#001: TRYING TO SMOOTH EQUITY WITH MULTIPLE SYSTEM FILTERS IS A REALLY BAD IDEA
Download FREE resources to boost your trading
SOTR images-05-Emini min.png
SOTR images-06-STU min.png
SOTR images-08-TMI.png
SOTR images-07-SFB min.png
SOTR images-02 v4.png
SOTR images-09-v3.png
SOTR images-03-MSA min.png
SOTR images-01-v3.png
SOTR images-10-Checklist.png
SOTR images-04-Adaptrade builder min.png
Automated trading strategies that work!

© 2015-2018 SystemsOnTheRoad.com. All Rights Reserved  | Contact | About Me | Privacy Policy

  • LinkedIn Social Icon
  • Twitter Social Icon
  • Instagram Social Icon

DISCLAIMER:  Futures trading systems and commodity trading bear a high degree of risk. People can and do lose money.
Hypothetical results have many inherent limitations. Past performance does not guarantee future results. 

 

ACTUAL RESULTS SHOULD BE VIEWED WITH CAUTION, BECAUSE PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

OUR NEW PLACE

I'm a paragraph. Click here to add your own text and edit me. Let your users get to know you.

#001: TRYING TO SMOOTH EQUITY WITH MULTIPLE SYSTEM FILTERS IS A REALLY BAD IDEA

In the past, I used to be like most of the ATS traders and developers: I put an enormous amount of energy into each single strategy and had a vision of getting a perfect, smooth, stable equity. Yes, sometimes perfectionism is a good thing. Many times, however, it is a curse.

 

In the case of ATS development, it often does more harm than good. The more you try to make your strategy (and especially equity) perfect by adding more and more filters, the more you curvefit and overfit your strategy to the past data. The future live performance is, in most cases, fatal.

 

I could have probably saved plenty of money if I had known that with a basic portfolio of simple strategies (with minimum system filters) you could smooth your equity perfectly – and at the same time keep your strategies really simple, with the minimal amount of system filters. It was just a few years ago when I realized about that and started spending much more time on perfecting the portfolio instead of my systems.

Now, let me give you some examples that show how a simple portfolio can really smooth your results and stability of the equity and returns – hopefully, it will help you to see where the real effort needs to be placed on.

 

Let’s start with the simplest example:  a mini-diversification, just across different markets within one futures class – in this case it’s going to be the indexes futures class.

 

I took a small variation of my system called BOSS ATS (you can download this system for free) and simply put together the version for emini S&P market, emini Dow Jones market, and emini NASDAQ market. So in this case, it’s simply one system diversified over 3 different markets within the same futures class - and surely with a pretty high correlation between the 3 systems.

 

The result looks like this:

 

 

Probably, the most important metric here is the Net Profit / DD ratio, which we want to have as high as possible. We simply want to have much higher profits than drawdowns. In the case of this min-portfolio, the ratio is 9.69. Not bad, but not great either. We can definitely do better, by also smoothing the equity.

Now, let’s try a different example.  We’re still going to stick to 3 trading systems, but now, we’ll diversify a little bit further. We’ll keep only the emini S&P (ES) version of BOSS ATS, and combine it with a completely different swing system designed by emini Russell (TF) market, plus with one system for Soybeans (S). So now there will be a diversification across 2 market futures classes (indexes – ES and TF, plus grains – S). The whole three systems are low correlated among each other. What happens now? Just have a look:

 

 

Not only is the equity much smoother all of sudden, without the need to touch the underlying systems, but most importantly, we have also increased the Net Profit / DD ratio significantly, which jumped to a very nice 18.46. This is way better! So, as you can see, you can just do a great job by making a very small portfolio, and only 3 systems can bring you a real improvement, without the risk of overfitting or curvefitting when trying to “fix” your systems by adding multiple filters. Finally, what happens when we combine much more systems together? Can it bring even better progress?

