3/11 – Futures strategy development continues

Wow, these blog posts are getting fewer and fewer (it’s been nearly two weeks since the last one).  I also realise that the material might be becoming less interesting to readers – there are less pictures and I guess the content is a bit more progressive than a beginning trader would expect.

Since there also wouldn’t normally be a picture in this post either, I thought a post an image to remind me of the past three amazing weeks, away from foggy London!
Colours

Automated Strategy’s issues highlighted by back-testing

Spent another solid week back-testing futures data and monitoring the automated strategy in the live market.  I thought a lot about potential refinements to the strategy’s entry parameters as well as the position management approach.

One issue I am uncomfortable with (alluded to it briefly in my last post) is the apparent low win rate.  Although overall the strategy shows a positive expectancy, the overall profitability is dependent upon a small number of huge winning trades.  This can be difficult to handle from an emotional perspective but becomes easier (but not easy!) to manage when a strategy is automated rather than being executed manually by a human trader.

I am doing more testing and analysis to see whether I can improve thestrategy’s expectancy further.  However, my gut feel is that I cannot avoid the volatility in the strategy’s expected results.  I think of it as the ‘pink elephant in the room’.

The actual trading results (we are in our 8th trading session today) are somewhat reflective of the back-testing insights.

Questions/Ideas for refinement

Do trend-following strategies always have low win ratios and high reward-risk ratios? Is this a trend-following strategy, or is it a momentum strategy?  I’d be inclined to say a trend-following one that buys at reasonable (i.e. not overpriced) levels.  Can I marry this trend-following strategy with a mean-reversal strategy?  How would the strategy work on a different timeframe (e.g. moving from 5-minute to 1-minute)

I guess these are the sort of questions that all types of traders can ask themselves in order to improve their strategies.  In reality I already have a dozen other questions that I’d like to answer, each of which has potential to make things better.

What have my working days be like? What will they be like in the next few weeks?

Since leaving London three weeks ago, I have more or less not looked at any charts other than the S&P and the US 10-Year – I have not even looked at Cable and DAX charts – previously my two babies!

Thus the way I have been spending my working days has changed significantly over the last month.  I monitor an automated strategy that takes trades based on a strategy that I have designed and I am applying my Excel skills in data analysis in order to make strategy better.  My working hours have switched to 11am-9pm rather from 7am-5pm (all London times), because both of my “new babies” are traded on the floor of the Chicago Mercantile exchange.

Psychologically it seems easier to monitor an automated strategy as opposed to trading manually.

As well as monitoring and testing, I will soon start to trade both futures contracts manually using the Ozzy team’s platform.  However, this time I am adamant that I will do solid testing before executing my discretionary trades, as opposed to developing my strategy in the live market, as I have done with the K7 strategy to a large extent.

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