Dear Tom,
I have been following your posts for years now, going back to when you were first simulation testing this thing. I admire all your work and I think the software you have created is really impressive. However, I feel obligated to tell you that I think there may be no edge in your current strategy, and that is why you are now losing money.
I doubt the widely available scalping and correlation indicators you use are themselves a source of edge. As to the game, there is no reason to believe that having two players is any better than one player who can essentially trade the same overall strategy -- obviously you are free to code up arbitrarily complex logic in trading the account, regardless of the number of virtual players. This means, for example, that remembering stops is not in and of itself a source of edge, and that if anything, having the two players at all independent can only hurt you vs. one player with fully coordinated effort.
I think the main problem is that you have convinced yourself that the players waiting around for mean reversion (or really, price reversion to previous levels) is in fact a source of edge. You repeatedly make statements taking this reversion for granted. The problem is, there are no guarantees, so you are likely to make a lot of money on the scalping until such time as you take large losses, where some of the instruments "run away." For example, suppose you had been trading gold - would it be reasonable to include in your "unrealized PNL" the profits that might come from price going all the way back up to prior levels? Those levels may never come back... or it may take longer than the horizon of your investors. In particular, I think your "unrealized PNL" should really just be called "losses", because it is essentially a tally of losses incurred from prices not reverting to previous levels. Your true PNL is in fact the liquidation PNL you show in the charts, which is negative.
If you don't believe me that you have fallen victim to this hidden assumption of mean reversion, go all the way back to your out of sample simulations... didn't you always use a brownian motion with mean reversion instead of one without? I guarantee you that your method would show long run zero profits, and a loss including commissions, if you remove the mean reversion assumption from your simulation tests and just use a true martingale brownian motion.
Does this mean all hope is lost? No. But I think in order to be profitable you need to focus on instruments which are likely mean reverting. Commodities futures, especially agricultural ones, are known for having this property. I also think you should stop trading leveraged ETFs against their inverses "as a hedge", unless you are specifically after some statistical arbitrage on the spread. Otherwise, there is little reason to believe that simultaneously scalping almost-perfectly-negatively-correlated instruments is any better than just scalping one of them with stops in place. Finally, if there is any edge to be had on mean reversion of equities and ETFs, it is because they go through periods of mean reversion and then periods of "price discovery" to a new mean. Those periods of price discovery are the ones that cause your big drawdowns. Without efforts to identify these periods, and adjust stops/scalping accordingly, it will be very difficult to have a lasting edge.
Just my $0.02. I don't claim to be a market expert, but I strongly want to see you succeed. If there is anything I can do to help, please let me know.
mj
