Exit Strategy and Profitability

Discussions about the testing and simulation of mechanical trading systems using historical data and other methods. Trading Blox Customers should post Trading Blox specific questions in the Customer Support forum.
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andysmith
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Exit Strategy and Profitability

Post by andysmith » Wed Jul 06, 2005 3:58 pm

I usually trail my long positions with a Chandelier exit. Sometimes I exit based on the Chandelier stop, sometimes based on other indicators.

However, I don't like giving back profit each and every time at the exit. So I'm looking at having a predetermined exit, where I exit on strength with no give-back. (I try to catch trends, not swing trade). Couple of questions:

1) What are people's thoughts on exiting on strength (i.e. no giveback)?

2) Has anyone done any backtesting of exits with giveback versus exiting on strength (I'm doing this now but it is a slow process)...

sluggo
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Post by sluggo » Wed Jul 06, 2005 5:55 pm

Perhaps a hybrid system that does both, might be preferable? Here's a test of a little system that takes a new position when the 75-day EMA crosses over the 200-day EMA. At a profit target of 8 ATR's, the system exits 25% of its position. This is what you've called "exiting on strength with no give-back". With the remaining 75% of its initial position, the system just follows the trend and doesn't exit until the EMAs cross over again. This is what you've called "exiting with give-back".

The hybrid system blends your two ideas: exiting on strength with no give-back (25%), and exiting with give-back (75%).

I programmed the hybrid system into the pre-release, beta version of "Trading Blox Builder" software. The parameter values used for this simulation run, are shown below. I ran the simulation using one of the pre-supplied portfolios ("All Liquid") that come with the software. I also used the historical price data that comes with the software. Some of the results are shown below.
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andysmith
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Post by andysmith » Wed Jul 06, 2005 8:14 pm

Sluggo -- Well, I'm impressed at how quickly you did that. I'll take a look at Trading Blox Builder.

futurestrader111
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Post by futurestrader111 » Thu Jul 07, 2005 4:49 pm

Sluggo,

How come when I go to www.iasg.com and do countless searches of the professionally managed futures world I never see results that good?

Why dont those multibillion dollar traders simply purchase Trading Blox? Seems as though they could double or triple their performance ratios! :roll:

What size account did the test assume and how much margin was needed at the minimum? If starting at the worst date could a 20k-50k account have traded this without a margin call? If not, then how much money was needed at a minimum (margin+dradown) on the worst possible starting day?

Certainly c.f.'s real time performance match's this, right?

Would hate for the NFA / CFTC to think of you as a misleading marketing shill! (I know your not, but the NFA has their own perspective) Just ask yp.

sluggo
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Post by sluggo » Fri Jul 08, 2005 9:51 am

It sounds like my reply to Andy has annoyed you; I'm sorry to hear that. The system and its parameters are fully disclosed in the prior message, you can test it yourself if you like. However if you want to look at a graph of Margin-to-Equity ratio, you'll have to use a different software package; the current release of Trading Blox Builder doesn't do that.

Fortunately, Trading Recipes does. After running the system and pulling up its Portfolio Summary Report, hit CTRL-S and save in spreadsheet format. Then open that spreadsheet file with MS Excel, divide column 8 (total margin) by column 2 (total equity), and you've got the M/E ratio. Plot it on an Excel chart, voila. I think you'll find that scaling out is just as easy in TR as it is in Trading Blox Builder. The TR keyword to do this is "MULTIPLIER".

In case you don't have a copy of Veritrader or TBB, and don't know the composition of the All Liquid portfolio that ships with these programs, it is:
AD BP C CC CD CL CT ED EM EU FC GC HG HO HU JY KC LC LH MP NG S SB SF SI TY US W
If you're surprised that SP and/or ES are missing, you're not alone. It seems odd to have an "All" Liquid portfolio which omits two of the top 3 most liquid markets in America. And if it bothers you that only USA traded futures are present -- hey what about Bund and Brent Crude and Aluminum Alloy and the FTSE and the DAX and so forth -- again you're not alone. On the other hand, TBB does come with ten years worth of historical price data for 20+ markets at no additional charge, so I guess it might be churlish to complain that they left some out. Rather, be glad that quite a few are supplied.

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Post by nickmar » Fri Jul 08, 2005 12:03 pm

Sluggo - I think that the M/E Ratio can be calculated using TBB on a daily basis from the "Daily Equity Log" log file. Simply import the file into MSExcel and divide the "Margin Equity" column by the "Total Equity" column. The only shortcoming here is that only the current margin (i.e. not historical margin) is used in the calculation but I suspect that Trading Recipes has this same limitation.

