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Mark,
While I am a long term trading kind of guy one thing does upset me when I
see results for simple long term systems like channel breakout and
aberration: people tend to choose the "usual suspects" (currencies, energy,
interest rates) to test their ideas on.
The markets you chose to test on:
6 currencies: BP,CD,DM,DX,JY,SF
4 energies: HO,HU,CL,NG
5 interest rates: FV,MB,TU,TY,US
5 other: CT,HG,JO,KC,LB
Maybe you're happy trading these groupings but if we do a quick revision of
why these particular groups performed well in the past the results are at
least cause for thought:
Currencies: all trend systems make stacks of money trading these markets
because of the huge moves on most of them after 1985. The JY/DM appreciation
against the dollar in the 1990s was a huge structural change. The BP fell
out of the ERM in 1992 again making big bucks for any trend system. Maybe
currencies will move like that going forward, maybe not.
Interest Rates: bonds and everything else have been in a long term
structural trend towards lower rates since the early 1980s. To continue
moving with enough size to get similar scaled profits, long term yields
will have to go to 2% or 10%! (exageration for effect)
Energy: Another historically huge swinging commodity group which has had a
fantastic trend in the last year. Let's just hope OPEC like making serious
adjustments to production quotas for the next 10 years...
Other: CT,HG,JO are fine - KC has a had a couple of enormous moves (last
1994 or 1997 I think) which make any system look good. LB had a blowout
trade I think in 1993 which would have made the vast bulk of any profit for
a system tested on this market.
So while in one hand it looks like a diversifed group of commodities what
you really have is 3 highly intra-correlated groups and 5 other commodities
at least 2 of which have a had massive spike trades in the past (and may
well in the future, I admit).
Of the 3 groups, at least 2 have partaken in major, possibly related,
structural moves over the last 10 years.
In the end by trading such an undiversfied group you are in fact making a
bet that interest rates, currencies and energy will move in a similar way to
the past. Frankly, I have no idea how these things will move in future and
I'd rather my system wasn't exposed to that assumption.
I point these things out only because I have tested Aberration and other
systems on a portfolio basis using my own "custom" software. It's results
are very sensitive to the choice of markets traded. If you really want a
secure consistent return in the future you have to accept "sub-optimal"
returns in back-testing, ie you have trade a universe of markets which is
far more diverse than these 20 (and preferably far bigger).
Regards,
Robert
P.S. How does the WKPD system or Aberration perform on these markets between
1988 and 1990?
My test which wasn't on the exact same set (it was more diversified) showed
a 2+ year period of little or no gain. 2+ years with no gain? - not very
nice at all...
-----Original Message-----
From: Mark Johnson [mailto:janitor@xxxxxxxxxxxx]
Sent: 26 March 2000 22:06
To: omega-list@xxxxxxxxxx
Subject: Re: Long Term Systems
"Andy" <andy@xxxxxxxxxxxxx> writes:
>
>
>Hi All,
>
>I'm and expereinced short term trader (ex. bank
>trader) looking for a longer term system. Apart
>from Abberation, can anybody recommend any other
>good ones out there. [snip]
>
Here's some Easy Language code for a long term
trendfollowing system, ZZZ_WKPD. The system
idea is well known and public domain; for
example it appears in Jack Schwager's book
"A Complete Guide To The Futures Markets",
copyright 1984. And Schwager's book contains
a footnote referring to a paper published
in 1980 (20 years ago) that discusses the
system, but I haven't seen the paper myself.
However, precisely BECAUSE the system's well
known, almost nobody bothers to research it.
And so it's a little-appreciated gem of a system.
I tested WKPD on the following futures markets:
BP, CD, CT, CL, DM, DX, FV, HG, HO, HU, JO,
JY, KC, LB, MB, NG, SF, TU, TY, US
And I compared it to another long term
trendfollowing system, Aberration, on
the same markets.
I tested them twice: (1) trading single-contracts
and with ZERO SLIPPAGE, and (2) trading single
contracts with MAXIMUM SLIPPAGE.
MAXIMUM SLIPPAGE is what happens when you get
the absolutely WORST POSSIBLE fill of the day.
If you're buying, you get filled at the absolute
high of the day. If you're selling, you get
filled at the absolute low of the day. This is
an extreme estimate of the worst-case thing that
can possibly happen to you. It's a torture test.
RESULTS WITH ZERO SLIPPAGE AND $25.00 COMMISSION, TRADING ONELOTS
=================================================================
WKPD Ntrades=743 NetProfit=$918556 AvgTrade=$1236.28
Aberration Ntrades=632 NetProfit=$781624 AvgTrade=$1236.75
RESULTS WITH MAXIMUM SLIPPAGE AND $25.00 COMMISSION, TRADING ONELOTS
===================================================================
WKPD Ntrades=743 NetProfit=$339879 AvgTrade=$457.44
Aberration Ntrades=632 NetProfit=$331012 AvgTrade=$523.75
Take a look at that! Even with MAXIMUM SLIPPAGE,
i.e. the worst possible fills, the Well Known Public
Domain ("WKPD") system averaged a profit of more
than $450 per contract per trade. Wow. The vendor
system did a little better but not much. (Its
strength is in non-onelot trading, i.e. trading
with geometric betsizing). These suckers are
resilient.
Apparently the days on which the WKPD system trades,
are a little more volatile than the days on which
Aberration trades. The average difference between
the desired fill, and the worst-possible-fill, was
a little bigger with WKPD. But not very much.
DISCUSSION
==========
A version of the WKPD system ships "free" with
TradeStation, at least, I got it with my copy of
TS version 4.04, build 19.6. It's so tiny it can
be written in the "Quick Editor".
Despite being 20 years old, well known, public
domain, and widely available, this system gives
great test results. I wonder how the Efficient
Market Hypothesis people feel about that :-).
I have attached an ELA to this message, so that
you can play with the system if you like. But
remember, Omega Research products can't do the
MAXIMUM SLIPPAGE test. Thus you won't really be
able to replicate the torture test easily (unless
you have non-Omega software like Trading Recipes),
I'm sorry. The ELA is cloaked; I'll uncloak it
in a few days if anybody really wants me to.
Meanwhile, think it over and ponder the question:
what well known, public domain, 20-year-old
system could possibly give an average of $457
profit per one-lot trade with MAXIMUM SLIPPAGE
(and $1225 per onelot without slippage)? It's
a fun little problem to work on. Hint: this is
an indicator-based system, not a chart-pattern-
based system. Murray Ruggerio's articles in
_Futures_ magazine claim this is not possible :-).
The Easy Language code is named "ZZZ_WKPD",
a name chosen so that it will be alphabetically
last on your list of installed systems in your
Omega menus. That ought to make it especially
easy to find.
Note: WKPD is *completely* unrelated to the
"Pretty Good Oscillator". They use totally
different design ideas and totally different
Easy Language code. To name one difference,
WKPD is a pure reversal system. It's always
in the market, either long or short. But
PGO is *not* a reversal system; it has lengthy
periods when it is "flat" (neither long nor
short).
-Mark Johnson
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