of data to compare against.
>
> I have discovered that I find it pointless to
> try to answer question (1). Instead, I try to
> answer question (2). It was a revelation.
>
> (1) Consider systematic approach X. Is X "good" ?
> (2) Which is "better," approach X or approach Y ?
>
> I hope you enjoyed reading this,
> -Mark Johnson
>
>
> > I use a fully mechanical system that I bought
> > from a vendor. I trade it on >20 different
> > commodities, using the exact same code and the
> > exact same parameter values (namely, "80" and "2")
> > on all markets. It trades Coffee the same as
> > Bonds the same as Crude Oil the same as Canadian
> > Dollar, the same as all the others.
> >
> > "80" and "2" are the parameter values in the
> > system manual supplied by the vendor; I've
> > done research to test out other parameter settings,
> > but have only traded my own money using
> > "80" and "2".
> >
> > I've been trading it for quite a while, and reporting
> > my actual real-money results in a newsletter called
> > _Club_3000_News_. The results of about 100 trades
> > (namely, calendar years 1997 and 1998) appear in
> > issue #99.02 of the newsletter; they will be glad to
> > sell you this backissue for $5.00. Contact info
> > is on the Club's website,
> >
> > http://www.ison.com/club3000/index.html
> >
> > I *DONT* trade using single contract position
> > sizes; instead I use a non-Ralph-Vince betsize
> > algorithm that employs a non-fixed-fractional approach.
> > This is covered in issue #99.04. I programmed
> > it in a dinky little PERL script that's about
> > 50 lines of code.
> >
> > 100% mechanical trading has done pretty well for
> > me. From 1/1/1997 to today (5/13/1999), my
> > net profits (including commission, slippage,
> > rollovers, etc) have achieved a compound annual
> > growth rate of 79.6% per year. As of today,
> > total net profits are $421K. $118K of the
> > profits came in 1997, $102K came in 1998,
>
> > and $200K of the profits have come (so far)
> > in 1999.
>
>
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