#031: 50% DRAWDOWN REDUCTION: THE SECRET CALLED THE MARKET INTERNALS
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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.

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#031: 50% DRAWDOWN REDUCTION: THE SECRET CALLED THE MARKET INTERNALS

Two years ago I was going through my ATS strategies and applied to some of them Market Internals conditions in order to improve the overall performance and reduce the drawdown. Some of the impacts were really amazing. Let me present you one of the examples of what impact Market Internals can have.

As a really effective example of Market Internals application I have chosen one of my oldest trading systems, which I have traded live since 2011, called TOMNES BOSS (you can download it for free here). In this particular case, it is slightly modified swing version that does not exit at the end of the day but keeps positions opened even for a couple of days. Besides this small difference, it is still the same strategy. For this example, I will use S&P500 e-mini futures market (ES), but I trade the system on several other futures index markets.

The goal was pretty clear - to use Market Internals to improve overall system parameters, reduce the drawdown and make the equity smoother.

The original equity, composed only of out-of-sample intervals (data that were not used for development of the strategy, the equity reflects only the unknown future and gives very realistic equity, not biased by overfitting or over-optimization), is following:

 

The equity is alright, for OOS intervals it is really nice result. Still, there is a space for an improvement - and this is exactly the task for Market Internals.

You can see the rest of parameters in this table:

 

Again, quite satisfactory parameters that don’t need to be improved that much. On the other side, it would be a shame not to try it at least. After a couple of tests using my MI-smart-codes I picked one of the system variants which had really nice in-sample optimization results, as well as on out-of-sample verification.

First, let’s take a look at the equity. It doesn’t seem to be changed that much, but you can still see it has slightly improved.

 

The equity curve is smoother and more stable. But the real change you can see when you take a look at the numbers below:

 

 

Let's start with the overall net profit (NP) which is not always improved by Market Internals (in most of the cases the drawdown is reduced, which improves net profit to drawdown ratio). In this case, the NP was increased from 68,300 USD to 70,550 USD, i.e. by +3,3%. Which isn’t extraordinary, but don’t worry, it will get better!

Quite remarkable change you can see when it comes to the drawdown, which has improved from 6,137 USD to 3,525 USD, i.e. we have managed to reduce the drawdown by almost a half (to be exact, by +42,6%)! Now try to remember, how much time you had to spend working on your system the last time you tried to reduce the drawdown by 20%. Now, using just one tool, you can reduce it by almost a half - without changing the system itself!

Also, quite impressive change you can see on the net profit to drawdown ratio, which has improved from really nice 11,13 to fantastic 20 - improved by +79,7%!

And finally, the profit factor has improved from 1,49 to 1,83 (improved by +22,8%) and WIN% from 41,47% to 50,53% (improved by +21,8%). And all I have to do is to run one optimization and approx. 60 minutes of a computer time!

For better comparison, I have summarized it in a table:

 

 

Conclusion

 

The advantages and possibilities of Market Internals are remarkable and today Market Internals is an integral part of my trading. The only MI disadvantage is that you need to find out how it should be used. The common pieces of advice that you can find on the internet, either don’t work or don’t work well enough. Personally, a couple of years ago I spent 6 months of very intensive work looking for new, interesting, and original ways how it could be used. The result was 20 new ideas that I apply to my systems. Even though I spent quite a lot of time looking for new possibilities of MI and testing them, eventually all this time pays off, because many of my systems have got improved in the similar way as you can see above, including significant drawdown reduction.

 

If you like the results, go to www.tradingmarketinternals.com and find out how Market Internals can improve your trading systems as well.

 

Happy Trading!

 

Tomas

 

 

 

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