Trader's Roundtable

[cyphrograph]

Hello everyone. I guess I'm 3rd member from Poland on this forum, together with TK and steady_jake. We had some hot discussion on a polish futures message board, and now I want to continue it at "Trader's Roundtable" as I believe it is more suitable for that kind of discussion. Here's the hypothesis: Short term trading can reach the level of robustness (or performance), which can not be achieved by long term methods or long term trend-following systems or - let's be straight - Original Turtle System. The question I want to ask you is: can we verify the above hypothesis using historical results (hypothetical from backtesing or actual trading figures)? IMHO, Yes we can do it. Since our abilities to predict future are weak, what else do we have beside history? Well-known method used for predicting possible outcomes, namely Monte Carlo Simulation is based on historical figures also.

I want to present a little research I've done on this subject. Let's compare actual trading performance. Turtles vs Active Traders battle. We take 3 famous Turtles on one side (B. Dunn, J.W. Henry, W. Eckhardt) and 3 quants who employ short-term trading methods on the other (T. Crabel, Denali, C-View Limited). Let's take 2 ratios for measuring robustness / risk-adjusted return / performance quality (name it like you want):

1. Compounded Annual Return / Worst Drawdown (CAR/WDD, monthly basis) - before management and incentive fees,
2. Annualized Sharpe.

Turtles camp:
DUNN Capital Management-DUNN WMA (Nov 84 - Sep 03)
CAR/WDD 0.52, Sharpe 0.64

John W Henry & Company-Financial and Metals (Oct 84 - Aug 03)
CAR/WDD 0.91, Sharpe 0.83

Eckhardt Trading Standard (Jan 87 - Sep 03)
CAR/WDD 1.38, Sharpe 0.75

Active Traders camp:
Crabel Cap. Mgmt-Diversified 1XL (Jan 92 - Sep 03)
CAR/WDD 3.77, Sharpe 1.38

Denali Asset Management-Ascent (May 99 - Sep 03)
CAR/WDD 10.26, Sharpe 2.75

C-View Limited 3XL (Oct 96 - Aug 03)
CAR/WDD 5.62, Sharpe 1.66

Source: www.iasg.com
Disclaimer: I'm not connected with any managers mentioned above.

Well, numbers speak for themselves As you may suspect, figures for short term systems backtested and optimized against the past data are much, much better - especially, when you set worst drawdown figure to around 40% by position size management rules.

Turtles camp has one advantage over active traders: they have longer track records. However, I don't want to wait 15 years in order to have comparable periods. That is the zillion dollar question: will these excellent CAR/WDD & Sharpe figures sustain in the future?

Where are the grounds for differences between short and long term trading performance? IMO, they're located in 3 main areas:

1. Math
Higher frequency of trades enables increasing positions size faster in a given period of time (compounding) during run-ups, but also enables decreasing positions size faster during drawdowns.

2. Source of profits
Long term trend-following / Turtle System captures profits from existence of trends (trends often connected with macro-economic cycles). As we all know, markets tend to move in trends but also experience long "choppy" periods, without any substantial move in one direction. Hence diversification is used to reduce negative impacts of non-trending periods in a single markets. Unfortunately, most liquid markets are highly correlated. As a result, these strategies performance depend on the magnitude of trends.

Short term trading captures profits from market inefficiencies, more precisely - from market's over-reactions. If we'll sum up all inefficiencies in the short-term level, they'll add up to a greater amount than in the long-term level. Of course in order to play on short-term basis we must have low commissions and high liquidity - two things which have dramatically improved since '90s or '80s.

3. Predictability
Volatility in the coming short-term periods is more predictable than in the long-term periods. Try to estimate the average daily range for the next 5 days. Now try to predict the average yearly range for the next 5 years - error will be much bigger.

[TK]

Cyphrograph, thanks for moving the discussion from our local forum to this one.

One point often raised by long-term system traders is that they know no single short-term system with a good track record of, say, 5 or 10 years. Look at I-Master. From what its users report on different forums, it had excellent back-test results and excellent performance during the first year after release but now, in its second year, it has been struggling around break-even or producing losses. On the other hand, you can argue that if a short-term system can earn as much in 1 year as a long-term system can earn in 5 or 10 years, who cares if its longevity is shorter?

