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Author Topic: When do you stop following a signal or system  (Read 3967 times)

Offline Berti99

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When do you stop following a signal or system
« on: January 28, 2014, 11:56:09 AM »
Hi,

I would like to ask for input from other users when to stop following a signal or system. You just can't keep trading in a drawdown forever.

I heard that professionals (hedge fund managers or whoever) stop following a system when certain drawdown criteria are met, e.g. largest historic drawdown + 25%.

Thanks for sharing your ideas and experiences.

Offline Nasdaq100

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Re: When do you stop following a signal or system
« Reply #1 on: January 28, 2014, 06:20:35 PM »
You must know about the trading strategy Worst Case Scenario DrawDown before you invest a penny.

Also, I recommend that you read this document we have just posted: http://www.konstantinfx.com/Documents/The%20Art%20Of%20Investing%20[Second%20Edition].html

I hope that helps

Offline Berti99

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Re: When do you stop following a signal or system
« Reply #2 on: January 28, 2014, 07:35:29 PM »
Thank you very much for your response and article.

You state that the worst case scenario drawdown is a drawdown which should never be reached and if it does, the trader must stop trading and evaluate his/her strategy.

This sounds logic, but how does a trader know about it in case of a manual trading strategy? e.g. he trades a strategy for 3 years and his worst drawdown was 30% during this time. Is this his worst case drawdown?
Or is it the worst case drawdown calculated in additional analysis (e.g. Monte-Carlo analysis)?

Offline odysseus11

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Re: When do you stop following a signal or system
« Reply #3 on: January 28, 2014, 08:25:25 PM »
Megabot I got a 404 error when trying to download that document from the link.
Berti, your question is a good one, it is one of the reasons that following any EA/signal/managed account is difficult. IMO you can NEVER know the true max DD. But you CAN know the max basket risk, assuming the vendor tells you the truth. That would be the biggest loss you can suffer from any single group of trades that might close at the same time or nearly the same time, which should encompass any open DD% (because you could theoretically have to close any and all open positions at any given time for any number of reasons).

So as long as you know that max BASKET risk, which should be definable, then your next question would be how often is the signal likely to hit that risk, how many of thos "basket hits" could happen in succession, and how much recovery could I (and should I) see before the next basket loss? All of these questions should be answerable by the vendor to your satisfaction, if they arent, the vendor doesnt know what they are doing and you dont want to use them anyway.

When you have the answers to those questions, yu should be able to come up with a pretty good GUESSTIMATE of a max DD%. But thats all it is. Because no vendor can guarantee they will achieve their goals even though they may try. They CAN define signle trade risk, currency risk, and basket risk, but they CANNOT control the other variables I mentioned. All they can do is shoot for their goals and hope their estimates at worst case for those items is close to accurate.
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Offline Nasdaq100

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Re: When do you stop following a signal or system
« Reply #4 on: January 28, 2014, 08:25:58 PM »
If the trading strategy is robust. meaning there are specific laws for both entries and exits while remaining profitable, then the strategy should be backtestable, at least visually, and through that, they can come up with a number for the their worst case scenario, which in my humble opinion, it should exceed the worst drawdown they see in their backtest.

We have asked so many traders who applied at KonstantinFX for their worst case scenario, and for the ones who did not know what that is, they actually turned out being either just hold and hope traders or had no clue what they are doing, and not even a single one of them didn't turn out to be so horrible at handling drawdowns later afterwords.

Offline odysseus11

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Re: When do you stop following a signal or system
« Reply #5 on: January 28, 2014, 08:49:09 PM »
If the trading strategy is robust. meaning there are specific laws for both entries and exits while remaining profitable, then the strategy should be backtestable, at least visually, and through that, they can come up with a number for the their worst case scenario, which in my humble opinion, it should exceed the worst drawdown they see in their backtest.


We are going to have to agree to disagree on this one. Backtests, visually or otherwise, dont tell you anything. Every single "robustness" test I have ever seen hasnt amounted to a hill of beans in real life trading. Just because the market did X or Y in the past means NOTHING about what it will do tomorrow. So as I said, I feel that once the known and definable variables are set, the rest of the variables (such as how many times in a row a basket SL will hit, how long and how much will the account recover before the next one, etc) in my mind are very simply a "best efforts" estimation. No one knows, and I dont agree that backtests will answer that in any reliable way.
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Offline SubZeroFX

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Re: When do you stop following a signal or system
« Reply #6 on: January 28, 2014, 09:11:05 PM »
Megabot I got a 404 error when trying to download that document from the link.

Yeah, having space in URL address is bad practice.

Here you've got fixed link to Konstantin FX's The Art Of Investing [Second Edition]:

http://bit.ly/1neVv05

Offline Viktory

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Re: When do you stop following a signal or system
« Reply #7 on: January 28, 2014, 09:53:43 PM »
SubZeroFX:
I was about to do the same! Hehe :P

Odysseus:
I agree with your points regarding backtests (even the most complete, realistic and "robust" ones) and past history, not ensuring any future behavior (this is a game of endless possibilities)... and also with everything else! ;)


Megabot:
Very good article regarding DD; with a nice general approach to when *CAN* be a good moment to join signals and how (your stated strategy is definitely better thought than nothing)... Thanks!

Offline Nasdaq100

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Re: When do you stop following a signal or system
« Reply #8 on: January 28, 2014, 10:03:13 PM »
If the trading strategy is robust. meaning there are specific laws for both entries and exits while remaining profitable, then the strategy should be backtestable, at least visually, and through that, they can come up with a number for the their worst case scenario, which in my humble opinion, it should exceed the worst drawdown they see in their backtest.


