|
PureBytes Links
Trading Reference Links
|
At 12:26 AM -0500 7/11/00, robert.cummings@xxxxxxxxxxxxxxxx wrote:
>I would be very anxious to tell anybody wouldn't you so where are
>these joyous happy people. Not saying there not around but like I
>said if they were I feel they would use them and they haven't. This
>is scam IMHO.
I personally know a person who has been trading Aberration on a
portfolio of commodities for several years. He has won his local
commodities trading association's prize for portfolio performance for
several years in a row trading this system so I am convinced that it
can work.
I have also done extensive backtesting on the system myself so
understand it very well. I can confirm that your money management
(bet sizing) algorithms are an important part of the success of using
such a system as is the need to trade it on a basket of commodities.
The trading system itself is very simple. It requires only a few
lines of EasyLanguage code. The code has been posted on this list
from time to time. But the system is only a part of what you need to
be successful.
The performance on a single contract on a single commodity is pretty
mediocre but usually profitable. To improve the performance you need
to do two things:
> Trade more contracts on high reward-to-risk-ratio trades
(bet sizing)
> Trade a basket of commodities (to realize the benefits of
diversification)
Most of us who trade a single market are accustomed to a trading
system that is highly accurate and precise - similar to "surgical
precision" - so it is difficult to understand how systems such as
this can work. They are quite crude by comparison but have a slow,
consistent performance.
As for bet-sizing, there are two parts of this problem:
> Deciding how many contracts to trade on each trading signal
> Deciding how much of your capital to allocate to each commodity
You find that some trades will have a higher reward-to-risk-ratio
than others so you need to trade more contracts for those cases. This
obviously will improve the overall profitability.
Then you need to allocate more of your capital to those commodities
where the system is working better. You might think that it would be
better to put all you money on the single commodity where the system
is working the best but that is not the case. First, you obviously do
not know which will be working best in the future, and second, you
need the benefits of diversification to improve the overall Sharpe
Ratio of you portfolio.
If you trade "X" different uncorrelated commodities, the Sharpe Ratio
of the portfolio increases as the square root of "X". So trading 4
commodities should double your Sharpe Ratio, trading 9 should triple
it, 16 should multiply it by 4, trading 25, as Mark Johnson did,
should multiply it by 5. So you can see where trading a basket of
commodities can improve the performance of a mediocre system to
result in a good performance of the overall portfolio.
The attached "Profits.gif" chart illustrates the concept. This is a
test over 13 years of daily data. (The overall position sizes were
forced to result in the same overall profit over that period.) Over
that period, the performance on the Japanese Yen was pretty good and
it is shown in the blue curve. A three-commodity portfolio is much
better and shown be the green curve. An optimum fifteen-commodity
portfolio is the black curve. Note that an equally weighted 15
commodity portfolio (red curve) is not the best combination, proving
that the optimum weighting depends upon the performance on the
individual commodities.
Bob Fulks
Attachment Converted: "f:\eudora\attach\Profits.gif"
|