As far as I know, at least two active Roundtable members, Kiwi and SirG, belong to a short-term camp just for the reason you mentioned: short-term strategies allow them to compound faster and generate better returns. Just wondering what they think on the subject.

Tomasz

[cyphrograph]

Quick update:

In Oct 03 Denali had the worst month ever -9.2%
Two of JWH funds are in serious drawdowns:

Global Financial and Energy Portfolio
Sep 03 -14.3% Oct 03 -25.9%
Original Investment Program
Sep 03 -14.5% Oct 03 -15.6%

[TK]

[kmulford]

Why is this an either/or proposition?

What about medium-term trading systems?

Ken

[Bondtrader]

Some traders do not have complete choice in the matter. Those who cannot quit their jobs to trade fulltime, for example. These folks simply can't trade off 3-minute charts; they're busy laying bricks or drilling teeth or drafting legal briefs or designing skyscrapers or taking the red-eye flight to Phoenix to make the crucial sales pitch at 8:30AM tomorrow.

They can use a robobroker but the increased commissions are particularly hurtful to short term trading. They can trade the night session but the lack of sleep will kill them. They can invest in a managed futures fund operated by a short term trader but many of the good ones are closed to new investment and the others require big (>1M) initial investment.

For this gang, trendfollowing offers the possibility of spending less than an hour a night on trading, yet achieving returns substantially greater than money market funds or mutual funds, while keeping their regular job and their family life intact.

[kmulford]

Look at George Pruitt's Top Ten S&P Daytrading systems report (Futures Truth magazine). These are short-term (ST) systems that, in most cases, require one hour per night of the "trader's" time. They have also been judged robust and effective by Mr. Pruitt.

I asked the question about why the debate is either/or because I believe that, if the trader is comfortable with trading multiple systems (and well enough capitalized to do so), there may well be an advantage to trading discrete systems with distinctly variant time frames.

Of course, the point about an ST sytem providing more opportunity for profit, while quite possibly true, has an important hurdle to clear: more opprtunities require more commissions and multiples of slippage costs. If a trader can get Crabel's execution (please don't think that the brokers are treating all customers, big and small, exactly equally), then maybe...

[cyphrograph]

[Kiwi]

Interesting discussion.

I like the point about futures truths reporting of the performance of the short term systems and remember John Hill's comments when I asked him about that. Basically he warned me off them because the factors you mentioned meant that they didnt achieve their hypothetical performance.

I only trade short term with a counter trend system (which has reverse slippage frequently) and in a discretionary fashion on instruments with a bid ask spread of 1pt and slippage of no points normally (bund and estx50).

I dont like the short term systems that are sold by vendors at all. Amazing how they can compound a loss. But thats a personal view and may not be entirely supported by facts.

John

[cyphrograph]

@Bondtrader

Agree, for some individual traders short-term trading is beyond their available time (especially when trading both european and US markets). The picture is totally different at institutional level since they are able to hire traders. You mentioned "robobroker" as a solution to this problem. This doesn't have to mean higher commissions. TradeStation has low rates. You can automate trading with Interactive Brokers via 3rd party software.

@kmulford

Commissions and slippage costs are included in historical backtesting. You assume that big players like Crabel have substantially better executions quality... I don't think this is the case. From my personal experience - execution speed with IB's TWS is very fast. It's probably even better with X-Trader platform. When speaking of "short term" I think of swing trading rather than day trading or scalping, where speed is crucial. Many great short-term systems are based on 30-min bars. Well, I don't think few seconds would make any difference in their real performance.

@Hiramhon

Our personal trading records are irrelevant to this discussion. You'll find winners and losers, big winners and big losers in all trading styles, all timeframes, all markets. For the purpose of this topic I think it's better to focus on historical hypothetical performace. Or real figures - but you have to do it in the proper way. Well-known managers that I've mentioned in the first post are among the best in their trading styles. Their results are audited.

Short term trading requires:
- high liquidity
- low commissions
in order to be profitable. Over the last 6 years we've observed huge improvements in both areas. That's why we don't have long track records for short term traders. Popular markets traded by Turtles for the last 20 years like Energies, Foods, Grains, Meats, Metals have low liquidity. Today's most liquid futures are traded at Globex and Eurex - these exchanges are existing for only about 6 years now.

