My Selection Criteria

[Pocketjacks]

I plan on setting up an account shortly and have done some analysis based on strategies that will fit my investment potential. Any feedback would be appreciated.

I’ve selected three strategies that I will run a demo for a little bit this month. I based these strategies off the following criteria:

Max Drawdown

Naturally I don’t want to get into a trade with a very high drawdown and also must consider multiplying this number by two or three since this could change in the future.

Number Of Positions

While the guide offered suggestions, I prefer to be very conservative with this at first and really won’t consider strategies that open more than 3 positions at once.

Number Of Trades

I only considered strategies that had more than 50 trades over the last year. This was based off of the help guide’s suggestions. They even encouraged looking at systems that had more than 90 trades to be on the safe side.

Profit In Pips

I measured this over the year, the last three months as well as this month since the market has been volatile lately. I wouldn’t want to get into a system that did well as the market was trending but is now suffering (assuming the system used that type of criteria).

Range or Trending Component

Some websites had more information than others so I might need to do some more research on this.


The first strategy I looked at was Izakalab’s strategy for AUD/JPY. Most of the data can be found on the program so I don’t plan on repeating it here except for the fact that it is a trend trading strategy. It has had a maximum drawdown of 604 pips so just to run this strategy comfortably, I will need to consider having around $1200 or so dedicated to it. This has gone down over the last three months but as mentioned, I would like to keep it conservative. The system has made 1338 pips over the year so the risk reward ratio is positive.

The second strategy I looked at was Quants VIP strategy for NZD/USD. I decided to look at this one since it had nothing to do with AUD/JPY. It has had a max drawdown of 205 pips over the year so this strategy would require a smaller capital investment than the Izakalab strategy. It has made 1198 pips over the last year so it has an even better risk/reward ratio than the Izakalab strategy. The one thing I couldn’t find out was what type of market this strategy trades, so I emailed Quants about it.

The final strategy I looked at was Technofinanzas strategy on EUR/USD. While this pair is not correlated to AUD/JPY I might be making double the bet by running it along with the Quants strategy. It has had a maximum drawdown of 342 pips over the past year but made around 792. Once again this strategy is more appealing than the Izakalab strategy. There was little to find on their website, which looked very amateur. So I will probably take my chances in this regard.

After considering this analysis, I will probably run the Quants and Technofinanzas strategies for the moment and put $2000 in my account. This is still quite conservative since I would have well over triple the funds in the account to cover the draw downs.

 

[rcanfiel]

"Any feedback would be appreciated."

You will likely find out that picking a few "top" systems, basing it on some stats and expecting it to do well will lead to disappointing results.

Past performance really DOESN'T lead to future performance.

Almost all systems that look good are due to luck.

Add some leverage, and you may learn why 95% of leveraged traders lose their trading capital...

 

[Pocketjacks]

Quote from rcanfiel:

"Any feedback would be appreciated."

You will likely find out that picking a few "top" systems, basing it on some stats and expecting it to do well will lead to disappointing results.

Past performance really DOESN'T lead to future performance.

Almost all systems that look good are due to luck.

Add some leverage, and you may learn why 95% of leveraged traders lose their trading capital...

I've been running my system since I first made that post and am up about 6%. While it has only been a month or so, my account has not blown up.

I don't think you actually read over my selection criteria or you would have seen that the systems I have been looking at have made over 100 trades over the past year. I decided to pick these systems because they have been profitable even as the FX market went through the recent credit crunch that wiped out alot of systems (as well as traders).

If you read over the selection criteria I used, my maximum portfolio leverage is 10:1. Furthermore, the max drawdown on the systems I chose has ranged from 200 - 400 pips. I will make sure to let you know when my account blows up.

 

[dusktrader]

Hi Pocketjacks,
I'm new at this (autotrading) too. I'll give a few comments below... let me know what you think. Btw, overall I think your strategy is sound and makes sense.

Max Drawdown

Naturally I don’t want to get into a trade with a very high drawdown and also must consider multiplying this number by two or three since this could change in the future.