We are going to have to agree to disagree on this one. Backtests, visually or otherwise, dont tell you anything. Every single "robustness" test I have ever seen hasnt amounted to a hill of beans in real life trading. Just because the market did X or Y in the past means NOTHING about what it will do tomorrow. So as I said, I feel that once the known and definable variables are set, the rest of the variables (such as how many times in a row a basket SL will hit, how long and how much will the account recover before the next one, etc) in my mind are very simply a "best efforts" estimation. No one knows, and I dont agree that backtests will answer that in any reliable way.

I have to say you are both incorrect and correct about this one, in my opinion, backtesting is the ONLY way to find out if the trading strategy can make money or not.


I am not sure based on what experience you have come to the conclusion that the X and Y behaviour won't necessarily repeat, as it will ALWAYS repeat, while "some" patterns that used to repeat more often in the previous X and Y cycles wont necessarily repeat as much in the future cycles.


Lets just put it this way, if you put Five genuine, profitable, robust and backtestable strategies on one account and place Five other strategies that were never backtested on the second (While all 10 strategies show great results for 6 months), and leave them on for Three years then come back to see what happened. The most likely scenario is that the first account will survive while the second will blow up.


Of course any trading strategy can face periods where is gets smashed in the face, but this is the job of the trader/strategy designer to handle the situation through his discretion to fix the situation.


And by saying to fix the situation, I mean by having a deep understanding of his strategy where he get to use his own discretion, for example: to only trade when the super perfect line up of his set of rules show up. and trade only based on that till his drawdown is recovered, causing his trade frequency to get lowered.


That is why I think EAs that never get interfered with by its designers are ALWAYS distend to fail. And I assume that the reason why you do not view backtests the same way I do is because your experience with backtesting is based on the fully automated commercial EAs which are available for purchase on the Internet.

Anyways, in my opinion, the strategy MUST be robust and backtestbale to come up with an estimate of the worst case scenario. Otherwise, the numbers would be simply made up, based on absolutely nothing and can't be taken seriously.

Offline odysseus11

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Re: When do you stop following a signal or system
« Reply #9 on: January 30, 2014, 02:46:19 PM »
That's why I said we will have to agree to disagree.
IMO any strategy that utilizes only the inputs that mt4 (and most other trade platforms) can understand is merely a coin flipper, and any backtesting results cant be used to infer anything. This is the same situation whether the system is an EA or manually executed. And if it is manual and the trader uses inputs not limited to price@time,  then a backtest of results still not likely to give reliable information regarding future performance of that trader. I don't agree with your assumptions at all.
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Offline Nasdaq100

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Re: When do you stop following a signal or system
« Reply #10 on: January 31, 2014, 08:38:01 AM »
That's why I said we will have to agree to disagree.
IMO any strategy that utilizes only the inputs that mt4 (and most other trade platforms) can understand is merely a coin flipper, and any backtesting results cant be used to infer anything. This is the same situation whether the system is an EA or manually executed. And if it is manual and the trader uses inputs not limited to price@time,  then a backtest of results still not likely to give reliable information regarding future performance of that trader. I don't agree with your assumptions at all.

Without the inputs of MT4, how can you set-up the variables of your strategy, which inputs can you use?

Is there any other way you suggest to study a trading strategy and know whether it will be profitable for the longer term?

I really think that MT4 inputs are enough to draw conclusion only for specific strategies, not all of them. For example: a strategy that is based on the four hours time frame, especially the ones that require the closure of a candle simply can't be backtested. and that is just related to the different day light savings for each broker.

There are many other examples where the backtest could be indeed worthless. But if done correctly, then that would be a reliable evidence of the future success of a strategy, as long its not curve fitted and not left in the wild without any tweaks.

Take the famous FGB for example, I really think if the trader behind this strategy had a deep understanding of how it works, he would had tweaked it, because the markets have definitely changed, and EURUSD has slowed down a lot! But unfortunately, the developer did not design the actual indicator which the strategy highly depends on, and therefore, does not have a deep understanding of anything.

Offline Berti99

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Re: When do you stop following a signal or system
« Reply #11 on: March 21, 2014, 12:44:43 PM »
Hi,

Here are my observations on when to stop following a system or signal:

Most of the time signals/systems are followed when they already show a more or less steady uptrend of the equity curve. Sometimes a drawdown could be a good opportunity to start trading it on a real account.

But when we see a drawdown is it only a drawdown or does it mean the end of the profitability of this system?

My experience is this: If we see a fast recovery after the drawdown the system is still tradable even when the equity is still below the ATH. If we see a kind of sideways movement even with a small upward slope of the equity curve after the drawdown, stop trading.

Sometimes we don't see a sudden drawdown but a longterm slow downward slope of the equity curve after the initial win. In this case I also stop trading it. This looks like the trader won by pure luck at the beginning.

To summarise: The duration seems to be as important as the percentage of the drawdown. Nobody talks about historical duration of drawdowns.
I know it's simplistic but there seems to be some truth in this theory.
What do you think?

Offline superbaby

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Re: When do you stop following a signal or system
« Reply #12 on: March 21, 2014, 12:57:20 PM »
when dd reaches your comfort level

Offline Berti99

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Re: When do you stop following a signal or system
« Reply #13 on: March 22, 2014, 07:39:02 AM »
when dd reaches your comfort level

But when something happens like this, my theory could be helpful:

http://www.myfxbook.com/members/PipInvestor/pip-investor-forex-signal-service/810373

 

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