Somebody once asked me, If you had to choose about a trading system by only taking a look at one performance report, which report would you choose? My first reaction was that this was a stupid question. There are many factors that really must 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 needs and robustness.
However, regardless of this big selection of information that really must be considered, there’s indeed one report that I have come to depend 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’s a Start Trade Report.
A Trading Systems Start Trade Report
In my view, a Start Trade Report can give the st, three-dimensional view possible of trading systems. It cuts thru many problems that come with standard analysis and gets all the way down to the real heart of the matter. It even cuts thru all of the foolishness that comes up when looking at real time performance.
I know what traders are thinking. I hear it now. Wait a minute, how can real time performance be contended 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 7th, 2004 ), this one trade has made profits of over $25,000 a contract.
Now, if a trader were using position sizing he’d trade two or three, or even more, of these, but here’s the thing : had they started a week or possibly even a day after this trade was originally made, they would have missed it totally! 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 could have only started one day apart!
This can create tremendous misunderstanding. One broker’s real time accounts can inexplicably appear to be far different to the realtime accounts of another broker, even if employing the same trading systems.
Misleading Trading Systems Reporting
This phenomenon may also be utilised for devious or disingenuous purposes. It is feasible for a trading systems seller to simply cherry pick out the best historical starting date to suit his purposes. He can choose a date right before a massive winner, or a series of winners. This may lead it to look like the system needed little original start up capital and the return on invested funds was enormous. Choosing this date would mean that the first wins financed the rest 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 required two, three, or perhaps four times the starting capital than would be required had he started on a different date. His returns on the invested capital would be much less. In the worst-case scenario, he could have lost his whole investment before earning the profits shown.
Regardless of if a broker or seller shows an average of several of his accounts, this may still be a meager view and offer less than the required quantity 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 could have so few accounts to average from that the data is afflicted with what statisticians call a tiny sample size — not enough data to draw any valid conclusions.
A much worse offense would be if a disingenuous brokerage or vendor 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 the technique worked.
The point I’m making is that there are countless ways that inaccurate or intentionally changed start dates can have an effect on performance, both in theoretical reports and realtime performances. Traders need to rely on something better and more robust than much of what is presently available.
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A Trading Systems Solution
What is the answer? Well, in my humble opinion, the answer to this is the Start Trade Report. The Start Trade Report runs tests on various systems as many as hundreds or thousands of times over the given period. It starts each test on a different date inside the period in which the trader could have made his new trades. For instance, if there were 2,000 trades over a period of ten years, the Start Trade Report will retest the system 2,000 times, every time beginning on the date provided for each new trade.
The Start Trade Report also makes certain to reset the equity back to the original beginning amount with each test. This is required because when using position sizing, traders may skip some trades in the beginning when the equity is still small, however it isn’t 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, many of my clients wouldn’t have taken. I’ve seen, as an 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 starting capital of the traders.
This report can also permit traders to evaluate performance based totally on the margin needed rather than account size. This feature permits traders to see the entire spectrum of all of the possible outcomes instead of only one.
Trading Systems Start Trade Report Summary
Here are a few things that a Start Trade Report can show traders :
1. What p.c. of the first twelve 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. What quantity of cash would my account have needed to contain if, theoretically, I started on the worst possible date?
4. What would be the average account size needed to trade this system based on the 2,000 different possible starting 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 allows traders to filter lots of the garbage found in typical performance reporting. The Start Trade Report can clear out many errors in reporting real time performance based on either a sample size that’s too little or beginning dates and accounts that are cherry picked.
I hope traders can see this info is invaluable. I honestly don’t 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 which gave me the most assurance. It was the only report that comforted me when there were drawdowns. It allowed me to know whether we were in the normal 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 1st year of trading.
We suspect that providing traders with these reports will not just give them an awesome 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 I’m in a position to remain calm even during the worst of times.
To get a copy of the Start Trade Report please send us an e-mail.
Dean Hoffman
DH Trading Systems
This article was written by Commodity Trading Advisor Dean Hoffman. For more information about his trading systems or managed futures please click on the links.
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