Trading algorithm stopped working(?)

[Handle123]

Hi all,

I've been running a futures trading system now successfully for the last 3 years, with annual returns ranging between 80-120%. Last 6 months have things have turned for the worse though, where it seems like the systems has "stopped" working (I put this in quotation marks as I don't know when it will revert to "normal"), with drawdowns now amounting to almost 30%.

I have now added a order placement "circuit breaker" to the system, which, if implemented earlier, would have stopped most of the decline at an early stage, however with the result of flat instead of declining performance, however further decline is now impossible.

I'm aware of the fact that most algorithmic trading systems have "expiry dates" so to speak, but does anyone have experience how to cope with situations like these? The situation is especially depressing as I have a $10m institutional investor about to commit, hence I fear that this might now not materialize...

Thanks in advance for your thoughts and ideas...

Well, if you check out weekly chart on S&P500, you will notice market is actually in chop high volatility(bigger range bars) which normally runs down for retracement as opposed to before November of trending in normal bars, I am guessing your method has limitations to higher volatility or extended chop. I would run optimized scans to see if both sides of what you been using is still being profitable. You program is picking up a change that might occur and unknown how to adjust.
Do you do this on monthly/weekly basis?
I do weekly scans but can't change them based on weekly as I require four weeks or more of change and only if both side of optimum is not right.

 

[lindq]

Hi all,

Thanks in advance for your thoughts and ideas...

Occam's Razor would have us looking for the simplest explanation.

A quick glance at the S&P brings up the possibility that your system was supported by a powerful bull market that's now become range bound.

The market dynamics the past few months simply are not what they were for the previous few years.

Markets change. Simple as that.

 

[d08]

I have also experienced a significant drawdown this year (around 25%). I don't see this as a big issue since last year was a very good one and just like yours, my drawdown isn't record-breaking. Interestingly, my approach is quite a bit different from yours.
A 30% drawdown on a 100% APR isn't catastrophic, especially since you mentioned this has happened previously in backtesting.

 

[AlphaMale]

I have also experienced a significant drawdown this year (around 25%). I don't see this as a big issue since last year was a very good one and just like yours, my drawdown isn't record-breaking. Interestingly, my approach is quite a bit different from yours.
A 30% drawdown on a 100% APR isn't catastrophic, especially since you mentioned this has happened previously in backtesting.

Always nice to hear you're not alone, it's just that redemptions now come like amen in church and that it happens to come at a crucial point of time where institutional investors are waiting on the door step...

 

[Turveyd]

Okay so you think slow market has stopped your method working right ??

How has your method performed over the Summer Doldrums the last 2 years ??

2 Months back I'd of said yeah, too damn slow, but since then market movement has really picked up and doesn't look any different to me than any other day / year.

 

[d08]

Always nice to hear you're not alone, it's just that redemptions now come like amen in church and that it happens to come at a crucial point of time where institutional investors are waiting on the door step...

That's too bad but just inevitable when managing OPM I suppose. Some convincing of the situation being within the norms might do good but I'm sure you've already done this.

Okay so you think slow market has stopped your method working right ??

How has your method performed over the Summer Doldrums the last 2 years ??
2 Months back I'd of said yeah, too damn slow, but since then market movement has really picked up and doesn't look any different to me than any other day / year.

It's not always as simple as volatility=good! It's considerably more complex, as the OP mentioned intraday volatility vs. daily volatility plus the market dynamics can temporarily be very different. Even more so if the strategy uses volatility based sizing in which case it might just be volatility=irrelevant.

 

[johnbennett103]

As a system trader, you have to stay with your system. Don't let your emotions override your logic. But, you have to set a benchmark to determine if its broken, i.e. winning % or drawdown, or something else. If this is the only system that the investor likes, stay with it and trade through the drawdown, or possibly try to improve it. Is there a new market condition that you can filter out? Can you skip some of the risky trades? Are there low risk conditions where you can push leverage? This where you really earn your money. Good luck.

 

[AlphaMale]

As a system trader, you have to stay with your system. Don't let your emotions override your logic. But, you have to set a benchmark to determine if its broken, i.e. winning % or drawdown, or something else. If this is the only system that the investor likes, stay with it and trade through the drawdown, or possibly try to improve it. Is there a new market condition that you can filter out? Can you skip some of the risky trades? Are there low risk conditions where you can push leverage? This where you really earn your money. Good luck.

Well, as a matter of fact, in the current version the system attempts to predict how favorable the following trading session will be, and we have recently introduced "circuit breakers" based on daily PnL (i.e. equity curve) where order placement is momentarily halted, in order to ensure the system's efficacy after a drawdown - downside is that there will be periods of inactivity, but still it's better than big drawdowns without know the bottom. Position sizing is based on account NAV so it scales up with success and vice versa.

 

[johnbennett103]

Personally I don't like to time using equity curves. I have found that you end up missing as many profitable days as losing days.

 

[AlphaMale]

In principle I agree with you - the more you try to eliminate drawdowns, the more you lose on the upside. However, after having run extensive simulations, a delicately balanced circuit breaker has in fact proven to maximize long-term return. As far as I've learnt, it only makes sense if it only gets activated very seldom, otherwise what you describe becomes reality.