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Yes! And I would only add that if you really want to feel comfortable
trading a system, you had better develop a plan for cutting off a system and
switching to another. Know where you will get out if the system heads
south. Like discretionary trading, system "stop loses" can be the achelies
heel of system trading. This takes some work too because your less likely
to think about your system stop loss than when descretionarily trading. But
if you really want to feel comfortable trading a system IMO this is
critical. A system that's stopped working can lose money real fast. If
you're not careful there can be a tendency to want to continue trading a
system that is going through a "rough patch" thinking that it will come back
any day now. It's a lot like not taking loses. So have a plan to cut off
and stick with it. I use a percentage of cumulative 3 months profit before
I bail.
Then have a plan for getting back in. And there's the subjective part of
system trading. While system rotation can be quantified, that's much harder
to factor into a backtest.
B.
-----Original Message-----
From: Gary Fritz [mailto:fritz@xxxxxxxx]
Sent: Friday, December 13, 2002 8:26 AM
To: omega-list@xxxxxxxxxx
Subject: Re: Limited life span of mechanical systems?
> Therefor i think every system will eventualy keep on working. It's
> just that the characteristics (like maxDD etc) might change so much
> that it does not work for you anymore because it's getting to much for
> you. But if the logic is good it might not work for a few years but
> after that work like a "holy grail" again..... It's just... can you
> bare the flat or drawdown periods....
Which can be daunting. I've had systems perform very
consistently for 3-5 years, and then suddenly heel over and die.
Maybe some day they'll wake up again, but in the meantime they're
losing money for 6 months or a year or more. If that was my only
system, I'd be in serious trouble.
Moral: don't put all your eggs in one basket. Even if you have
one supersystem that's better than all your others, and you want
to trade it exclusively, have other systems in reserve ready to
swap in if your star suddenly flops. Better yet, trade them all
at the same time to minimize the damage if one of them takes a
dive. And hope they don't all take a dive at the same time.
Be aware that you'll probably have to suffer through a protracted
drawdown sometime in your trading career. Prepare for it so it
doesn't kill you when it happens. Trust me, drawdowns are a LOT
more painful in realtime than they are when you're looking at the
equity curve in a backtest.
Gary
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