How many trades (number wise) do prop firms / clients want to see before gaining confidence?

R

ResonanceFx

Hi guys,

I have a problem I need some advice/assistance on. It has to do with gaining confidence in a trading strategy when there are not enough data points.

I've back tested over 50 systems and taken a little something the best performing ones. Right now the system I've been working on seems very promising, but the main problem I have is the following:

I can only trade it on 1 hour time-frames or above. (The reason is complicated to explain, but simply put the overall market direction is of supreme importance. The whole "mini-trends" on lower time frames has simply never worked for me. 1 hour time-frame is the minimum where the signals I'm getting are actually correleated to overall market direction)

In one year, I'll get about 30 trades for one instrument.

- Those 30 trades will produce on average a 100% return with 25% drawdown.
- By cutting size in half, it becomes 50% return, with 12.5% drawdown,
- By cutting size by four, it becomes 25% return with 6.25% drawdown.

I prefer the 25% return method since it has a more attractive drawdown number.

I've tested this on 20 years of data for 25 instruments.
(30 trades per year * 20 years) * 25 instruments = Sample size of 15,000

(PS. the methodology is not a strategy that is curve fitted to win over a sample size. I first came up with the strategy on corn futures, then tested 20 years of corn data and found it consistent through various market cycles. I then began testing the system on out of sample data [in the form of other instruments from currencies, indices, energy, etc] and kept getting roughly the same results for every instrument tested over 20 years. This includes markets that have low to negative correlations over the time period.)

But the question then becomes: How long would I need to trade live in order to build a track record?

I do not have the funds to follow more than 2 markets at time, so following two markets, that is only 60 trades a year. (

If I traded two years, thats only 120 trades.

Is that really enough to manage money or get hired at a good firm. Any feedback would be appreciated. (the method simply doesnt work on lower time frames, a sample of 100 trades 30 minute charts copnsistently produces break-even because of the commissions, and 5 minute chart produces negative results)
 
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I would say you need a track record of at least 12 months to begin to interest anyone in your strategy. Sometimes investors want to see how you have done in many market conditions. So that takes many years unless we go though a bear market anytime soon.
 
rmorse said:
I would say you need a track record of at least 12 months to begin to interest anyone in your strategy. Sometimes investors want to see how you have done in many market conditions. So that takes many years unless we go though a bear market anytime soon.
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Thanks for the reply, but what about for a swing-trader?

A long term swing trader might take 30 trades in a year.
A day-trader might take 30 trades in a day.

Is 30 trades (producing a 12 month track record) really enough to indicate competency/winning system? My mind is kind of stuck in the strategy testing mind-set where you need thousands of samples before you can make a judgment on a system. (problem is it would take 20 years to generatate even 500 trades on a swing trading system that only takes one or two trades per month)
 
Brokers care about volume, investors do not. Investors care about risk adjusted after tax returns and how long you can maintain them. The only issue I see with funds or managers that don't trade often, is that it might be harder to get an investor to pay a 2% management fee for part time work. Trade when you should and build a saleable track record.
 
rmorse said:
Brokers care about volume, investors do not. Investors care about risk adjusted after tax returns and how long you can maintain them. The only issue I see with funds or managers that don't trade often, is that it might be harder to get an investor to pay a 2% management fee for part time work. Trade when you should and build a saleable track record.
More...

Makes sense.

Thank you.
 
rmorse said:
Brokers care about volume, investors do not. Investors care about risk adjusted after tax returns and how long you can maintain them. The only issue I see with funds or managers that don't trade often, is that it might be harder to get an investor to pay a 2% management fee for part time work. Trade when you should and build a saleable track record.
More...

I agree with the statement regarding brokers vs. investors.

However, if you can show a high net worth accredited investor a 25% return with a 6.25% draw and a two year track record, you can justify the 2% management fee, regardless if you "don't trade often."

Cash is always a position. The biggest financial advisory firms don't believe in this, since they "put capital to work" as soon as your check clears, and don't believe you can "time the market" with a strategy. So you can't expect your Schwab or Chase Private Client advisor to run such a strategy. But if one creates a niche to gain outsized returns that beats the benchmark, then it's worthy of consideration.

You'll just have to find investors on your own, instead of working with a big box retail firm.
 
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Because of number of trades per year, thinking more like three years and more of your own money you have in it shows how much trust you have in it, then keep all your monthly statements. In mean time, take test for CTA and get good lawyer, most brokers will sponsor you since they want you to stay with them. If you can, have two fairly good sized brokers for the three years, you can inquire after three year if they interested in getting you accounts. You can do both of theirs and yours you have gotten. Often times brokerage will get the management fee to advertise you, accounting and profit, they certainly don't want you to lose money, and will pull the plug if drawdown gets too big than the norm.
 
Thanks for the tips guys.

I was debating what route to take

Route 1 : Trade with more leverage and try to ramp up my own account quickly. I have 23k to trade with.
End of Year 1: 40k (~100% return)
End of Year 1: 80k (~100% return)
End of Year 3: 160k (~100% return)

Pros: Fast money, potentially do not need any investors or prop firms in future, just trade my own money.
Cons: Risky, I have 15,000 trades backtested but you never know what the future might hold. Also investors/firms dont like high drawdown. (although it should be obvious to them that simply cutting down size will change the drawdown figure as well)

Route 2: Trade conservatively, make slow gains, but have a more "mature" track record to show for it after a few years trading.
End of Year 1: 28K (~25% return)
End of Year 1: 35K (~25% return)
End of Year 3: 43K (~25% return)

Pros: Professional steady gains.
Cons: Puny gains when I'm starting with such little capital.

I work so I dont really need to live off trading earnings, but still ... route 1 seems tempting haha.
 
"In one year, I'll get about 30 trades for one instrument.

- Those 30 trades will produce on average a 100% return with 25% drawdown.
- By cutting size in half, it becomes 50% return, with 12.5% drawdown,
- By cutting size by four, it becomes 25% return with 6.25% drawdown."


Sorry to be so blunt, but you can probably just stop right there and continue your regular job. Anybody who talks this way, ie literally zero live trading experience but claims he can make XX% profit per year has very little future in this biz. Especially someone who uttered the statement, 100% return with 25% drawdown. This is silly on so many levels I can't even get into it...


If you are hell bent on giving this a try, then get trading already ! Nobody cares about paper traded back tests. Until you have a 2 year audited track record, you have nothing at all. As negative as this was, I do wish you the best of luck if you choose to pursue this. :)
 
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