With this in mind, here’s a discussion of some of my recent attempts in the trading arena…
Heavy Back-Testing/Data Analysis on Historical Futures data
I spent the entire week backtesting the futures trading strategy that I am working on with the Ozzy futures trading team (I am going to call them the Ozzy team from now on, since most of them are based, or at least linked to, Australia).
As I mentioned, I was able to get accurate historical futures data from TradeStation, a US broker with whom I have had an account for many years. I put this data through a myriad of formulae in Excel and came out with some data on the strategy’s likely performance over the May-September period. It ended up taking over 500 trades across the two instruments.
Based on the findings from the backtesting I proposed some refinements to the programmer who adjusted the code of the automated trading strategy – now we will see how the adjusted strategy trades.
At this point, based on this data, it looks as if the strategy is a profitable one, albeit with highly volatile results – which I guess is a typical trait of trend-following trading strategies. This is most evidenced in a low win rate (in this case 25%), a high average reward-risk ratio (in our case close to 4:1) and a small number of really big winning trades.
General observations on the process of strategy testing
Being able to inexpensively get my hands on accurate historical data, having a reasonable working knowledge of Excel, and being put under time pressure, helped me to quickly get to some meaningful data. In terms of time taken to complete, Excel-based backtesting is much faster than ForexTester2-based testing, which is turn is again much faster than paper or live trading. I am sure that there are faster methods than xls, such as programming on the TradeStation platform, or programming in SQL rather than Excel, but for now I am limited to Excel.
That said, I do believe it is vitally important to understand how trading in the live markets works to ensure that testing methods are well-grounded and realistic. In that sense, there is no substitute for screen-time and real market experience – hundreds, if not, thousands of hours.
How does this fit into my trading career path?
In a way I am glad that I have ended up in the situation where I am right now – where I came to the realisation that I need to engage in a lot of testing in order to build my confidence (and to hopefully speed my progress), re-stumbling across the Quantitative Trading methods book to be reminded of the importance of testing prior to launching into live trading (author’s blog), and thirdly being fortunate enough to work with the Ozzy team, whose pressure and professionalism in a round-about-way led me to detailed backtesting work, and helping me realize how much and how quickly meaningful insights can be achieved.
Because, obviously, the lessons I am learning with the Ozzy team, I can equally apply to my own trading – and to my approaches for K7 and other strategies.
I keep on trying to visualize my progression as a trader on a map – learning valuable lessons along the way, and trying to spot some clear direction in the steps/journey that I have already taken. But sometimes it does seem very unstructured and ad-hoc.
Anyways, I thought I do a quick blog post to let you guys know that I am still here, that I am working very hard and to share with you all the evidence that becoming a successful trader is anything but easy! Hence the image above!
(Trading related): Sometime last year I came across a performance tracker for a bunch of trend-following hedge funds – I get an email once a month telling me how they did in the previous month – looking at their returns might be a good wake-up call as to how hard it is to make money – bearing in mind that these funds have a lot of resources at their fingertips. Here’s the link to the latest monthly performance card.
(Not Trading related): As an aside – here’s an awesome pasta dish I managed to put together last night – two types of salami, bacon, red onion, pine nuts, pumpkin seeds, mushroom, spinach leaves, garlic and oil. Very tasty!!