When to Stop a Trading System

[SimpleMeLike]

Hello All,

Here are some example 16 year back test systems performance metrics for :

Questions:

1. When do you recommend to stop the system due to system losing too much money? I am thinking somewhere between 2-2.5 times drawdown

Thank you

 

[Xenomorph]

I read one of the Hedge Fund Market Wizards books. It's been a while but if I recall some of their swings could be wild. If I remember it was not uncommon to see a -50% drawdown on a system that averaged 20% a year. That's why there was a rule that only wealthy individuals with a certain net worth could put their money into hedge funds. It was reasoned such people would understand things like severe drawdowns but the average joe who had little money would flip out and demand a withdrawal.

 

[TrAndy2022]

Hello All,

Here are some example 16 year back test systems performance metrics for :

View attachment 299426

Questions:

1. When do you recommend to stop the system due to system losing too much money? I am thinking somewhere between 2-2.5 times drawdown

Thank you

Another rule you can watch out, is the underlying market reward-risk-ratio how much it goes up to its drawdown in relation the combined portfolio. When the portfolio is worse than it does not make sense to trade this, because B&H would be better in this case. Here you can also divide any time period into sub periods to measure this.

 

[tiddlywinks]

Just throwing this out there...

Target Hit Rate might offer a warning of a waning or inappropriate environment for the system.
If there is no target, the system is incomplete. NB: taking that target or not is a different topic.

Another area to consider, the type of system and the expected hold duration. Looking at the data table, System B is with lower W/L and lower Profit factor is returning greater than 50% more nominal profit, with a maximum drawdown increase of only approx 30% in context of the other 2 systems.

 

[hilmy83]

I say when you start to underperform the standard buy and hold index fund for any given year. The name of the game is how profitable you are and whether your risk profile can survive the worst drawdowns

 

[trend2009]

Hello All,

Here are some example 16 year back test systems performance metrics for :

View attachment 299426

Questions:

1. When do you recommend to stop the system due to system losing too much money? I am thinking somewhere between 2-2.5 times drawdown

Thank you

this system is superb. How long do you hold your position? But the number of trades is too small for a period of 16 years. Anyway, nice system

 

[SunTrader]

I read one of the Hedge Fund Market Wizards books. It's been a while but if I recall some of their swings could be wild. If I remember it was not uncommon to see a -50% drawdown on a system that averaged 20% a year. That's why there was a rule that only wealthy individuals with a certain net worth could put their money into hedge funds. It was reasoned such people would understand things like severe drawdowns but the average joe who had little money would flip out and demand a withdrawal.

Seriously?

Plenty of hedge funds every year have experienced wealthy individuals demanding their money back when severe drawdown-istis strikes.

Geez did you get that from some SEC gubmint protect us all document "while Rome burns" and Madoff makes off with billions.

 

[SimpleMeLike]

I say when you start to underperform the standard buy and hold index fund for any given year. The name of the game is how profitable you are and whether your risk profile can survive the worst drawdowns

Hello hilmy83,

Thank you for responding.

Good point

 

[Businessman]

I am thinking somewhere between 2-2.5 times drawdown

There should be some really bad drawdown(s) in your back test already. Otherwise it is probably curve fit or not long enough.

This maybe the case with your back test (hard for me tell given your limited metrics).

If so anything more than the biggest drawdown that you saw in the last 16 years would be a red flag.

 

[Xenomorph]

Seriously?

Plenty of hedge funds every year have experienced wealthy individuals demanding their money back when severe drawdown-istis strikes.

Everyone knows that.