Developing a Trading System Step by Step

[Murray Ruggiero]

Quote from dx1:

Murray

I agree with you about the low efficiency of most trend following trade systems; still people trade them. Is that because there is not really anything better or what ?

Kind of , The point is that they work on a large array of markets, even with the same parameters and have remained profitable over a long period of time. Long term trend following over the past 20 years has performed better than the stock market over the same period, and represents a uncorrelated return to stocks.

 

[Murray Ruggiero]

We now have selected our core method. The next step is to build a finished system around it. We need to address several issues.

1) Open equity give back
2) Filtering false breakout
3) Risk control

We will address these issues in future installments.

 

[Vol]

Looked over your AdapAnalysis worksheet. Let me make sure I've got this straight. This is a regression or counter-trend system? Also appears to be a sort of swing system - always long or short, always in the market, correct?

Some futures did well such as C, DX, FX, JY. Others did poorly throughout such as AD, CC, HU with negative running P&Ls. Lots of give back as with trend systems.

Lastly, 2000-2005 looks poor in most markets with this system. Does it really still work in your estimation, Murray?

Vol

 

[Murray Ruggiero]

The fact that it does well in some markets and badly in other is part of the point of a trend following system. The problem is you need to trade markets where you get break even or slightly below performance because they might produce major trends. Let's look at Copper for example, this market has done bad for trend following since it started trading , only a little more than break even, but this one trend over the past 2-3 years had made this market more than work trading all this time.

Your analysis of the fact that the system has done badly over the past five years is wrong.

2000 $173,778.10
2001 $62,501.45
2002 $8,128.60
2003 $12,018.15
2004 $42,482.68
2005 $41,190.50
2006 $28,195.55 up though feb 21.

These results would make this one of the top trend following systems on this basket for the past 5 years. The 1.4 set of parameters which I originally used and released in Jan 1996 has done. It has made about the same profit over this period, but has had a higher drawdown and one losing year.


2000 $168,277.80
2001 $62,062.40
2002 $2,082.70
2003 $-4990.95
2004 $49,887.38
2005 $54,990.00
2006 $18,915.05 up though feb 21.
These results are amazing considering I am using a set of parameters originally optimized in Dec 1995!.

 

[Vol]

Sorry if it sounded like I'm dissin your system; I'm not. I just eyeballed the trades 2001-2005 and the profit looked slim. Heck, famous trend traders like J Henry have had really bad results the last few years. I assume it has been a dry spell for trend trading.

I checkeed your previous workbook AdapChannel1_4 which shows the following:

Beginning 1st trade 2001 (Jan01) 977k
End of last trade 2005 (Nov05) 1057K

Return is 8.1% or 1.6% CAGR.

Caveat: this does not include open trades at end of 2005 and so far in 2006 the system is on a tear up to 1182K. Even so, the return since 1/01 is 21% or under 4% CAGR.

Start of 2000 was 844K so return since is 40% for CAGR of 5.7%.

Of course S&P was negative during this time and there is good anti-correlation which is important for me.

What else can we do to juice up the system?

 

[swingman]

Post some results for whatever YOUR favorite currency pair or Dollar Index, if you prefer, to see what happens, due to the fact that successful results are market dependent as you say, since currencies have certainly moved quite a bit the last 5 years. Should make a killing if indeed robust.

 

[Murray Ruggiero]

The first thing I want to make clear is we are not reinvesting profits so that 8.1% over the past 5 years is really underestimating what this system can do. In addition we are only trading a one lot here, not even balancing based on volatility.
If we include money management, and use percent risk for example and reinvest profits the returns are much greater. If you look at the return of other systems during this time the results are really very good.

If we start with a $250,000 account and 3% risk we get a compound annual growth rate of 26.93% over the 25+ years. The percent returns over the past few years are low but this is during a period some of the largest trend following hedge funds lost 40% of their capitol. We have average 4.4% per year since 2001, not including 2006, which is over 3% in 10 weeks. This would push us to around 5%. In addition we would have average 2% in T-Bills over this period . This means that since 2001 we would have average about 7% per year with a max drawdown of 8.37%.

We will work on improving this system in my next installment.

 

[dx1]

Murray

I'm looking forward to reading about both money management and gain protection.

They are both very interesting topic and I'm curious to see what you have to share with us.

 

[Hombre]

Murray,
Would you, please, post entry and exit rules for the channel BO system you are using ?
Thanks
hombre

 

[Murray Ruggiero]

Sub SimpleAdaptiveChannel(Mult)
Dim MinMove
Dim ChanLen As BarArray
Dim ChanWidth As BarArray
MinMove=GetActiveMinMove()
ChanLen=Min(CInt(CyclePeriod((High+Low)/2,0)*Mult),100)
Buy("ChanBuy",1,Highest(High,ChanLen,0)+MinMove ,Stop,Day)
Sell("ChanSell",1,Lowest(Low,ChanLen,0)-MinMove,Stop,Day)
End Sub