my journal 2

dog4 · Apr 3, 2010, 2:20pm

Quote:

Originally Posted by travis

Now let's get back to work and analyze what the newly implemented profit factors tell us about the systems.

I want to do two things. First see what the profit factor tells me about my systems. Second, see if there's any discrepancies between that and what the ROA index was telling me.

1) What the profit factor is telling me

First of all, i must say that a profit factor below 1.5 is not good enough, unless it's due to few trades having been made (since it's based on the forward-tested data).

So let's look at how many systems I've got below 1.5 and see if they're all bad.

Attachment 80214

I've shaded those systems in yellow. There is a total of 22 bad mother ****ers, quite a lot actually. A majority of my systems seems to suck in terms of profit factor, and such value rarely lies.

Let's see how many of them have a low value because they have under 20 trades. We can forgive these:

CL_ON_4 (12 trades and 1.4 profit factor)
All opening gap systems get forgiven because they trade rarely but rarely miss, I am positive about this.
GBP_ID_4 is good enough (I guess 1.5 would be acceptable)
...

...hmm, this analysis of profit factors has made me realize that I really do not have much of an edge, and I can't afford to discard profit factors of below 1.5, but should be happy to discard just those below 1.25. Because most of my edge stays with systems that have about 1.5 of profit factor. I am glad I didn't discard this measurement as I was going to do a couple of days ago.

Essentially, due to profit factor, I know that I should discard those 7 systems that have traded enough and that still have a pf lower than 1.25.

2) discrepancies between profit factor and ROA index?

Just as profit factor is not complete, the other index could also be lacking, and they indicate conflicting ratings for my systems. For example, if a system traded 2000 times, and each time either made 11 dollars or lost 10 dollars, such a system would suck, and have a profit factor of 1.1. On the other hand, in terms of ROA, this system would score very high, because its maximum loss and drawdown could be as low as 1 dollar. Furthermore, this system would make 1 dollar every two trades, and the 1000 profit would get divided by 1 dollar loss and drawdown, giving me a stellar ROA rating. I have such systems. And they're not worth trading, as they keep my capital busy for no profit. I was alerted as to that by seeing a very low average gain per trade, which in many ways is an indicator similar to the profit factor. Now let's see if profit factor demolishes any high-scoring ROA index systems.

Not really, I was even wrong about that ZN hypothesis (that scored high on one ratio and low on the other). I guess right now the PF is in line with the ROA. Actually some PF values are telling that some systems are better than what the ROA values would have had me believe.

From this little study, I'll retain that it was a good idea to compute an average index of ROA and PF. And that systems with PF lower than 1.25 are to be discarded.

I know you mentioned that you don't like the Sharpe ratio, but all it does is calculate risk-adjusted performance. In other words, enormous returns with the occasional big drawdown may do no better in terms of Shapre than a small return system that is very regular.

Instead of fretting about which system passes the ROA and/or PF tests, you should find some very interesting results if you take a "portfolio approach" to including or excluding systems. Combine the p&l of many systems and calculate the overall Sharpe... its not that hard to do. The system that looks poor, may make its money when the others suffer. You want to avoid losing systems of course, but if the equity curve is flat, or only loses a little, in the bad periods that's not too bad

Many traders have very few systems. You have loads. And they could trade many, many contracts as these are liquid markets. If you do what is suggested here (max an hour or two for an excel wizard!), you could find you get excellent results from only 5-10 systems that combine well i.e. select systems based on their contribution to the portfolio Sharpe.

FXTrend240 · Apr 3, 2010, 2:21pm

im lazy lol; the CME currency futures; is it spread based ( as in like retail forex) or commission based ( as in you pay like $5 RT rather than a 1 pip spread). I'm trying to conclude whether ECN spot forex is better than futures or vice versa.

travis · Apr 3, 2010, 2:33pm

Quote:

Originally Posted by dog4

I know you mentioned that you don't like the Sharpe ratio, but all it does is calculate risk-adjusted performance. In other words, enormous returns with the occasional big drawdown may do no better in terms of Shapre than a small return system that is very regular.

Instead of fretting about which system passes the ROA and/or PF tests, you should find some very interesting results if you take a "portfolio approach" to including or excluding systems. Combine the p&l of many systems and calculate the overall Sharpe... its not that hard to do. The system that looks poor, may make its money when the others suffer. You want to avoid losing systems of course, but if the equity curve is flat, or only loses a little, in the bad periods that's not too bad

Many traders have very few systems. You have loads. And they could trade many, many contracts as these are liquid markets. If you do what is suggested here (max an hour or two for an excel wizard!), you could find you get excellent results from only 5-10 systems that combine well i.e. select systems based on their contribution to the portfolio Sharpe.