I agree and believe that drawdown is probably the most important factor to look at, at least for smaller accounts.

One thing that Tradency does not seem to give us is the equity drawdown while trades are open. I think the figure shown on the platform is representing the max drawdown of a SINGLE CLOSED trade. The negative implication here is that 1) the equity drawdown while trade was open could have been much worse; and 2) there could have been multiple consecutive drawdowns but this is just the worst one.

I think to properly evaluate risk of a system, you need to manually look through the trade history and mark it on a chart. After opens, measure the equity (pip) drawdown while the trade is open and compute your own "max equity drawdown". I think this will help you determine if you have enough starting capital for the strategy you're trading.

Number Of Positions

While the guide offered suggestions, I prefer to be very conservative with this at first and really won’t consider strategies that open more than 3 positions at once.

I agree. Definitely don't trade more strategies than is appropriate for your starting capital. I can only start with the minimum $2000 and will probably trade 1 or maybe 2 strategies. In general, I don't really believe the "diversification" argument.

Number Of Trades

I only considered strategies that had more than 50 trades over the last year. This was based off of the help guide’s suggestions. They even encouraged looking at systems that had more than 90 trades to be on the safe side.

Sound like good advice.

Profit In Pips

I measured this over the year, the last three months as well as this month since the market has been volatile lately. I wouldn’t want to get into a system that did well as the market was trending but is now suffering (assuming the system used that type of criteria).

I slightly disagree here. In fact, I'm not looking at profit pips at all. I think focusing on the profit pips is tempting and wrong. What we should look at is the efficiency and risk of a strategy. Who cares if it makes a gazillion pips on record but bets the farm to do it? I would rather have a slow-and-steady consistency and take what pips can be taken safely.

Range or Trending Component

Some websites had more information than others so I might need to do some more research on this.

I think you're saying that you are classifying strategies as either ranging or trending, and taking that into account. Sounds good if you can manage to pull it off (ie, determine what a strategy is doing, or when it performs best.)

The first strategy I looked at was Izakalab’s strategy for AUD/JPY. Most of the data can be found on the program so I don’t plan on repeating it here except for the fact that it is a trend trading strategy. It has had a maximum drawdown of 604 pips so just to run this strategy comfortably, I will need to consider having around $1200 or so dedicated to it. This has gone down over the last three months but as mentioned, I would like to keep it conservative. The system has made 1338 pips over the year so the risk reward ratio is positive.

604 pips drawdown scares me. I think that is too much.

The second strategy I looked at was Quants VIP strategy for NZD/USD. I decided to look at this one since it had nothing to do with AUD/JPY. It has had a max drawdown of 205 pips over the year so this strategy would require a smaller capital investment than the Izakalab strategy. It has made 1198 pips over the last year so it has an even better risk/reward ratio than the Izakalab strategy. The one thing I couldn’t find out was what type of market this strategy trades, so I emailed Quants about it.

Agreed... 205 pips max drawdown sounds pretty decent.

The final strategy I looked at was Technofinanzas strategy on EUR/USD. While this pair is not correlated to AUD/JPY I might be making double the bet by running it along with the Quants strategy. It has had a maximum drawdown of 342 pips over the past year but made around 792. Once again this strategy is more appealing than the Izakalab strategy. There was little to find on their website, which looked very amateur. So I will probably take my chances in this regard.

I like your thinking on keeping the correlations in check. I don't really place any emphasis on the provider website at all. An expert trade system does not need a professional looking site because the numbers speak for themselves (fx-performance numbers are reputable).

After considering this analysis, I will probably run the Quants and Technofinanzas strategies for the moment and put $2000 in my account. This is still quite conservative since I would have well over triple the funds in the account to cover the draw downs.

What money mgmt settings are you using? For my starter $2000 account, I'll probably run 1-3 strategies tops, and all will use Fixed Lot 0.1 (10k mini lot) at least for the first quarter.