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Post by sluggo » Fri Jul 08, 2005 12:49 pm

Thanks Nick! I pulled it into Excel and made this plot of the M/E ratio of the above scaleout system.
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Roger Rines
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Post by Roger Rines » Fri Jul 08, 2005 1:07 pm

futurestrader111 wrote:Sluggo,
Why dont those multibillion dollar traders simply purchase Trading Blox? Seems as though they could double or triple their performance ratios! :roll:
Seeing a small size portfolio test that looks tremendous isn't unusual. As to why large-scale traders don't show similar performance in many cases has to do with the size that is allowed in some markets, and the risk that large-scale traders are willing to assume.

For example, the major currency markets can absorb a tremendous amount of size. This is also true for the Bond, Crude Oil, and Eurodollar markets. However, Cocoa, Cotton, Coffee, Feeder Cattle and to some extent, the Natural Gas and Australian Dollar market listed in Sluggo's listing, don't absorb large position size very well. This limited participation in those small size markets at some point will put the large scale trader into the position of being the market, leaving too few people on the other side at the worse possible moment.

Because of the limited market depth of some markets, large scale traders need to focus more heavily on the other markets to utilize their assets under management, and then they are limited by how strongly many of those markets are positively correlated. If a trader has too much weight on positively correlated market set, and that set of markets begins to move against him, draw down accumulates at the same time – creating large risk and annoyed money owners. Correlated draw down raises the risk and forces a large trader to be more conservative in how they apply their funds.

Another point to also consider is reporting limits and CFTC exit dates. Large traders must have their positions in some markets below a certain level x-number of days prior to expiration so they aren't in a position to run a squeeze play. If a trader fails to be careful, or his broker starts too late to unload and misses the cut off date where the positions need to be closed or rolled forward, that failure will certainly bring a notice from the CFTC asking in no uncertain terms "What Happened and Why?" An example of this is the Natural Gas market. No trader can have more than a thousand contracts on in an expiration month about a week prior to that contract’s expiration. Getting nasty letters from the CFTC will also happen when a large trader accidentally gets past the reporting limits without proper disclosure.

To handle these restrictions, large-scale traders are forced into many compromises that won't create the gains shown for smaller size traders, and none of these will show up in a simple back test.

In simple terms, to look at simple display of performance will most often be misleading if the underlying markets won’t absorb the size assumed by the back test, so they can’t be used for anything other an a lead towards what might be a good solution. In this case, the example was to show the efficacy of exiting the market early instead on a retracement.

When looking at test performance results, it is always best to look at the process being used to create the results, and then to try to learn what aspects of the method work well, and how they impact the displayed equity curve. This approach will keep you from ever believing in anything you see until you can understand why it worked out that way.

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Post by Zoso » Sun Oct 10, 2010 4:31 pm

It'd be interesting to see how Sluggo's "slugg_2ma_scaleout_sys" has done out of sample - on that portfolio - since this post.

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Post by LeviF » Mon Oct 11, 2010 10:54 am

I thought i'd seen every topic on this forum. I'm surprised that this one has slipped under my radar until now.

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Post by LeviF » Tue Oct 12, 2010 9:58 am

I havent been able to duplicate Sluggo's run. But I can get a MAR of about 2 during that time frame, that drops to about 0.7 after adding the last five years.

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Post by TK » Tue Oct 12, 2010 10:29 am

LeviF wrote:I havent been able to duplicate Sluggo's run. But I can get a MAR of about 2 during that time frame, that drops to about 0.7 after adding the last five years.
This book from the TBB Trading Library can help avoid such overfitting. It's a lot of work with many pitfalls along the way but the results are worth it.
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mirec79
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What is the %volatility betsizing?

Post by mirec79 » Sun Jul 29, 2012 11:59 am

Sluggo,

What is the %volatility betsizing?

M.

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Post by bobsyd » Sun Jul 29, 2012 4:44 pm

Have a look in the User Guide at the Money Managers section of Built-in Systems and Blox. Also, re your questions in another thread on how to improve a system you might consider walk forward testing, which is a key part of Pardo's book mentioned in this thread. If your trial system is the latest version of TB, the User Guide still references the old walk forward process and would probably confuse you so suggest sending Tim an email. Hope your trial is going well -d epending on your skill set there is quite a learning curve but ultimately Trading Blox, particularly the builder edition is well worth the investment in my opinion.

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