Trading several systems at the same time

Discussions about Money Management and Risk Control.
Post Reply
Mark Johnson
Roundtable Knight
Roundtable Knight
Posts: 122
Joined: Thu Apr 17, 2003 9:49 am

Trading several systems at the same time

Post by Mark Johnson »

In another topic area, kmulford wrote:Using two or more different trading systems, each with positive expectancy, should provide a trader with more opportunities to trade and, thus, realize on the positive expectancy of the systems.

Has anybody had any experiences they would like to share regarding the construction, testing and trading of multiple systems methods? How does one go about picking the systems to trade in conjunction with one another? What characteristics of the second system are most useful in complementing (offsetting) the first? Long term and short term?

How many systems can/should be optimally traded?
One of the things I've fooled around with, is simultaneously trading several extremely-similar systems at once. I wanted to see whether small diversification in entry date/price and exit date/price, would smooth out the equity curve.

This is stuff like (A. enter on the open the day after PGO exceeds 3.0), (B. enter at market-on-close on the day whose close pushes PGO beyond 3.0), (C. enter on a limit order 5 ticks below the close of the day that pushed PGO to 3.0) and so forth. Trade 1/3 of your bankroll on system A, 1/3rd on system B, 1/3rd on system C. Spread your entries around a little bit.

Here's a concrete example with a surprising result. Take a "Standard deviation bands" system whose time window is X days. Add to it a decrementing trailing stop (such as George Pruitt suggested for Trendchannel and Aberration a few issues ago). I picked an exponential moving average whose #days decrements by one for every day the position is held. On initiation day (#days=0), it's the X day EMA. Four days after initiation (#days=4), it's the (X-4) day EMA. And so forth.

This modified system had about the same performance ratios as the original without the trailing stops. (Sharpe, MAR, Lake, RRR, and so forth). Changing the exit, by itself, didn't improve the system.

However when these two variants are blended together in a 50-50 ratio (half your bankroll on the std dev bands without decrementing trailstop, the other half on std dev bands with decrementing trailstop), the performance measurements shot upwards. Apparently for the time periods I chose and the markets I chose and the system I chose, exiting half of your position when hitting the decrementing EMA, and letting the other half of your position ride onward to the final exit signal, boosted profits significantly. All the measures shot up, the one I remember right at the moment was that MAR increased by 1.24X (MAR of 50-50 blend = 1.24 * (MAR of original)).

This might be a programming error (I haven't double and triple checked the results yet) and it might be an accidental anomaly that's good for this one well-chosen example but lousy in general. But I doubt it. I kinda think it's often helpful to diversify entries and exits, even on the same base system.
Dutchtrader
Roundtable Fellow
Roundtable Fellow
Posts: 58
Joined: Wed Apr 30, 2003 4:35 pm
Location: Netherlands

Increasing risk

Post by Dutchtrader »

Mark,

Nice topic. My 2 cents:

You wrote:

the performance measurements shot upwards.

But how about duration DD? How about 5 biggest DD? And your risk profile?
For me blending two almost identical systems ( from entry point of view )looks like pyramiding and that is imho most of the time more risky.
But these assumptions are made by myself after just a few months of testing. So maybe I am totally wrong...

Marc
Gerry Gunter
Full Member
Full Member
Posts: 14
Joined: Sun Apr 20, 2003 4:10 pm
Location: Washington State

Post by Gerry Gunter »

On my testing using Trading Recipes on the stock market using 2 systems but different entry parameters my test results are simular to Mark's. When using 1 system my betsize used was 2%, but when I combined the systems I used 1/2% and returns were better with DD a tad lower.
I have more testing to do but it does look very promising.

Gerry 8)
redbullpeter
Roundtable Fellow
Roundtable Fellow
Posts: 82
Joined: Mon Apr 28, 2003 9:12 am
Location: London, UK

Post by redbullpeter »

In Ralph Vince's book Portfolio Management Formulas he demonstrated an example where trading two systems, one with a positive expectancy and the other with a negative expectancy, resulted in significantly improved performance by all measures. Counterintuitive but in this example it was due to negative correlation of the trades allowing for higher trade values though with fixed percentages.

I think there is a lot of potential in this area.

Happy hunting!

red
kmulford
Senior Member
Senior Member
Posts: 41
Joined: Mon May 12, 2003 5:59 pm
Location: Setauket, New York

Re: Trading several systems at the same time

Post by kmulford »

Mark_Johnson wrote:One of the things I've fooled around with, is simultaneously trading several extremely-similar systems at once. I wanted to see whether small diversification in entry date/price and exit date/price, would smooth out the equity curve.
Mark,

Thanks so much for this simulation idea. Recipes will get a work-out this weekend. I had focussed more on divergent methods to provide diversification across systems plus more entries. Yours is a twist on that strategy, one that makes good sense, at least on the surface, and is worthy of an attempt at falsification.

I do, however, have a rather mundane question about the following statement:
Mark_Johnson wrote:Here's a concrete example with a surprising result. Take a "Standard deviation bands" system whose time window is X days. Add to it a decrementing trailing stop (such as George Pruitt suggested for Trendchannel and Aberration a few issues ago).
I do not know who George Pruitt is, nor to which past "issues" you refer. Would you please enlighten me further?

Thanks again.

Best,
Ken
Kiwi
Roundtable Knight
Roundtable Knight
Posts: 513
Joined: Wed Apr 16, 2003 1:18 am
Location: Nowhere near

Post by Kiwi »

In case Mark is away :-)

George Pruitt is one of the principals of Futures Truth (www.futurestruth.com --- worth reading the system designer interviews).

John
TK
Roundtable Knight
Roundtable Knight
Posts: 167
Joined: Tue Apr 15, 2003 5:45 pm

Re: Trading several systems at the same time

Post by TK »

kmulford wrote: I do not know who George Pruitt is, nor to which past "issues" you refer. Would you please enlighten me further?
I think Mark referred to the A Trend Follower's Friend or Foe? article by George Pruitt that appeared in the May 2003 issue of the Futures Truth Magazine.

Mark,

I would like to test your idea on the PGO system since it is similar to the system you described in that it also uses bands (ATR bands in this case) and a moving average to generate entry / exit signals. I have a technical question, though.

Let's assume the following scenario:

1. The close goes above the ATR band and both the Original PGO System and the Modified PGO System go long.

2. The Modified System hits the decrementing MA trailing stop and goes flat. The Original System remains long.

3. The close goes above the ATR band again. The Original PGO System does not take the signal since it is already long. But what does the Modified PGO System do?

(A) Does it re-enter the long position?, OR
(B) Does it go long / short only when the Original System goes long / short?

Which version have you tested? I assume it was the (a) version but maybe both :) ?

Regards,
Tomasz
Post Reply