Somebody once asked me, If you had to choose about a trading system by only looking at one performance report, which report would you choose? My first reaction was that this was a stupid question. There are many factors that must definitely be considered when choosing a trading system. Besides many performance indicators and ratios, there are things like the average yearly return, maximum drawdown, the Sharpe ratio, margin requirements and robustness.
However, despite this wide array of information that must be considered, there is indeed one report that I have come to rely on more than any other report. This report has given me more comfort and confidence as a system trader than any other report. If I know that a system is correctly created, I can almost use this report alone to decide about trading it! So what is this report? It is a Start Trade Report.
A Trading Systems Start Trade Report
In my judgment, a Start Trade Report may give the most robust, three dimensional view possible of trading systems. It cuts thru many problems that come with traditional analysis and gets all the way down to the real heart of the matter. It even cuts through all of the foolishness that comes up when taking a look at real-time performance.
I know what traders are thinking. I can hear it now. Hang on a minute, how can real-time performance be debated with? Well, let me give an example that obviously illustrates this point, using one of my systems : Synergy.
In May of 2003, Synergy started a trade in London Copper. This trade became the most successful trade of the year. As of this writing ( March seventh, 2004 ), this one trade has made profits of over $25,000 a contract.
Now, if a trader were using position sizing he might trade two or three, or maybe more, of these, but here’s the thing : had they started a week or possibly even a day after this trade was initially made, they would have missed it entirely! Two investors trading the same system with the same investment size and the same money management rules could show a difference in their accounts of $25,000, $50,000, $75,000, or an even larger, more preposterous amount! They might have only started one day apart!
This could create incredible confusion. One broker’s real time accounts can inexplicably seem to be far different to the realtime accounts of another broker, even when utilizing the same trading systems.
Misleading Trading Systems Reporting
This phenomenon can also be utilised for dishonest or disingenuous purposes. It is feasible for a trading systems vendor to simply cherry pick out the best historical beginning date to suit his purposes. He can choose a date right before a massive winner, or a collection of winners. This could make it look like the system required tiny original starting capital and the return on invested funds was giant. Choosing this date would imply that the first wins bankrolled the remainder of the trading.
But what if trading had started on a different date? What if that trader had even started on a date that was right before a series of losers? He might have needed two, three, or even four times the start up capital than would be needed had he started on a different date. His returns on the invested capital would be far less. In the worst-case scenario, he could have lost his whole investment before earning the profits shown.
Even though a broker or vendor shows a median of several of his accounts, this can still be a meager view and offer less than the needed amount of information. In prinicple, he could still cherry pick the starting dates of all 3 or 4 accounts, using each to show as much profit as possible. Alternately, he may have so few accounts to average from that the info suffers from what statisticians call a tiny sample size — not enough information to draw any valid conclusions.
An even worse offense would be if a disingenuous brokerage or seller were to push some day trading systems due to the high frequency of trades and commissions they have the ability to generate, and then use some of his cherry picked real time accounts to prove that his method worked.
The point I’m making is that there are numerous ways that wrong or intentionally changed start dates can affect performance, both in theoretical reports and real time performances. Traders need to depend on something better and more robust than most of what is presently available.
A Trading Systems Solution
What’s the answer? Well, in my humble opinion, the answer to this is the Start Trade Report. The Start Trade Report runs tests on assorted systems as much as hundreds or thousands of times over the given period. It starts each test on a different date within the period in which the trader might have made his new trades. For example, if there were 2,000 trades over a period of 10 years, the Start Trade Report will retest the system 2,000 times, every time starting on the date provided for each new trade.
The Start Trade Report also makes sure to reset the equity back to the original starting amount with each test. This is mandatory because when using position sizing, traders may skip some trades at the start when the equity is still little, however it is not correct to take a look at the outcome of trades a trader wouldn’t have taken. I have sometimes seen brokerage firms report on trades generated by my system that, based on their account size, lots of my clients would not have taken. I have seen, for example, a $3,500 losing trade in a system where most clients would have skipped any trade with a risk above $2,000. The Start Trade Report knows which trades to skip and at which times based primarily on the startup capital of the traders.
This report can also permit traders to guage performance based on the margin required rather than account size. This feature permits traders to see the whole range of all the possible outcomes rather than only 1.
Trading Systems Start Trade Report Summary
Here are a few things a Start Trade Report can show traders :
1. What % of the first 12 months was profitable based on the 2,000 different beginning dates?
2. What was the average first year performance of the system when averaged over the two thousand different possible beginning dates?
3. How much money would my account have needed to contain if, in theory, I started on the worst possible date?
4. What would be the average account size needed to trade this system based on the two thousand different possible beginning periods?
5. What would be the average amount that I went under my original starting point? What about the biggest amount possible over all two thousand different dates?
This report permits traders to clear out a lot of the rubbish found in standard performance reporting. The Start Trade Report can filter out many mistakes in reporting real time performance primarily based on either a sample size that is too little or beginning dates and accounts that are cherry picked.
I hope traders can see this information is invaluable. I honestly do not know how a trader could ever trade any trading systems without it. When investors look at a system in this much detail, it is going to be surprising to them how much confidence this report can build, not to mention the comfort. Ever since my early days of trading, this report was the one that gave me the most assurance. It was actually the only report that comforted me when there were drawdowns. It permitted me to know whether we were in the ordinary ranges of the bell curve, or whether we were going through something intense. It also gave me a realistic range of outcomes to expect in the first year of trading.
We believe that providing traders with these reports will not only give them an incredible edge, but also build their confidence hugely. Confidence is a valuable attribute for a trader to have when the unavoidable drawdown comes. In my personal experience, it is thanks to these reports that I am in a position to remain calm even during the very worst of times.
To get a copy of the Start Trade Report please send us an e-mail.
DH Trading Systems