Tackling NOISE: The Key to ATS success

For me it is pretty obvious that bots could do alot but not everything. The most distinct difference between computers and men is the former deductive capabilities and the latter impressive inductive skills. A bot is somehow the inductive human capabilities translacted into deductive computer language.

In my humble opinion , the edge resides more on money management aspects rather than in pattern recognition aspects, even though both are important. I never claimed that a trader is better off with a random signal strategy, even though I believe there is more chances of profiting out of good money management rather than out of good pattern recognition.

Having said that, my point is, the cornerstone of ATS is tackling noise through diligent money management. There is no way to profit (or at least BE) from noise than having a sound MM framework. So, IMHO, the most important building block of successful ATS design is MM.

Now, MM is not as easy or simple as many believe. From all the metrics and ratios available, there is one that concentrates statistical measures and the outstanding teachings of gambling. It was coined by Sterling and it was named after him, it is the sterling ratio. Managing your sterling ratio in realtime is about improving your equity curve slope and that is paramount. How cares if one's bot could make 10% today if tomorrow will lose 10% and put itself bellow day one? Who cares about what sharpe is if your equity curve doesn't follow a normal distribution?

Anyway, here is some thoughts to tease you.
 
Quote from asap:

For me it is pretty obvious that bots could do alot but not everything. The most distinct difference between computers and men is the former deductive capabilities and the latter impressive inductive skills. A bot is somehow the inductive human capabilities translacted into deductive computer language.

In my humble opinion , the edge resides more on money management aspects rather than in pattern recognition aspects, even though both are important. I never claimed that a trader is better off with a random signal strategy, even though I believe there is more chances of profiting out of good money management rather than out of good pattern recognition.

Having said that, my point is, the cornerstone of ATS is tackling noise through diligent money management. There is no way to profit (or at least BE) from noise than having a sound MM framework. So, IMHO, the most important building block of successful ATS design is MM.

Now, MM is not as easy or simple as many believe. From all the metrics and ratios available, there is one that concentrates statistical measures and the outstanding teachings of gambling. It was coined by Sterling and it was named after him, it is the sterling ratio. Managing your sterling ratio in realtime is about improving your equity curve slope and that is paramount. How cares if one's bot could make 10% today if tomorrow will lose 10% and put itself bellow day one? Who cares about what sharpe is if your equity curve doesn't follow a normal distribution?

Anyway, here is some thoughts to tease you.
More...

Tease away :)

Bad Luck, or Bad Trading

by Daryl Guppy
 
Good stuff on Sterling and MM on the link posted by JJ.

The beauty of bots is they allow to code extremely complex MM rules into a straight forward set of mechanical rules that are completely deductive. I am inclined to believe that every liquid market out there that offers neutral odds might be traded from a MM perspective and yield profits in the long run. In today's marketplace, the instrument that offers the closest to neutral odds is the main FX pairs during active hours.

By neutral odds, I mean a market that when you enter a trade you don't carry a negative expectancy due to bid ask spread, commissions or risk of extreme events (fat tail occurrences). Notice, that I used the EUR/GBP to run the test instead of an index dujour. I also ran tests on indices and most of them shown a loss as the negative expectancy erodes one's luck over time and ends up beating you (this should be seen in the context of a random trade generation).

George Soros made a couple of billions playing GBP against the bank of england. He then went on writing some books on how to keep "ahead of the curve", and yet, a couple of years later he scaled down its main hedge fund after a huge string of losses. Lousy MM :). Also, a couple of months ago a big commodities hedge fund went bust by taking too much exposure on natural gas futures. It lost more than $1b. The guy that managed it, ranked in the top three managers in the industry the year before.

So, what is going to systematically raise your equity curve? Is it "staying ahead of the curve" or diligent money management? Probably both, but MM is the key since it is impossible to outsmart the market endlessly.
 
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