Can I be confident with this strategy?

[Outlander]

I'll try to help you, not with theory but with some graphical examples.

Here's the out of sample profits of one of my trading strategies that's about to go live.

View attachment 170561

It spans from 2009 to 2016 and it looks great!
But if you isolate some years, months or weeks you can see that it had some very difficult periods.
Here's 2014:

View attachment 170562

The strategy had a drawdown of 40 trades. If in this situation you stop trading, you will lose the next 100 trades that will give you great rewards.

A great advice I listened once is that you have to memorize the drawdowns of your backtests. Memorize the annual drawdowns, the losing months, the horrible weeks. In that way you won't lose your confidence when you are struggling with the bad trades.

So, in your case, I would continue trading the strategy A if it is well tested. And if the strategy B is also good, start with few contracts at the beginning. It is totally good to add as many strategies as you can. It diversifies your portfolio of strategies as long as they aren't correlated.

If there is anything else I can help you, just let me know.

Cheers!

Thanks for the detailed post.

The backtest performance of Strategy B in 2016 is like this:

but in 2015, it's like this:

I didn't test it for that many years like you do, since it's a intraday strategy. Based on the two years testing, I might not think the overall performance is good enough. But it does being good in 2016. Can I assume it's a short-term strategy that is supposed to not work across many years? If we look at only 2016, the max drawdown is like 2000. So based on your idea, whenever I had a drawdown greater than 4000, I would think of stopping trading this strategy. Am I correct?

 

[Outlander]

Have you looked into why it might work/not work depending on market schemes?

I can not see why. If I could, I would be able to code it in to conquer that. For example, "when this happens, stop opening".

 

[quant1]

I can not see why. If I could, I would be able to code it in to conquer that. For example, "when this happens, stop opening".

You may want to go back and do an analysis of the market when the strategy did and did not work. Measure several statistics and compare the two different time periods. I would imagine the strategies failure is embedded in some metric.

 

[Handle123]

Thanks for the detailed post.

The backtest performance of Strategy B in 2016 is like this:
View attachment 170579
but in 2015, it's like this:
View attachment 170580
I didn't test it for that many years like you do, since it's a intraday strategy. Based on the two years testing, I might not think the overall performance is good enough. But it does being good in 2016. Can I assume it's a short-term strategy that is supposed to not work across many years? If we look at only 2016, the max drawdown is like 2000. So based on your idea, whenever I had a drawdown greater than 4000, I would think of stopping trading this strategy. Am I correct?

Each year trade differently, check out weekly data of both years, I just posted charts few days ago somewhere based on each were different. If you are Scalping for ticks, for me doesn't matter much what longer term charts are showing as I trade noise, but for like 60 minute systems I have, very much different based on sustain trends either don't last or reverse and I get losses.

When I backtest, I do it over 10 years, because you are showing differences in automation, and what if 2 of past years it loses each week, you have no way of knowing.

 

[systematictrader]

I see, the keyword here is portfolio.

And diversification

 

[systematictrader]

Hello systematictrader,

Very good post and this is a good conversation/discussion.

I am confused bit when it comes to automated strategies and the back testing.

Forgive my ignorance or lack knowledge regrading automated systems.

Question:

If a trader back tested (automated or manually back tested) an automated trading systems for say +8 years and the results were profitable, why does a trader need to Stop the system when the system is producing losses?

If I spend hours/days/weeks/months/years developing trading systems and back testing a trading system and the results are profitable, I do not understand why I should never need to click Stop or manually stop trading the system.

Why spend all that time developing something automated, to stop it trading it when it starts losing a certain amount of money? For example, I am invested in Vanguard Total Stock Market Index, I will never take my money out of that index because I am losing money. However, I do understand the need to be diverse in developing automated system for different market, say one for ES and one for CL.

Someone please explain to me.

Thanks

I think your overthinking it, or over worries, when u develop a system either automatically or manually its gonna happen that your also developing an infrastructure where it can be applied to other instruments, so while the system u develop takes 50 hours lets just say kr 50 mos or whatever, and it stops working on es lets say, the next time u go to develop something it wont take as long because u shouldve and usually its i heritied that u developed a formula or a system where the input can be changed and u still get an output so dont worry too much if something stops working, focus on building the infrastructure to where its mobile to other products and time frames and insteumenets etc

 

[SimpleMeLike]

I think your overthinking it, or over worries, when u develop a system either automatically or manually its gonna happen that your also developing an infrastructure where it can be applied to other instruments, so while the system u develop takes 50 hours lets just say kr 50 mos or whatever, and it stops working on es lets say, the next time u go to develop something it wont take as long because u shouldve and usually its i heritied that u developed a formula or a system where the input can be changed and u still get an output so dont worry too much if something stops working, focus on building the infrastructure to where its mobile to other products and time frames and insteumenets etc

Thanks systematictrader,

Yes, I will keep it simple. That's a good point.

 

[O(1)]

If I back test a system for 10 years, should it not work the next 10 years?

hi SimpleMeLike..
I'm sure everyone handles it differently. But, what I do is .. let's say I based it off of 10 yrs (I like to at least go back to 2007-8 to include that environment). And you have a max drawdown from the tests. You can add some to that to be conservative. Now you have some idea of where you might start thinking of unplugging the thing in case things start to happen that were not accounted for. Remember.. you only took a small sample of what can happen.. and that was based off the past.. So.. now that you have some guesses of drawdowns.. this could help to hang-on during "normal" drawdowns and not get depressed or scared at every move against your equity curve.. ha

 

[pauljherrera]

Thanks pauljherrera,

ok, its making some sense to me now.

What developing automated systems to trade intraday resistance and supports?

I like trading supports and resistance, but i do this manually now. Is it difficult/challenging to code, backtest, and overall automate trading supports and resistance going forward.

Sometimes I can not be next to the computer during market hours.

Thanks

Support and resistance aren't very hard to code. In general, almost anything related to classical technical analysis is relatively easy to code.

 

[SimpleMeLike]

Support and resistance aren't very hard to code. In general, almost anything related to classical technical analysis is relatively easy to code.

Thanks pauljherrera,

This is good to know as I have good experience with trading levels (support and resistance) price action on intraday small timeframe.