Ed Mamula.com

I stumbled upon a remarkably simple little code module for Tradestation that showed me how to capture all of the trading system’s trade by trade profits from inception to date.  I had been under the mistaken impression that this could not be done natively in TS.  This is important because it allows me to quickly find the average one contract gain per trade for a system and do a statistical validation of sorts on the more recent trades.  Now I can employ criteria to determine whether a system should be turned on or off, and the system itself can be coded to know when to do this.

For now, I have settled on the following two provisions:  If the average trade over the last 25 trades has been profitable after slippage and commission, AND the average profit of the last 25 trades is no more than 2 standard deviations away from the average trade profit over the course of the “early” trades (N-25), then the system can be kept on.  In practice, I may have to relax the first criteria, as very many times the average profit over the last 25 trades can go negative but still be within statistical norms for the system.  But it’s fine for now…I always learn and tweak as I go.  There’s nothing magical about the number 25, and in fact, I’ve been waffling between using 20, 25, or 30 trades.  It would be nice to use at least 30 trades to have a decent sample size for a statistical test, but at the same time, this may not be practically feasible.  Remember, the goal here is to shut down the system if there is reason to believe it is “broken” due to a structural change in the market, and to react quickly enough such that the account is not crippled.  Of course, with any shutdown provision, there is always the chance that we will shut down too soon and miss out on the speedy recovery…speaking of which….

The Cable Glider has been performing well while I have had it shut off.  Indeed, it is on a 7 trade winning streak, and has returned to a zone where the numbers say that it should be turned back on.  (As I’ve mentioned in prior posts, the decision to turn it off in the first place was based more on emotion than analytics.)  I have a modified version of Cable Glider ready to go as well, and I’ll need to decide which version to go live with.

The Euro Ranger system continues to perform very much in line with its historical averages, so it looks like I will be back to running two systems again. 

My anti-Midas 2008 stumbling and bumbling continued as recently as last Thursday, when I erroneously had Euro Ranger turned off and missed a sizable gain.  In fact, I’m now sitting on a drawdown of around 25% since March 1, which was the time that I adopted the two system, lower risk approach. 

Even though the 2008 year to date results have been so poor, my systems and methodologies keep evolving and improving, and well, it’s never over as long as I remain adequately capitalized.  I still tend to beat myself up mentally for the mistakes that I make, but when I put things in perspective, I’ve come a long way as a trader.  Several years ago, my mistakes would be things that blew up my account.  Today, my mistakes tend to be things that turn 2% drawdowns into 4% drawdowns…so it’s a step in the right direction, and in truth, that’s all I can ever hope to do…more steps in the right direction, and less damaging setbacks. 

Over the past couple of weeks, I’ve received some suggestions on how to decide when to turn a system off and on. 

Here are the options that I explored:

Equity Curve Timing :  The idea here is to track a system’s cumulative profits and losses and to turn the system off when the cumulative profit moves below some trailing moving average of cumulative profit.  Since I only run two systems, I can’t say whether or not this is useful in general.  I can only say that for my systems, this technique does not seem helpful.  The same issues with using moving averages on a price chart show up on an equity curve chart as well.  Namely, moving averages are a lagging indicator.  Recognizing the fact that I don’t use moving averages in my trading systems, but I do use MACD, I could choose to get fancy and chart a MACD of my equity curve, but this probably won’t work well either.  My goal is to keep the system on most of the time and turn it off when there’s reasonable doubt about the fact that it still works at all.  Using an equity curve timing method seems unreasonable for that purpose.

Control Charts :   I tried the methods detailed at Vertical Solutions:

“As an example, my automated systems turn themselves off if both the ratio of expected wins to actual wins and the twenty trade rolling P&L move 3 standard deviations below their average.
”

This method sounds great, and it probably is.  However, this method told me to keep trading both Euro Ranger and Cable Glider.  So what’s wrong with that?  Nothing…other than the fact that I WANTED to turn Cable Glider off and I was searching for a method that would support that decision.  Of course, in retrospect, I realize how silly that approach is…think of a trader who is stuck in a losing trade and keeps switching indicators until he finds one that tells him to stay in the trade…yeah, bad idea.

At the beginning of this week, I settled on a simpler criteria.  If the rolling cumulative 20 trade profit of either of my systems is negative, I will shut them off.  I chose this criteria because of my biased view that I needed to shut Cable Glider down.

In fact, in a truly out of character moment, I decided that since I’m shutting Cable Glider off, I will double the amount that I risk in Euro Ranger….well, since I’ve really had the anti-Midas touch for all of 2008, it’s not hard to guess what happened this week…

Euro Ranger immediately suffered its worst single trade pip loss EVER, and Cable Glider (off) had a fabulous week, netting something in the neighborhood of 250 pips. 

So this week, my equity is at a new low for 2008, and now I’m facing the decision about whether or not to turn Cable Glider back ON…well now, it’s always something…