::dusktrader

 

[Pocketjacks]

Thank you for the suggestions. This is more of what I was looking for when I made this post.

Quote from dusktrader:

I think the figure shown on the platform is representing the max drawdown of a SINGLE CLOSED trade. The negative implication here is that 1) the equity drawdown while trade was open could have been much worse; and 2) there could have been multiple consecutive drawdowns but this is just the worst one.

I agree that we can only see the drawdown for closed positions, which does mean the system could have a larger floating loss than what you would assume from the Max DD column. For this reason I chose to consider double to triple the amount of drawdown as a worse case scenario before I got into these systems. It is also true the system could have had multiple drawdowns where the positions were closed but since this shows the worst that doesn't make me too nervous.

I decided to take a gamble and run my two systems after only demoing them for a week or so. As a possible solution to the issue you raised, I've examined all the trades the strategies have made on my live account and have somewhat of a "feel" for them. Unfortunately, I don't have the time to plot each trade on a chart, so the paragraph that follows outlines my short term solution.

For the Technofinzas system, I notice it does one or two trades a day and while it often has very large stop losses, the strategy appears to close out losers when they are down over 70 pips or so. All trades are also closed before the weekend. In my opinion the stop losses are never intended to be hit but are there in case of some sort of dire event. For the Quants VIP system, it doesn't trade a whole lot but holds the position for a couple of days and closes out losers around the same level that the Technofinanzas strategy did. In summary, I think the only way to determine what might happen is to analyze the system quite closely at first until you can get a "feel" for the strategy.

Quote from dusktrader:

I agree. Definitely don't trade more strategies than is appropriate for your starting capital. I can only start with the minimum $2000 and will probably trade 1 or maybe 2 strategies. In general, I don't really believe the "diversification" argument.

In terms of money management I agree with you completely. From the posts I read, most of the people that end up losing money are overleveraged and manually closing out positions. In terms of the diversification argument, I am on the fence. Both of my systems went short dollars right around the recent top and took a beating. Had I thrown in some yen cross, I could have potentially been hedged a bit or I might have been down on three strategies instead of two. Time will tell on this one.

Quote from dusktrader:

"I slightly disagree here. In fact, I'm not looking at profit pips at all. I think focusing on the profit pips is tempting and wrong. What we should look at is the efficiency and risk of a strategy. Who cares if it makes a gazillion pips on record but bets the farm to do it? I would rather have a slow-and-steady consistency and take what pips can be taken safely."

I do agree with you and for this reason have avoided systems that have 4 or 6 positions at once. Based on what you are looking for, I think a system that only does one position at a time would probably meet your risk tolerance. In terms of strategies that bet the farm, the only thing we have to work with are draw down and the profit. Besides trying to figure out the system, do you know of anything else we could examine?

Also, I think something that might help is to look at the average range of currency pairs. I purposely picked EUR/USD and NZD/USD because they don't move as much as other pairs, therefore making it less likely that the system will destroy your account: http://www.fxcmtr.com/education/currency-pairs.html

Quote from dusktrader:

I think you're saying that you are classifying strategies as either ranging or trending, and taking that into account. Sounds good if you can manage to pull it off (ie, determine what a strategy is doing, or when it performs best.

This was suggested in the userguide and is easier said than done. Once again, take a look at the pairs you are trading for clues. Most likely a system on EUR/GBP is probably range bound since from a long term persepctive this pair has no trend and on a short term basis does not move enough for trend trading (my opinion). I would assume that a longer term system on GBP/JPY would be a trend system but GBP/JPY is so volatile it is probably a bad example but I hope you get my option.

I decided not to run the Izaklab strategy because the drawdown was too high and agree 604 pips is too much. I have an account with $2K and am using the "Fixed Lot" option. According to the userguide this is the only option recommended if you are starting with the minimum deposit size.

