Managing expectations + benchmarking

[TonyStevenson]

Hi

A question for our mentors and indeed the group at large.

Having built our wonderful system(s) we will be surging forward eager to trade. The backtesting & MC and other tests provide a good theoretical basis of what we can expect to see but when we’re in the thick of trading action there will be times when we might question our systems and their current performance.

From what I’ve gathered there will be times when trend following works and doesn’t work. The same applies for mean reversion systems.

Are there some simple rules of thumb which we can apply to remind ourselves that we might be in a period when our strategy is less effective and may not work so well?

eg for a trend following system I imagine that if say the 200 day MA of the index is trending down then our chances of positive returns in that period will diminish.

Is it that simple?

I am less clear when a Mean Reversion system would ideally perform or not perform.

Our systems should be designed to be robust and deal with different trading conditions.

This is more a case of managing our own expectations and encouraging us to be patient and trade-on.

Or perhaps we can use benchmarking eg if we’re trend following ASX we should be performing inline with Growth Portfolio (not exactly but in the same direction).

Thanks in advance for some rules of thumb.

–tony

[ScottMcNab]

Hi Tony,
Not sure if you listen to podcasts at all but Nick did an interview on Chat with Traders back in March I think…its a free podcast/download and I think it would be worth a listen as it addresses some of those questions as well as giving other insights. I’m tempted to try and throw in my 2c but its covered so much better in the podcast.
Cheers
Scott

[JulianCohen]

I can offer some feedback.

I have been trading a systematic trend following futures account for a year. It is a long term breakout system, buying the HHV(100), that’s weekly not daily, so it tracks very long trends. The first six months, until January this year in fact, I was up. It wouldn’t stop making money. The commodity markets had been on a long trend, some of them for a long time. I had a position in Eurodollars that would have been initiated in June 2010, five years before I bought into it !! So I caught the end of those trends. In January the system was up 15% for the month as a lot of trends ran their last burst. February I ended up down 16% from the highs of January. The next four months have been painful. From highs to lows!

However I didn’t break through the initial start figure so I could rationalise it by thinking that I was still square. That helped although it was a kind of “fallback” thought, one I used when I was in my darkest moments. The rest of the time I just told myself that the system works, it does what I expected it to do and I just had to get through this. Everything that the trend following gurus write about played out to be true for me. The biggest drawdown was indeed in front of me, and probably still is. Don’t let your ego get in the way of your trading…when I was up 30% I thought I was brilliant as all the other trend following CTA’s were down for the year. Now I’m a lot more circumspect about things

Things do pick up. Drawdowns don’t last forever. The best time to invest in a system is during a drawdown so I took my balls in one hand and added to the equity with the other. The system has started to retrace and I am having some positive weeks. I won’t be out of this drawdown for some time I’m sure, but the point is the system is doing what I expected it to. It hurts when it happens, but I’ll have to get used to that. With the gains come the pains and that is a traders life.

That’s my two bobs worth anyway. Hope it helps

[JulianCohen]

I’d better listen to that again…

[SaidBitar]

Regarding comparing the returns to the Index for benchmark I am not sure how much this is good practice, since normally with Trend Following the fluctuations are higher than those of the Index. This is why the ride feels like roller coaster, 2 months ago i had 12% in open profits then in 10 days went to 1% and now going back while at the same time the Index had similar moves but on much lower scale. This is why i feel that comparing the returns to those of the index is not accurate, for me what is important and what i check if the Index over certain period of time had positive returns while my system had negative then there is something wrong.

Regarding managing expectations this is the difficult part, all the time we hear professionals talking about the psychological part of trading in the beginning i used to say what the hell they are talking about. I will trade like a robot no feelings I do not even want to know the name of the company i am buying their shares, if the system says Buy i am buying and if it says Sell i am out. I backtested over and over and happy with the results. But reality is different and especially when you start draw downs doubt will start coming to you and all sort of weird ideas (did i make any mistake in my code, is there anything i am not seeing, am i having my lucky shirt ..) the only way out of it is just to believe in the system and trust it. So whenever i used to be in doubt i used to run backtest in Amibroker see the results and then i say I am OK). As Julian did i also added to my account when i was in DD I said my system worked, works and will work just the market conditions are not in suitable for it. So in December last year i added to my account almost doubled it so i can go out of DD faster and to reduce the commissions effect.

These days i try not to check how the systems are doing during the day, so I try to keep myself busy otherwise I will be checking P/L all the time (not yet 100% successful in this).

These are my observations, the observation of a newbie finally i want to mention one thing that TF is the hardest easy money ever. Because the money that you make they are done with NO EFFORT just you put the trade and it takes care of itself while you spend most of the time caring about the losers.

[LeeDanello]

Hi Tony,
My 2c worth. I had no clear performance metrics on how an alternative system to my long term system would perform before I started to design it. I just dived in and thought “let’s see where this takes me”. I think the point is to try and diversify your systems to perform differently to each other so when one is not working as well another might be making you the money. I have a long term system that trades in sync with the index. I thought that having a shorter term system that traded when the longer term system was off might improve my portfolio returns and improve the robustness of the portfolio. The mean reversion system l designed doesn’t use an index filter so it’s always active, it has a high win rate so it should keep me happy and testing shows that it’s profitable which hopefully will compliment the returns of the long term portfolio. I had no specific objectives for it other than it should be reasonably profitable, have a low drawdown and it allows me to diversify my trading system/style to compliment my bottom line. My idea of diversifying my portfolio would be to have a short term system ie one that holds in days, a medium term system one that holds in weeks and a long term system one that holds on for months to years. So I’m testing the short term system in a simulated account and when I’m happy that it performs as tested, I’ll start trading that and then I will start designing a mid term or momentum system.

[Author]

Posts