Backtesting engines and some initial results

The end of year arrived with a idea flourishing in my head. That to put some of the market insights provided by my algorithms in to a automated trading strategy, as I wrote in one of my previous posts (a serious post, most are not, nevertheless I don`t suppose you mind and if you do its not really my business, I do one thing very well -money- so either you like it or not that's the situation - I`m not sure why I`ve just remembered I need something from Ebay...) For that idea to become reality I needed to be able to build a testing engine from the scratch so, given the fact that this period of the year is not very active most people are thinking at other things than trading, I had the time to put together and figure it out how the testing engine must be done in order to allow me to accomplish most of the tasks I use in my discretionary trading. While I was doing that I`ve stumbled upon some unexpected results shortly after I begun. I`ve started building the testing engine around the most simple buy/sell "rule" or indicator or market insight, call it whatever you want, provided by my algorithms and obviously after I was done and satisfied by my most basic creation I hit the "Backtest" button and find out the engine is working and now I can add some complexity to it. As a parenthesis here, I do not have enough historical data to be able to say that any back test I do now its relevant, I`m only testing on last 4 months of data on Crude Oil but the point is to have the back testing engine and the strategies to be back tested in place. The results of my most basic strategy were not very good, as expected, but since that was not what I was after in this phase I`ve continued to the phase 2, that of adding some more complexity to it. Still basic stuff and without using other complex trading rules I`ve unexpectedly stumbled upon a reasonable good strategy that could have been applied in the last 4 months and produced a good return even for my discretionary trading. I have to remind here that 4 months is irrelevant however since the result is quite good and I have not optimized anything I will leave this system as it is curious about how will it do in the future. Here are the results:

    First and foremost the backtest is not relevant with 4 months of data I have to repeat this over and over again and after that the results, while certainly not extraordinary, show a trend following strategy that (assuming the same results would be given after real robustness tests would be performed on a few years of data) most people would be quite happy to have I believe especially since no optimization or curve fitting was used, nothing at all, there is not a single parameter in this backtest that was optimized in any way.

 

Now, lets move on. After the above strategy (I`m already calling it strategy even if its just the basic testing engine), gave me these results I left it as is and went to the next phase of building the engine. Phase 3, where I copied the above engine and added some more complexity, the point being all this time not to create a trading strategy but to create the testing engine that I`ll be quickly adapting to whatever idea comes in to my mind. The results of phase 3 of the back test engine building can be seen bellow:

One commentary on the result, it shows a improvement of the previous results but the improvement comes from a few trades that achieved a large gain however you know or you should know that many successful trading strategies results are given by very few trades that hit the jackpot as is the case of the well known trend following strategy the Turtles used back in the `80s. Anyway, I`m done with the phase of actually trying to develop the back testing engine as I have everything required (at least for what comes in to my mind now)  at this point and now I should start to feed this back test engine with some of the data I use in my discretionary trading. I will do so and feed it with data crunched and combined in many different ways in time but for the moment I`m done with back testing this year. What I`m actually puzzled now is how would these two strategies perform if back tested on 10 years of data. I know how I build them and what they have under the hood and I would not be surprised if they would actually prove to be reasonably good even if for me are much to simple to think seriously about creating the robot that would place trades automatically based on them. And now that I`ve remembered that's another headache, a robot that would place trades automatically requires more coding and, as I said since I know I won`t actually use it my mood of doing it is at very low levels right now. But maybe in time, when the level of my greed of making money from the markets simply because I can will be reduced and I have already got enough I will leave a robot to do the job for me, until then I`ll continue to trade myself and show you results you did not believe are possible. The advice that I have is ride with me or stay out of my way :) 

 

Happy New Year!    

