Welcome to my online repository of research and insights on automated trading system development
2011 offered challenging market conditions for trend followers (as illustrated by both the State of Trend Following and the Trend Following Wizards reports). The second half of the year in particular threw a few “curve balls”, in the form of wild volatile moves with inter-market correlations spiking up. With this backdrop, I wanted to revisit [...]
Entries Tagged as 'Backtest'
Monthly vs. Daily Trading – updated
March 13th, 2012 · 5 Comments · Backtest, Equities, Futures, Strategies
Tags: monthly
Further Musings on Randomness
March 23rd, 2011 · 31 Comments · Backtest
The last post on “Monkey-Style” trading with random entries and trailing stop exits generated a fair bit of interest, comments and questions. In this follow-up post, I want to explore the concept further and address some of the points raised in the discussions resulting from that study. Before I get started, I want to clarify [...]
Tags: random
Trade what you Test and Test what you Trade
January 20th, 2011 · 5 Comments · Backtest, Data
In order to avoid bad surprises in live trading, the maxim forming this post title should apply to as much of a trading system as possible. The goal is to ensure back-testing results are as realistic as they can. Input data is one component of a trading system and the area this post focuses on, [...]
Can You Trade Effectively on a Monthly Basis?
January 11th, 2011 · 19 Comments · Backtest
Long-Term Trend Following is often billed as a superior and simple alternative to Buy-and-Hold for individual traders. For those investors wanting to take a DIY/self-trading approach, an active strategy might bring better performance – but requires a far more active involvement. In the case of an End-of-Day Trend Following system trading a global portfolio, the [...]
Tags: monthly
The Good, the Bad and the Ugly Portfolios
November 18th, 2010 · 13 Comments · Backtest
Following the last study on diversification using a “portfolio randomizer”, I wanted to further explore further the concept of hindsight bias in portfolio selection and how it can impact performance. This short post is an illustration of that concept. 51 Instruments, 40 Picks, How Many Combinations? The answer is… a lot: there are 47,626,016,970 ways [...]
Tags: diversification
Trading Diversification: A Free Lunch?
November 10th, 2010 · 20 Comments · Backtest, Money Management, Strategies, Trend Following
The more I think about system design, the more I get convinced that diversification is a key to great performance. As the cliche goes: Diversification is the only free lunch on Wall Street. This is a concept equally shared by Modern Portfolio Theorists and Trend Following Wizards, who usually emphasise the concept – and [...]
Tags: diversification
Profit Targets and Trend Following
September 30th, 2010 · 22 Comments · Backtest, Trend Following
OK, Profit Targets. You’ll tell me this is the anti-thesis of Trend Following, with one of its strongest mantra being: Cut you losses short, let your winners run… Indeed, Trend Following relies on a few positive outlier trades (from a fat-tailed distribution) to derive most of its gains. Stopping trades from running as high as [...]
Tags: profit target
A Different Application of the Bootstrap
September 28th, 2010 · 3 Comments · Backtest
In the last volatility filters post we saw that trades from a simple Trend Following system (20-50 MA cross-over) had different expectancy based on the relative level of volatility at trade entry. This suggested that a filter blocking trades most volatile at entry (in the top decile: 90 to 100% of past volatility) would raise [...]
Tags: bootstrap·volatility
Volatility Filters
September 23rd, 2010 · 6 Comments · Backtest, Trend Following
I have touched on trading regimes before; and looking at volatility-based regime switching was in my research stack since then. Today, I’m looking at a practical example: Trend Following results based on entry vs. past volatility. System Code Concept I developed a simple Trading Blox filter, which calculates the current volatility (via the Average True [...]
Tags: Trading Blox·volatility
Walk-Forward in Trading Blox: Back-Testing Adaptive Trading
September 8th, 2010 · 7 Comments · Backtest, Software
A few months ago, I got quite interested when Trading Blox announced that they introduced a new walk-forward functionality in their latest version. I just got round to upgrading, and giving that walk-forward testing a go. Amongst other things, some of the chart features have been improved – as can be seen in the eye [...]