Ok, it's a deal. If you can make the Sharpe Ratio very simple and logical to me, as would be a "Sharpe Ratio for Dummies", then I'll deal with it. Feel free to ignore my post if you're too tired to reply. I am giving Sharpe Ratio a chance, only if it incorporates all the indicators of a system's performance. In other words, I am expecting it to be better than PF and ROA put together. Beware that the name "Sharpe" is frightening to me, because I feel like I could get cut dealing with this formula.

travis · Apr 3, 2010, 2:37pm

Quote:

Originally Posted by FXTrend240

im lazy lol; the CME currency futures; is it spread based ( as in like retail forex) or commission based ( as in you pay like $5 RT rather than a 1 pip spread). I'm trying to conclude whether ECN spot forex is better than futures or vice versa.

I would say go for the bigger market, so futures. It's harder to get ripped off in general. Go with the futures. As long as we're talking about automated trading. If we're talking about discretionary trading, based on my experience, don't trade anything at all. I'd advise anyone against discretionary trading, no matter what market. But if you have to lose or find out you're not profitable, maybe ECN is better, because you can invest less, and even diversify more as a consequence. But once again I advise against discretionary trading. If instead we're talking about automated trading, you do need futures because you need a big broker like Interactive Brokers which will make your automation much easier. Besides, as a general principle, I would go where there's more customers, more volume... because everything works better, you know, economy of scale first of all, and also in terms of customers (e.g.: if there's a technical problem, bug, you won't be the first one to notice). But it's true that FXCM is just as big... well, you know what I meant. Big is not always good, but IB is big in a good way.

To answer your question, IB does futures, and yes it's commission-based. And they have the lowest commissions.

FXTrend240 · Apr 3, 2010, 2:40pm

discretion

. I'm yet to go live and will have a small account so only option will be retail forex (FXCM), if however i do make money and have enough to trade both i think futures too;it's not that much of a difference anyway but meh.

travis · Apr 3, 2010, 2:46pm

Then go with FXCM, as you said. It's big so you can trust them better. Of course, after my own failure at discretionary trading, I wouldn't recommend it to anyone. But if you know you're profitable, then you're one of the few profitable discretionary traders and you can afford to do whatever you want. Don't do like me: I thought "if others can do it, I can do it, too". But I was wrong. It doesn't mean someone is stupid. Being profitable at discretionary trading doesn't entirely depend on being intelligent or hard-working. I think I am both, but I never succeeded, so there must be a third ingredient, which is probably what your personality is like.

FXTrend240 · Apr 3, 2010, 2:58pm

Quote:

Originally Posted by travis

Then go with FXCM, as you said. It's big so you can trust them better. Of course, after my own failure at discretionary trading, I wouldn't recommend it to anyone. But if you know you're profitable, then you're one of the few profitable discretionary traders and you can afford to do whatever you want. Don't do like me: I thought "if others can do it, I can do it, too". But I was wrong. It doesn't mean someone is stupid. Being profitable at discretionary trading doesn't entirely depend on being intelligent or hard-working. I think I am both, but I never succeeded, so there must be a third ingredient, which is probably what your personality is like.

The odds are definitely against me , less than 5% chance i'll succeed; but whatever- better to have an honest attempt and fail rather than never know at all; it's a risk that i'm willing to take. Even if i fail at discretion, i have a mechanical system up my sleeve.....

travis · Apr 3, 2010, 4:10pm

All right, goddamn it... I am studying this sharpe ratio thing. I found a good link:
http://www.thepreparedinvestor.com/2...rpe-ratio.html

What kind of pisses me off is that it's basically based on the standard deviation which is yet another formula to deal with (and I never liked its name and concept). Besides, on the numerator I gotta write the Return, which is yet another formula to figure out... because I need to write what? The return based on the maximum loss or the return based on margin required? Or the Return compared to the maximum drawdown? I would feel my "Return" needs to take care of all those things together. So we got a formula based on two different quite complex and debatable formulas, and this is why I guess I've been discarding this Sharpe Ratio formula until now, and I will probably do it again, unless dog4 convinces me otherwise. By "debatable" i mean that the sub-formulas could be done in so many goddamn different ways that I'd risk getting different results... the more variables I have the more things can go wrong... and is this thing that useful to be worth risking so much?

Quoting from the link above:

Quote:

The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess investor risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk.

Ok, this is ****ing hell... no need to quote any further... or let's do it:

Quote:

Here is an example:

Say you have an investment portfolio, You can calculate the value of your investment account periodically, say every month.

Then calculate the average monthly return over some number of months, by averaging the returns for those months. You also calculate the standard deviation of the monthly returns over the same period. Note that you might need data for few months to calculate the standard deviation.