 

[dusktrader]

Hey PJ,
I think it is definitely worth the effort to overlay trade history onto a candle chart. The way this would work is to just get the list of all known trades from fx-performance (and even further back if the provider themselves give back data) and then just walk through from the beginning and keep a paper trail of pip-equity. Personally I don't want to assume anything, and I feel like this is an important due-diligence step before signing-on to any system. Crazy moves are going to happen, and I want to know how a system performs if it gets stuck in them.

By the way, Technofinzas is a manually traded system. My philosophy is that I will not trade any(one elses) discretionary system. I trade my own account and don't want to let others manage my funds this way. Fully-automated systems are different and I am okay with them. I believe the most difficult component in a successful system is keeping the human factor in check. I also believe a human can out-trade a robot (efficiency-wise). But humans are too dynamic, too difficult to measure, and tend to be inconsistent.

I like the idea of staying out of trades over the weekends, but not sure if a robotic system would/could do this.

My thoughts on diversification come from my discretionary trading, and reading I have done in the past on equity trading (William O'Neil). I believe diversification is ideal, but only if you truly have done the due-diligence on the basket of securities/systems. What you don't want to do is just throw together a bunch of sexy strategies and hope they "even out" over time. Instead, fully complete your due-diligence and build a legion of expert performing strategies. In the case of a smaller account, the starting capital limits your ability to diversify anyway, so in this case I say work harder and find the absolute best 1 or 2 systems.

By the way, I'm okay with strategies that open multiple positions if that is a strategic move. What I'm NOT okay with are systems like FXSignaler which just recently opened 5 identical positions. The effect of this is that my risk is now 5x larger than it should be as a result. I cannot think of any good reason why a system would do this.

You mentioned that the only thing we have to work with on examining systems is the drawdown and profit. I think you are missing some very important pieces here. This is what I'm looking at:

# of trades
max drawdown
profit factor
risk adjust
win % (although maybe not important)
correlation with other pairs

Also, I plan to determine these:
max equity drawdown (pips)
max consecutive wins/losses

Once I have a portfolio of systems trading, I plan to define some rules for reviewing them. I think there will be a periodic review for sure, like perhaps monthly or quarterly. At that time I will re-evaluate systems and see if they are still performing satisfactorily, or in-spec with the original due-diligence.

Also, I think there will be triggers for immediate re-evaluation to determine if a system falls out of spec in live performance. To do this, I plan to count the equity drawdown and max consecutive losses. Since I will already know what these are historically, it will be easy to tell if a system is becoming out of spec. (For example, if historically only 3 consecutive losses, then I immediately red-flag a system when it gets a 4th consecutive loss and possibly take it offline for evaluation)

Just like trading rules, I think it's important to pre-define rules regarding how you will respond when these various eventualities occur with the automated systems.

::dusktrader

 

[q827]

Quote from rcanfiel:

"Any feedback would be appreciated."

You will likely find out that picking a few "top" systems, basing it on some stats and expecting it to do well will lead to disappointing results.

Past performance really DOESN'T lead to future performance.

Almost all systems that look good are due to luck.

Add some leverage, and you may learn why 95% of leveraged traders lose their trading capital...

Is that what happened to u?

 

[Pocketjacks]

Quote from dusktrader:

Hey PJ,
I think it is definitely worth the effort to overlay trade history onto a candle chart. The way this would work is to just get the list of all known trades from fx-performance (and even further back if the provider themselves give back data) and then just walk through from the beginning and keep a paper trail of pip-equity. Personally I don't want to assume anything, and I feel like this is an important due-diligence step before signing-on to any system. Crazy moves are going to happen, and I want to know how a system performs if it gets stuck in them.

::dusktrader

It has been a long time since I've been on this forum. Sorry for getting back to you this late. I wanted to simply let my systems run for a couple of months and see what happened. It turns out that the Technofinzas system has done extremly well. My account has a 44% return since I set it up, mostly due to that system. I dumped the Quants VIP system since it pretty much broke even and decided to increase the lot size by an additional unit for Technofinanzas. I honeslty haven't looked at your suggestions but plan on adding an additional system so will look them over and get back to you. What have you been up to?

