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

[VIXTrader]

Showing a good track record is just part of it. The more important aspect is showing that your results have a reasonable chance of sustaining themselves into the future. There's so many people out there right now with "systems" that are making great returns, but the vast majority of them are highly correlated to the S&P 500. When stocks finally stop going up, guess what happens to those returns?

So yes a track record is step one, and a 5 year is long enough. But you'd also have to demonstrate that it wasn't just a good 5 year streak because of a bull market like we've seen since 2009.

If you can show a 5 year track record with good performance and a correlation to the S&P 500 of less than 25%, or even negative, that would be something. If you can only show good returns when stocks are also going up, then it's not worth much of anything.

 

[fan27]

Ideally, wouldn't you want a set of strategies that are correlated to the S&P 500 when the market is in a bull phase but are uncorrelated when the market is in a bull phase. I currently have a group of strategies that have the following results (backtested) over the past 10 years. The strategies are still in development but initial results seem promising.

Is it safe to assume that it is ok to have performance that does not beat the S&P every year (but does overall) if you can demonstrate that you can avoid massive drawdowns in general and especially during an S&P bear market?

In the attachment, blue is backtest results, black is SPY.

fan27

 

[VIXTrader]

A few problems with that:

First, your "backtested" results are not that special to be honest. If I had a nickel for every backtest that showed 2 or 3 times the returns of the S&P I'd be a millionaire. The problem is once you start live trading them, 99% of the time they don't work out that way. Backtests just curve fit the downturn of 2008 in hindsight. X Y and Z happened, so don't do that next time etc... But every sell off is different, so it doesn't matter if your backtested and curve fit system avoided the last one. All that matters is, will it avoid the NEXT one?

That's why 99% of trading systems that look promising on paper turn out to be duds after a year or two of live trading. It's just curve fitting that isn't forward looking.

Secondly, I was speaking about what investors want to see. If you think a strategy that looks to be about 80-90% correlated with stocks is what you want, then fine. For your own trading account go for it. But investors who would take a chance on a little independent trader don't care about S&P 500 correlated systems, they only want something to balance out what they are already invested in. And 90% of that is likely already correlated to the S&P 500.

The only shot the little independent guys have is to show something different. S&P 500 correlations are a dime a dozen. Show a 5+ year live trading system with low or negative S&P 500 correlations and you'll raise investors money, I promise you that.

Remember, right now most people use Treasury's or gold for negative correlations. Build a system that competes with those and you'll get investor money much easier. As they say, everybody is a genius in a bull market. Try being the genius when things go south, that's worth money.

 

[fan27]

A few problems with that:

First, your "backtested" results are not that special to be honest. If I had a nickel for every backtest that showed 2 or 3 times the returns of the S&P I'd be a millionaire. The problem is once you start live trading them, 99% of the time they don't work out that way. Backtests just curve fit the downturn of 2008 in hindsight. X Y and Z happened, so don't do that next time etc... But every sell off is different, so it doesn't matter if your backtested and curve fit system avoided the last one. All that matters is, will it avoid the NEXT one?

That's why 99% of trading systems that look promising on paper turn out to be duds after a year or two of live trading. It's just curve fitting that isn't forward looking.

Secondly, I was speaking about what investors want to see. If you think a strategy that looks to be about 80-90% correlated with stocks is what you want, then fine. For your own trading account go for it. But investors who would take a chance on a little independent trader don't care about S&P 500 correlated systems, they only want something to balance out what they are already invested in. And 90% of that is likely already correlated to the S&P 500.

The only shot the little independent guys have is to show something different. S&P 500 correlations are a dime a dozen. Show a 5+ year live trading system with low or negative S&P 500 correlations and you'll raise investors money, I promise you that.

Remember, right now most people use Treasury's or gold for negative correlations. Build a system that competes with those and you'll get investor money much easier. As they say, everybody is a genius in a bull market. Try being the genius when things go south, that's worth money.

Good points VIXTrader. Agreed that the results are not spectacular. Like I said, it is still in development. And yes, systems need to prove themselves in live trading through a variety of market conditions. As you noted, making money is one thing. Differentiating yourself from everyone else trying trade OPM is another.

fan27

 

[OddTrader]

The only shot the little independent guys have is to show something different. S&P 500 correlations are a dime a dozen. Show a 5+ year live trading system with low or negative S&P 500 correlations and you'll raise investors money, I promise you that.

Remember, right now most people use Treasury's or gold for negative correlations. Build a system that competes with those and you'll get investor money much easier. As they say, everybody is a genius in a bull market. Try being the genius when things go south, that's worth money.

Interesting ! There must be many of them already, but who are they?