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.
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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…