[cyphrograph]

[Kiwi]

I think that part of the problem is that most short terms systems are not all that short term and many seem to try and take advantage of quite crude market effects (like if it goes over the open hour then buy and hold until x). If the market changes a little then they stop working ... like the low volatility the indexes have provided in 2H03.

If you drop down further into the zone that is supposedly noise you find a much more exciting and solid set of opportunities to exploit.

John

[aquaman1]

Anybody watching (or care to comment) about the thread on Chuck Lebeaus site about R-Breaker?

http://traderclub.com/discus/messages/18/1840.html?MondayJanuary1220040636am

The poster has put up test results based on the original settings and $500 point value in the S&P and it looks like it has fallen apart since its 1993 release date.

I thought R Breaker was one of the few day trading systems that has "survived" in its original non-optimized form.......looks like thats not the case.

[Erwin Dicker]

Hello all,

Since i am interested in short term trading and c.f. said it is possible i immediately started researching. So now i post my findings, although i am not ready, will never be, of course.

The idea is to find one basic system.
Testset: Dax, German Bund, Euro (CME), Nasdaq, Eurostoxx.
Software Metastock
Period : March 2000 - March 2003, 10 minutes data (Tickdata)
Typical: Index futures were in bear markets, so i tried to find LONG systems, if a long system is good in a bear market, it will be good in a nontrending and uptrend market, was the idea.

What i can conclude now:

The breakouts were the best with 30 - 40 periods, hold overnight positions.
No exit indicators.

Then i only optimized stops. I optimized maxx loss, profit, trailing stops. In turtletrading atr is used, i compare the optimizing stops equal to finding a good value for N.

In my opinion there is a serious difference between short systems and long systems. Short start fast, and often rebound..... so stop management is different and also breakout periods, but i did not completely test the short systems....will do of course. I will not use the bear market

MY QUESTION TO ALL WHO ARE INTERESTED...

What do you find of the ideas used?
1. Is optimizing stops the same as curve fitting?
2. Good LONG systems in BEAR market are good in all kinds of markets?
3. What you see in equity curves: the trends+system give you the money?
4. Would the portfolio be diversified enough to trade succesfully?
5. The profit is made during the sitting, and not because of superiour timing?
6. Close stops kill a trader?
7. Far away stops kill a trader?

In the meanwhile i go on, searching, re-searching, re-re-searching, and trading

I keep you all informed!

Erwin

[cyphrograph]

I don't know how well R Breaker or breakouts work on indicies. Other methods do work very good. I want to show you the optimization report from my Dax system. It has only 3 parameters. MAR ratio ranges from 7.3 to 2.4 within a broad sets of parameters and 80 EUR slippage + commissions per round turn (that is 3 ticks on enter, 3 ticks on exit plus 5 eur comm. fee).

Funny thing is many people in this business still don't grasp the concept of short term trading. For example here http://www.tradingrecipes.com/faq.html we can read why TR can only test on EOD data. "Trading is about making money. The shorter the time frame, the more difficult it is to overcome the execution costs". While it's true in general, execution costs are low in recent years. Mr Abraham from SAA Ventures who is making around $30k a day from ES ultra-fast scalping probably laughs out loud when he reads something like this

[cyphrograph]

Another optimization report on EUR/USD pair which shows what you might expect when you have low execution costs. One more advantage - you won't have problems with scalability on FX...

[drm7]

Cyprograph,

What platform did you use to code and test your systems? Is it off the shelf (like Tradestation, TR) or custom (in C++ or VB)?

Also, I think that 2 pip per RT slippage is very optimistic. Most FX platforms have 3-5 pip spreads on EURUSD.

-Doug

[cyphrograph]

It's true. You'll have to trade directly on the interbank.

[fliesch]

but where and how?? Spreads are often below one pip if you do size.

Eur/USD spreads can be found 2-3 pips with good brokers! The others are way to expensive.

Very interesting discussion.

[Kiwi]

I agree that you can get spreads of 3-4 pips with no commissions and if you trade futures can place your order between bid and ask.

I dont understand how one gets a spread of less than 1 pip from any broker who is representing the true market without commission?