Tags: Trading Blox·walk-forward
Monte Carlo Permutation: Test your Back-Tests
August 18th, 2010 · 9 Comments · Backtest
The second method to evaluate the statistical significance of a back-test result presented by Aronson (in EBTA) is the Monte Carlo Permutation. This is an extension of the classic Monte Carlo method, applied to rule testing. The concept behind the Monte Carlo Permutation is similar to the Bootstrap method: Generate multiple random outputs based [...]
Tags: aronson·monte-carlo
Bootstrap – Take 2: Data Mining bias, Code and using geometric mean
August 13th, 2010 · 64 Comments · Backtest, Code
In part 1 of this bootstrap post, we looked at how to apply the method to establish the statistical significance of a single trading rule. In Part 2, we’ll look at how to deal with the data mining bias, the impact of geometric vs. arithmetic mean return. The code implementing the bootstrap test is available [...]
The Bootstrap Test: How significant are your back-testing results?
August 11th, 2010 · 29 Comments · Backtest, Books
As mentioned in the Evidence-based Technical Analysis review post, the main value of the book lies in the presentation of the two methods allowing for computing the statistical significance of trading strategy results, despite having a single sample of data: Both methods solve the problem of estimating the degree of random variation in a test [...]
Tags: aronson·bootstrap·data mining
Evidence-Based Technical Analysis
August 5th, 2010 · 14 Comments · Backtest, Books
Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals Today I’ll be talking about an excellent book, which was recommended on several “quant” blogs I read: Evidence-Based Technical Analysis by David Aronson. One of the main reasons I picked this book is because it teaches you to fish (instead of [...]
Slippage – Take 3: Stop-Limit Orders
May 20th, 2010 · 7 Comments · Backtest
Another slippage post inspired by a reader’s comment (thanks to Eventhorizon this time). Stop-Limit Orders The idea is to use stop-limit orders in the Donchian Channel system to avoid slippage. The stop-limit orders would prevent the system from buying/selling above/below the entry breakout level – thus reducing entry slippage. Of course, with daily data, it [...]
Tags:
Follow-up on Slippage
May 17th, 2010 · 7 Comments · Backtest
The previous post on slippage generated very good comments and I decided to address some of the points discussed in a follow-up post. Slippage and Long-Term Systems Last post concluded with a question: How can you reduce slippage as a small trader? You might not be able to reduce slippage in absolute terms, but you [...]
Tags:
Slippage: Are your back-testing results realistic?
May 10th, 2010 · 10 Comments · Backtest
Slippage can make or break your trading system. Hard to believe? Read on and check the tests and charts further below… We recently talked about some data pitfalls that can affect your trading and testing of mechanical systems. Slippage was not mentioned. However, this is a critical piece of data to integrate in your back-testing [...]
Tags: slippage·Trading Blox
A trick to reduce Drawdowns
April 28th, 2010 · 16 Comments · Backtest, Strategies, Trend Following
Drawdowns represent the scary part of trading system statistics. The drawdown number emphasises the level of loss you might suffer while trading that system. It is risk to your trading capital. Now, for a quick disclaimer: I do not have a magic trick to simply reduce drawdowns… but with this cheeky title, I wanted to [...]
ALGODEAL: new horizons for retail quant traders?
March 31st, 2010 · 17 Comments · Backtest, Software
Recently came across ALGODEAL, which aims to provide us, quant traders, a platform to backtest and implement live automated trading strategies, as well as access to institutional money. This appears to be a promising development in the world of retail quant traders. Quant Fund Management meets Crowd-Sourcing In an adaptation of the web 2.0 model, [...]
Vince’s Leverage Space Model: better than MPT?
March 22nd, 2010 · 33 Comments · Backtest, Money Management
Ralph Vince‘s book Handbook of Portfolio Mathematics has been shamefully lying untouched on my desk for a few months… I started reading it but never finished it. I recently found a 30-page paper introducing the ideas and principles of his Leverage Space Model. I thought reading it might be a good way to get back [...]
Tags: distribution·leverage space model·optimal f·optimisation·ralph vince·research paper
