System longengevity? How long can a decent system last on average?

[Bob111]

Quote from t0yland:

Bob,

that funny. I have something vary similar but it holds for two days. Has a 70% chance of being correct.

i don't know,what you have,but i did try to extend holding period from 1 to 3 days-not much difference i got. anyway-i trash some of my best systems,because IB did not let me short many stocks and for now i have only one left. if you have some ideas -we can work together on something similar. i have all soft,data and knowledge for it, but nothing creative didn't come to my mind))))))
PM me if you interested.

 

[lindq]

Quote from vanilla2:

this topic interests me because i have been trading one fairly simple mechanical system for most of this year and done well with it. my concern is the uncertainty over whether it could either make a small fortune over a period of years, or peter out for good, starting tomorrow. i have several decent backups and variants to fall back on, but they are a bit too closely related for comfort. unfortunately, i realize i can't solicit specific advice and opinions without disclosing details ... but i would be interested in anyone's general thoughts/experiences on the maturation of mechanical systems, or war stories regarding great systems that died. the turtle system is an excellent example, thanks runningbear.

without inviting the system sellers and uber-gratification-seekers, has anyone traded a great simple system that did last several years and compound as predicted?

If you have a good comprehension of why and how it works, you should be able to judge yourself how it will perform in various market conditions. On the other hand, if you don't have that understanding, then I wouldn't ever count on continuing gains.
It is all a matter of understanding, which breeds confidence. This is also why using or buying a system from someone else typically leads to failure. The trader doesn't fully understand the system dynamics, and can't adjust accordingly. I've traded basically the same system for three years, but I've had to make simple adjustments to one indicator based on market conditions. But I can do this because I understand perfectly what's happening and why. IMHO, once a trader gains that understanding, a good system can work indefinitely.

 

[vanilla2]

yes, totally. i would never buy a system.

my system was a collaborative effort with another trader, and i have studied it every which way i can think of. (not very hard either, conceptually it's pretty simple). my concerns stem from general uncertainty over volatility, changing market dynamics and liquidity. things i guess nearly all system traders confront.

 

[TheStudent]

Quote from lindq:



If you have a good comprehension of why and how it works, you should be able to judge yourself how it will perform in various market conditions. On the other hand, if you don't have that understanding, then I wouldn't ever count on continuing gains.
It is all a matter of understanding, which breeds confidence. This is also why using or buying a system from someone else typically leads to failure. The trader doesn't fully understand the system dynamics, and can't adjust accordingly. I've traded basically the same system for three years, but I've had to make simple adjustments to one indicator based on market conditions. But I can do this because I understand perfectly what's happening and why. IMHO, once a trader gains that understanding, a good system can work indefinitely.

I think lindq is right - you have to know the nature and character of your system - when it rakes it in, when it gets vulnerable, and the source of its profits.

BUT - I think the market is non-stationary. Tectonic shifts do occur which demolish the profit source of many systems, and create new profit sources for other systems.

As evidence of tectonic shifts in markets, I'm including the results of a study I did on simple trend following. There's a lot of distracting data on the sheet, since it was meant for my eyes only, there is little annotation. But the important numbers to look at are the ones in blue and red - they signify profitability across a parameter range.

From 1950s to 1970s, the profitability of this system would have been constant. Then it started to break down in 1980s and finally became consistently unprofitable in 1990s.

 

[m&m&m]

Quote from Walther:



Really good system will last forever. It has to have built in features that will adjust to recent conditions and characteristics of price action . It require more work to generate signals then MA crossover system, but it will last forever.
Walter

Totally agree. Buy low sell high for one.

 

[OddTrader]

A decent system may still come and go, the mindset underlying its development would be forever.

 

[harrytrader]

Like you also ... still you stay yourself or not ?

From a statistical book:

Regression to the mean can lead to mistakes with repeated observation or testing of the health or performance of an individual. Consider a patient with a chronic health problem. Depending on the problem, symptoms can fluctuate in severity over a period of weeks or months, for no apparent reason. When the symptoms get really bad, the patient may try a new alternative therapy. The symptoms then improve, because they were bound to improve from their atypical severe level. The patient can be forgiven for thinking that the new therapy worked. Later on, the patient stops taking the new therapy, the symptoms get bad again, the patient takes the therapy again, the symptoms improve... Get the picture? You can imagine a similar scenario with an athlete who turns in a particularly bad performance, then does something about it. Whatever the athlete does, it's likely to work–artifactually. Now you can understand why there is so much snake oil on the shelves of drug stores.

Quote from mdl060374:


Since th market is always evolving

 

[MarketDog]

What I've noticed is that several systems just stop triggering trades for awhile (sometimes years)...then start back again. These are systems I've geared to uncover specific market dynamics. The dynamics stop...the system stops.

Other systems similar to the the channel breakout (turtle) system have their ups and downs....but over the long term will always work, might have to change to a different market, but will always work. They will also have their large drawdowns.

What seems to work for me is something either Tom Basso or the other mutual fund system developer in the Market Wizards book said. Basically trade the systems that are hot now and continue to rotate into the hot ones. And always, always, keep developing systems to replace the ones that either stop triggering trades or stop matching their expected performance.

The person even mentions that once a particular system stopped working that he never went back to it. I have to admit I have a tendency to do that as well. Everyday I learn something new in regard to the market or just in system development. You look at code or an idea you had six months ago and wonder, what the hell was I thinking? Or how did that ever work? You always seem to come up with something better.

Anyway, good luck with your systems and have a great Thanksgiving next week everybody!!! Gobble, Gobble...

 

[harrytrader]

long term and large draw down enough to get you out of the market for a long time or definitely . But if you trade only OPM (Others People Money) there's not much problem since the industry's rules have managed to put all the risk on the clients side .

Quote from MarketDog:

Other systems similar to the the channel breakout (turtle) system have their ups and downs....but over the long term will always work, might have to change to a different market, but will always work. They will also have their large drawdowns.

 

[MarketDog]

Quote from harrytrader:

long term and large draw down enough to get you out of the market for a long time or definitely . But if you trade only OPM (Others People Money) there's not much problem since the industry's rules have managed to put all the risk on the clients side .

I agree with ya. Funny thing about that drawdown is it can draw you down til' your completely out and then the system can return to profit in a matter of weeks leaving you in the dust. Many of those trend systems including mine hit very large drawdowns back in March 2003...just before the market turned on a dime and hit it out of the park from mid-March to present.

I'm sure a few threw in the towel just before the market turned up. I believe Tom Basso was one of them.

Anyway, money management systems will help in this department. Definitely saved my behind. But, they'll only help you and your system to an extent.

We're wrestling a pig when we trade the market...we both get dirty...only the market truly comes out ahead. I know, I know, cheap copy of the David Miles quote...but definitely applies.