 

[Pocketjacks]

Quote from q827:

Is that what happened to u?

Nope, I was rather upset to read his response and since I made that post I've had a 44% return. If you think I'm full of it, check the date of the post and the system I subscribed to: Technofinanzas EUR/USD. It's all right there and the system has done quite well. Who knows what will happen in the future. The guys who trade the system could go bonkers and blow up the account but its a risk I'm willing to take.

 

[superalf]

Hi Guys,

How are the Auto trade portfolios doing? I opened a live account at the beginning of November. My account has been mostly flat, except these first two weeks of December have treated me well. I've made about 8%.

For me the most important factor is profit factor (no pun intended). It gives you an idea of how the DD compares to the profit. My other criteria for choosing a system are Max DD, Profit (in pips), # of trades open, Pips/Trade, and how long the system has been around. Not necessarily in that order. For me it's also important that the sample size be large enough (at least 20 or 30 trades) because the systems with little trades can have a skewed profit factor.

One stat that I have not been able to figure out what it means is "Risk Adjust". You see this in the performance ratings on the fxdd fx-performance site. I sent them an email about it but never got a response. If anyone knows, please let me know.

Here is my current portfolio of systems although it has changed as I've added new systems every month since I joined:

Team Aphid (GBPUSD)
Team Aphid (EURUSD)
Team Aphid (EURJPY)
Dream Machine (EURUSD)
ProSignal-Advantage (EURJPY)
ProSignal-ShortTerm (EURJPY)
Tecnofinanzas (EURUSD)


The Team Aphid system was the one I started with. It was because of them that I actually found out about FX Auto. I had been following their thread on forexfactory.com and liked their work. I demo traded it for a while and liked it. The DD might be a little high for the more conservative, but my risk appetite is higher I guess. The GBPUSD and EURUSD pairs are really good. They consistently make the top 5 or top 10 list in FX Auto. The EURJPY doesn't do as well. I will probably dump it at the end of this month. The DD is too large and overall I have lost money with it.

Now it does open 4 positions at once, but it is strategic. It's not simply increasing your leverage by 4. What it does is it sets a small profit target on the first position (1/4 position) of around 25 pips (varies by pair and volatility). Once this first position closes for profit, the S/L is raised on the next two positions (about -3 or -4 pips from breakeven) and the last position is unchanged. The 3 last positions will all have the same T/P (varies by currency, about 120 - 150 pips for GBPUSD and 100 for EURUSD). The initial stop loss on the entire 4 positions is somewhere between 25 and 50 pips (again depeding on currency and volatility). I like the way the 4 positions are managed. The end result is that it reduces DD and it also allows you to take advantage of larger moves.

Next is Dream Machine. I like this one because it has an extremely low DD. It doesn't make a lot of pips, but it's pretty accurate. It's conservative, but it balances out my higher risk systems. Another thing I like is that it doesn't open a lot of positions, so you're not paying as many fees (spread & commission). Their website was also very informative and it looks good.

I eventually stumbled upon the ProSignal systems. If you go to their website they have a lot of information and statistics. I like the "Advantage" systems because the try to capitalize on positive swap. That helps lower the risk. The EURJPY one seems to be the best one with the highest profit factor. The short term EURJPY system has also performed very well for me so far. These systems have not been around for long, so its a bit of a gamble. Of course I monitor and reevaluate my systems every month.

The last one is Tecnofinanzas. I really like this one. I'm aware that this system is discretionary, but I actually like that. I think it's good that someone is monitoring these trades on the other side. They can react quickly to major global disasters and changes, while a non discretionary system can't. And you can't argue with their results. They have consistently made good results since April 2007. I know, past results are not indicative of future results, but a system with positive historic results is less likely to fail than one with bad negative historic results (over a large sample). This system also helps me diversify as my other systems are not discretionary.

Well, I'd like to hear about your results, whoever is reading this thread and is a part of FX Auto, and what systems you are currently using.