Researching A Trading Systems Worst Case Scenario

Somebody once asked me ‘if there were only one performance summary I could look at to decide about a trading system what would it be?’ My initial reaction was that this was a ridiculous question. There are many factors that must be taken into consideration when choosing trading systems. There are numerous performance indicators and ratios. Things such as average annual return, maximum drawdown, Sharpe ratio, margin demands, robustness, the lists are long, but, there has in fact been one report that I have come to depend on more than any other report. It is a report that has given me more comfort and confidence as a system trader than any other report. If I knew a system was properly created, I could practically use this report alone to decide about trading it! So what is this report? It is ‘Start Trade Report’.

A Trading Systems Start Trade Report

In my opinion, the start trade report gives the most robust three dimensional view of trading systems possible. It cuts through so many of the pitfalls in conventional analysis. It even cuts through the nonsense involved in looking at real-time performance. I can hear it now “wait a minute, how can real-time performance be argued with?” Let me give an example with one of my systems Synergy. In May of 2003 Synergy began a trade in London Copper. The trade became the most successful trade of the year. As of this writing, (March 7th 2004) the trade has profits of over $25,000 a contract. If a trader were using position sizing, he may have had on 2 or 3 (or more) of these contracts, but had they began a week or even a day following this trade they would have missed it! Two traders trading the same system with the same amount of money and the same money management rules could show a $25,000 or $50,000 or $75,000 (or more) difference in their account! They might have only started one day apart! This can produce enormous frustration, because one broker’s real time accounts could be far different from other brokers real time accounts with the identical trading systems.

Misleading Trading Systems Reporting

This phenomenon can also be used for disingenuous purposes. It is possible for a trading systems vendor to cherry pick the best historical starting date for his test results. He can choose a date right before a large winner (or series of winners). This can cause it to look as though the system required little original beginning capital and that the return on invested funds was enormous. The initial winners financed trading. However, what if buying and selling had began on a different date? What if a trader had began on a date that was right before a string of losers? They may have required 2 or 3 or 4 times the starting capital than they would have had they started on a different date. The return on invested capital would be much less, or, they might have lost all their investment before earning the profits shown.

Even if a broker or vendor exhibits an average of many accounts this can still be a meager view. They could still cherry pick the 3 or 4 accounts and their different starting dates, or they could have so few accounts to average from that the information suffers from what statisticians call a small sample size (This means not enough data to draw any legitimate conclusions.)

The worst offender would be if a disingenuous brokerage or vendor were pushing day trading systems because of the high volume of trades and commissions it generated and then used some cherry picked “real time” accounts to “prove” that it worked.

The point I am making is that there are numerous ways that start dates can effect performance, both in hypothetical reports and real-time performances. Traders need to have something robust.

A Trading Systems Solution

What’s the solution? Well, in my view it is the start trade report. What the start trade report does is tests various systems hundreds or thousands of times over the given period. Each test it starts on a new date that coincides with a date that traders could have taken a new trade. If there were 2000 trades over a 10 year period, then it will retest the system 2000 times starting on the date of each new trade every time. It also resets the equity back to the initial starting amount with each test. This is essential because when utilizing position sizing traders may skip some trades in the beginning when the equity is small. It is not correct to look at the results of trades that a investor would not have considered. I have occasionally seen brokerage firms report on trades my system generated that many of my clients would not have taken (based on their account size.) For example, a $3,500 losing trade in a system where most clients would have skipped any trades with risk above $2,000. The start trade report understands to skip trades at the right time based on the traders starting amount. This report can also let traders evaluate performance based off of the margin needed. What this allows investors to do is see ALL the outcomes, rather than just one.

Trading Systems Start Trade Report Summary

A few things a Start Trade Report can show traders are:

1. What percentage of the first 12 months were profitable over 2000 different starting dates?

2. What was the average first year performance when averaged over 2000 different starting dates?

3. How much money did my account need if I started on the worst possible date?

4. What was the average account size I needed to trade the system over 2000 different starting periods?

5. What were the average and the most I ever went under my original starting amount? (This is different from maximum drawdown)

This report permits investors to filter out so much of the garbage observed in typical performance reporting. It filters out so many errors in reporting “real time” performance based on a small sample size or “cherry picked” starting dates and accounts.

I trust traders can see that this information is priceless. I honestly do not know how a investor could ever trade any trading systems without it. Traders can see how much comfort and confidence this can build when they have looked at a system in this much depth. When I began trading, this is he report that provided me extraordinary peace of mind. It was the only report that comforted me when there were drawdowns. It allowed me to know whether we were in the normal ranges of the bell curve. It also gave me a reasonable range of outcomes to expect in the initial year of trading.

We believe that offering traders these reports gives them an incredible edge and develops confidence. Investors need this confidence when the unavoidable drawdown comes. In my own personal case, I’m able to remain relaxed during those occasions because of these reports. To get a copy of the start trade reports please email us.

Dean Hoffman

DH Trading Systems

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Managing an internet business

The internet has revolutionized the way that we earn money. We are not limited to the all business opportunities defined by the traditional economic system. Nowadays we have more opportunities to work from home and earn a residual income. Indeed there are many people that have successfully put this into practice and are earning some interesting income. In order to help you learn more on this I have written this short article.

Internet marketing has created a host of opportunity for people to work at home. The good news is that you do not have to lose time in commuting to your office. in truth this can bring some useful benefits to you. Firstly this will let you take a part-time job if you are a student for instance. Or it might be an interesting opening for you to get a complimentary job. This text (available in French) on jobs (travail complementaire) has really grabbed my attention and should be worth taking a look.

Furthermore the net has produced new opportunities for people to earn residual income. Ordinarily your income is limited to the amount of work that you can possibly do. It is consequently important that you get out of the management structure of the business and automate as much work as you can. The internet has created a lot of new opportunities for individuals to earn a lot of residual income. There are indeed many resources on the net on the topic of retirement income and should be worth taking a look.

When starting in the domain of internet marketing it is however essential that you supervise your expenses carefully. To the contrary of what many individuals consider success in internet marketing will reckon a lot on your preparation. It might be fascinating for you to have a good understanding of management tools in order to supervise your expenses. For example you should formulate some precise performance indicators and supervise those cautiously to make sure you are achieving your goals. I will advise you to check out project management resources such as define quality so as to find more on this.

Internet marketing is indeed an interesting way to make money but it also requires some careful planning from the marketer. Unfortunately not all people are prepared to do that and just jump in the domain only to find themselves losing money. In truth if you ever want to make money on the internet you need to run it as a business and not a hobby. It is the only way that you will be profitable.

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