 

In the last example, I put a bunch of strategies together, both high correlated (like all the versions of BOSS) and really low correlated ones. To be more specific, I put together 7 systems over 3 futures classes (Indexes, Bonds, and Grains). So far, this has been the biggest jump you could have seen:

 

 

The equity looks really smooth now (and surely it can still get much better), without touching the underlying systems or increasing the danger of overfitting. Even better, the Net Profit / DD ratio is at 29.58, which is an absolutely excellent number, hardly achievable with a single ATS strategy that would be simple at the same time and contain minimum filters.

 

So, this is my lesson for today: Stop thinking in terms of a simple system and start thinking about the bigger picture. Don’t repeat my mistakes.

 

Happy Trading!

 

Tomas

 

 

(P.S. I took this picture several years ago in Angkor Wat / Cambodia. Angkor Wat is the biggest temple complex in the world and its scale is unbelievable. It reminds me that the sky is really the only limit, so, you can reach the summit – without setting any limits in your mind. As for this article, you should think especially big when it comes to portfolios. You can just scale it to the size of Angkor Wat. The sky is the limit and there is no reason why you couldn’t have hundreds of ATS in your portfolio!)

 

 

 

 

 

 

Please reload

Author: Tom Nesnidal (more about me
Join 15 000+
LinkedIn Followers
Join 5 000+
Twitter Followers
Get Social With Tom
  • Black LinkedIn Icon
  • Black Twitter Icon
  • Black Instagram Icon
  • Black RSS Icon
What others are saying

"Tomas is one of the most creative traders I know. He is able to generate unique trading ideas and elegant solutions to system development challenges."

Andrew Swanscott, BetterSystemTrader.com

"Tomas has been a professional trader for more than a decade and I have had the privilege of monitoring his accounts in action since 2006. His systems are performing as some of the best I have ever monitored and executed. I have been in the trading industry since 2002 and worked with many developers from all over the world. Tomas is definitely the one to consider."

Martin Lembak,

Systems Trading Expert,

MFRM, CAIA 

"Tomas is a professional trader, who for the last 10 years has specialized in developing trading systems. We have been tracking his trading systems for about 5 years and they generally show very robust, stable and above average performance. Striker is pleased to work with someone like him - a real professional with enthusiasm and deep knowledge of trading."

William Galwas, President Of Striker Securities, Inc 

"Personal consultation with Tom helped me to re-evaluate the complexity of my robustness testing and optimization processes. Plus, it has helped me with a specific plan on how to take things forward. It has given me some great ideas on how to avoid overfitting and make my testing more robust and provided tips on low hanging fruit in terms of the best markets to trade for intraday/short-term breakouts."

Craig Peters,

semi-advanced trader,

United Kingdom 

"Tom's approach to Automated Trading Strategies design, tests of robustness and portfolio diversification is really unique. He has been a professional trader for many years and the depth of his understanding of Breakout strategies and Market Internals is hard to find elsewhere."

Antonin Fisher,

Hedge Fund Manager,

Czech Republic 

"Tom´s systems and trading approach do really work and can bring good, stable and reasonable returns. I can highly recommend him as a teacher."

David Hruby,

Trader, Czech Republic 

"Tomas is truly an inspiring mentor and great trader with a positive life attitude. He has got very deep understanding of markets, breakout strategies, robustness testing procedures, and Market Internals."

Jan Lesanovsky,

Client, United Kingdom 

"As an experienced trader, I used Tomas´s consultation to get more clarity on best-practise robustness testing procedures, risk management, and portfolio management. He was quickly able to help me refine my current trading and system development approaches, and pointed me to really practical measures that I could implement immediately. I found Tomas to be not only extremely knowledgeable but very helpful and a great teacher. This has given me more confidence in developing robust strategies that work, and I would recommend his mentoring as extremely valuable for any systems trader."

Trevor West,

advanced trader, Australia 

The author of this trading blog has been featured on: