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Charts & Analysis

Trading System Log: 2% up for the month

I’ve been working with a system we had developed over 18 months ago at Moneyoga, and the results have luckily been charming.

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(Above is the daily equity curve, marked to market, including all commissions – which are unfortunately too high. The green curve is the portfolio normalized to 100, and the orange curve is the Nifty through the entire series, normalized to 100)

I’ve only had to take four trades, two long and two short. I’ve had no signal since the 22nd as the system does not throw up a signal when option values are too low to cover brokerage costs. Now I must retest that system using further dated futures and options – a task I have decided to use Python for and am learning the concepts of that scripting language.

This system’s been quite decent on back-testing; About three years is shown here:

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(182 trades, 1 Jan 2007 to 6 Nov 2009; I still need to finish the test till December)

I have about five years of data but some of the instruments used weren’t liquid at all in 2005, so it is unreliable. The system has seen a drawdown (peak to trough) of about 18% – but it’s likely to see something as much as 30%, from another statistical analysis test I’ve done. (See Carstens’ ultra-useful tool, which we modified to be more rigorous)

On the back test the system has seen about 55% gains compounded annually (242% flat), and with a 30% potential drawdown the  of the system the “system heat” (risk adjusted return or return/drawdown) is greater than one. 

It’s done about 2% on one month of live testing with real money behind it; will have to wait a few more months, increasing money allocated each month as I gain confidence. Note: not revealing the details of this system here; and the purpose is not to sell the system or it’s output as tips. This is just a log entry.

  • lukkha says:

    >Does the backtest include transaction costs?

    Also, curious to know what the average leverage of the trades is like since it seems like you are using F and/or Os. It will be nice to know the unleveraged sharp ratio.

  • Deepak Shenoy says:

    >The backtest only includes some transaction costs, not all, though in real terms the trx costs aren't too bad (this system doesn't trade too often). I would typically pay about 2x what I estimated, though it's minor in the whole scheme of things.

    Leverage: The system is actually 0.33x leveraged. Meaning, if themarket fell 100% or rose 100% i stand to lose only 1/3rd of capital. I've purposely kept it that way because it limits risk; but I can afford more risk so I might change that (both return and drawdown will scale appropriately). Though, honestly, the amount of money I make in interest on the remaining is usually enough to cover some of hte brokerage costs I hadn't allocated for.

    It's an early system, needs refinement. Running my own cash on it for now and it's useful.

  • lukkha says:

    >But the observed drawdown was 18% and the expected worst case drawdown is 30%. How can a 0.33x leverage system have an expectation of 30% drawdown? Unless, it has option like characteristics in which case the leverage can't be that low?
    thx.

  • Deepak Shenoy says:

    >Let me explain – let's say you have a zero leverage system in which you only buy stocks and only buy one stock (totally undiversified, example system) Zero leverage means if you buy for Rs. 100 the max you can ever lose in a SINGLE trade is Rs. 100.

    In reality you might exit at say a 20% loss on a trade. If you have 5 losses continuously you will have lost 68% of capital! (20% of remaining capital lost on each trade) In the same system if you are 0.5x leveraged you will end up losing 65% if you have 10 continuous losing trades and so on.

    Leverage and drawdown are in different angles – leverage refers to what you can lose in a single trade, and drawdown is what the system sees in multiple trades (peak to trough)

  • Ak says:

    >Hi Deepak,

    What options does one have to commercially gain from such a system within the current regulatory framework, other than trading one's own money

  • Deepak Shenoy says:

    >Ak: Regulatory framework doesn't disallow auto-trading (in fact there are rules set up that allow them). And I'm doing manual trades, not using a computer to execute (the computer only throws out signals).

    SYstem based tradign can be used for your money, for other's money, and even as IP – not sure if I understand what problem there might be?