Then annualize the numbers by:

- Multiplying the average monthly return by 12

- Multiplying the standard deviation of the monthly returns by square root of 12

You also need a number for the "risk-free return" which is the annualized return currently available on "risk-free" investments. This is usually assumed to be the return on a 90-day T-Bill (currently about 5% per year)

You now calculate the "Excess return" which is the annualized return achieved by your investment in excess of the risk-free rate of return available. This is the extra return you receive by assuming some risk. Then the Sharpe Ratio is calculated as:

Sharpe Ratio = [Annualized annual return - Risk free return] / Annualized standard deviation of returns;

Here is how you can use Microsoft Excel to calculate Sharpe Ratio for your portfolio. Fill out each column in the excel sheet as follows:

You can see a sample calculation of Sharpe ratio in excel sheet here.

- Column A: Fill out Month Name
- Column B: Beginning Balance
- Column C: Ending Balance
- Column D: Monthly Returns = ((C/B)-1)*100 (to get %)
- On cell E2: Get the average of all monthly returns. E2 = AVERAGE(populated cells from column D)
- On cell E3: Annualized returns = E2 * 12;
- On cell F2: Get the Standard Deviations for all months. F2 = STDEV(populated cells from column D)
- On cell F3: Annualized standard deviation = F2 * SQRT(12);
- On cell G2: Get the 3 month treasury bill from www.ustreas.gov, lets say it is 5%
- On cell G3: Sharpe Ratio = (E3 - G2)/F3

Given all this data, you can strive to achieve higher Sharpe Ratio for your portfolio. Or if your Sharpe Ratio is low, then you can figure out where to fix it.

This is total crap. **** this crap.

After all, the sharpe ratio basically is nothing but the standard deviation, which I ignore what it is, so let's worry about that. Screw this nobel laureate guy who recycled an existing formula.

And then later I'll screw the standard deviation, once I'll have found out what it's for.

Ok, now don't do like the "look elsewhere" data vendor expert, dog4. Come back and help me make sense out of what you got me started on.

Here's what I've found out. The standard deviation is crap itself so far, because it's not what it pretends to be. They all say it's the average distance of items of a list from the average of the list. Well, it's all ****ed up because that is not what it is.

Look:

understanding_stdev.xls

I have written down ten items of a hypothetical "crap" list. The total is 55. Their average is 5.5. Their average distance from 5.5 is 2.5 and not 3.02 as the excel formula says. So far so good... So far so bad I mean. So if the standard deviation is... what? You gotta be kidding me.

I was reading wikipedia. Now the Sharpe Ratio mother ****er is based, among other things, on standard deviation. But the mother ****ing standard deviation is based on the variance, and the mother ****ing variance is none other than this crap:
http://en.wikipedia.org/wiki/Variance

Forget this crap. This is definitely NOT worth it. This formula is just as good as the ones I am already using, and it is ten times more complicated and I could go wrong in about 20 places while i calculate it and I wouldn't even notice... pedantic mother ****ing formula. Besides, I'd have to do calculations using each trade, and this would make things even harder and heavier on my excel sheet. May this formula rest in peace.

Apr 3, 2010, 2:21pm	#618
FXTrend240 Banned Member Since Feb 2010 292 Posts	re: my journal 2 im lazy lol; the CME currency futures; is it spread based ( as in like retail forex) or commission based ( as in you pay like $5 RT rather than a 1 pip spread). I'm trying to conclude whether ECN spot forex is better than futures or vice versa.

Apr 3, 2010, 2:40pm	#621
FXTrend240 Banned Member Since Feb 2010 292 Posts	re: my journal 2 discretion . I'm yet to go live and will have a small account so only option will be retail forex (FXCM), if however i do make money and have enough to trade both i think futures too;it's not that much of a difference anyway but meh.

Apr 3, 2010, 2:46pm	#622
travis Legendary Member Member Since Mar 2003 7,999 Posts	re: my journal 2 Then go with FXCM, as you said. It's big so you can trust them better. Of course, after my own failure at discretionary trading, I wouldn't recommend it to anyone. But if you know you're profitable, then you're one of the few profitable discretionary traders and you can afford to do whatever you want. Don't do like me: I thought "if others can do it, I can do it, too". But I was wrong. It doesn't mean someone is stupid. Being profitable at discretionary trading doesn't entirely depend on being intelligent or hard-working. I think I am both, but I never succeeded, so there must be a third ingredient, which is probably what your personality is like. __________________ Read: E.P. Chan, Cogneau - Hubner, Martin Sewell, Gail Tverberg. Search: expected shortfall, historical VaR, Monte Carlo VaR, extreme value theory.

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