Correct me if I`m wrong

After winning the game of trading on the futures market (quite fast I would say, I`m new here), as I did on FX, all that is left to do is to think about the real scenario where real cash are involved. In which case one can not help thinking at the (very unfortunate I would say) other side that takes your trades hoping they will win and you will lose. Since I do not know what`s behind the scenes, nor do I care for that matter, I`m able to win a game that is supposed to be fair or at least on the surface pretend for world eyes to be fair, I have to assume that arithmetic's are real and the market really involves cash to move, cash that can be used to buy a house for example  (well, thousands of them but that is not the point here). So, in this case, how much cash is required to move the market? On a short term, not that much, and the market can be easily manipulated with a few millions however unless those millions are smarter than you those millions are lost. Why? Well, with Crude Oil for example the depth of market shows on average lets say 50 contracts/tick. That would be 5000 contracts for 100 ticks and 5000K to drive the market lets say one day (assuming nobody else is playing to provide more liquidity to rise your cost), not that much you would think. Trouble with driving the market is that unless you drive it in the right direction those 5 millions are lost because on a longer term the market will do what is supposed to do irrespective of the will of one or other particular group with enough cash to be able to drive and manipulate the short term price. So I would say that as a trader, you can be quite safe as long as you trade well no matter how small you are. Are 25K enough to play if the market can be manipulated against you? Absolutely, just be better than them for enough time and their cash are history and possible in your and other small trader`s pocket. That is why this game is beautiful....I`m not sure how things are with FX because in there I`m not even sure there are real money involved in moving the price so the theory might not apply there which kind of explains some things but then again I`m just someone who does not have a clue on how things work behind the scenes and as I said not care very much either. Anyway, I have an invitation open, if you got 250 mil and think ur wiser I invite you to trade against my demo meaning that when I`m selling, for example, you should use your cash to buy and drive the market up and of course keep it there whatever it takes otherwise I win (again and again) :))))), do it for enough time and I can quite assure you that soon you will find out how I feel trading on demo without cash. Of course the purpose of an exchange is to provide anonymity for all players and the above text is part of the fun after the trading day but nevertheless it is true. True in general I mean for any trader that is good enough.       

Last trading day of the year

Today was the last day of this year when one could actually enjoy making some money in the markets and normally what follows is 2 weeks of spending a part of the amount traders made in this year. If you ask me, these two weeks I would be able to spend everything I make in a year and not give a shit about it knowing that next year I would make it back. However since not a single one of you wise people seem officially interested in trading strategies I would have to do something else than spending during these two weeks when the markets are closed. The first thing that comes in to my head is to finish the mechanical strategy that I`ve started to create. I`m far from the finish and as I said its not something very appealing to me since I know I would not use it but it would be fun to see it in action. I`m currently in the phase of back testing and this phase is far from being done, actually I did not even start the real back test rather I`ve put some of the parts of my future back testing engine together. Working slowly , the software that I use (Amibroker) is capable of doing anything at the "cost" of not having something straightforward to follow -actually there is but its not useful for me. Which is a good thing, a straight forward path does not work in this business, you got to be creative and that takes time, time to think about ideas, time to think about coding the ideas and time to write the code and it all results in more work in verifying if the code is doing what you intended and so on so forth. For a good trading strategy to be developed, it would probably take months of testing, adjusting and double checking everything before real money could be put in to it and that only after you have algorithms that provide good market insights, which is also the explanation why an automated system that actually works is so hard to develop and so rare and I`m after the real thing just as in my discretionary trading so things are complicated enough. What I`m currently anxious to finish is the testing engine. The engine that can be quickly mold on any trading idea based on my trading algorithms and that is not so simple since the information provided by my trading algorithms and successfully interpreted in my discretionary trading is quite diverse and a lot and the machine needs more lines of code than I`m currently in the mood to write to properly interpret at least a part of it. After and if I manage to finish a testing engine that would at least partially satisfy me with its abilities I would have to feed it with information and do the actual back tests. The ideas of crunching the information`s are many and I do not expect to have the patience of testing and crunching more than a few of them before having a good automated strategy in place, as a matter a fact I was playing and testing some of the information in its most rudimentary form of trading and the results were quite good which makes me think that if I really put some work in to it the result would probably be an amazing automated trading system which I would not use. But having it does not hurt so the plan for this period of time its to do just that. In to what extent I would be able to finish it and what level of complexity it would have it remains to be seen. Other than that for now I wish you a Merry Christmas and a Happy New Year.       

And here we go again

The title of this post refers simply to my lack of motivation in trading demo accounts which in the end it always ends with a drawdown as is the case of this week when after first three days of the week being winners Thursday in the afternoon I started to play with fire because I was like up 50% anyway so, figure that, I could afford it. As a matter a fact, Thursday, the end of day was written somewhere at -10%, I was slightly profitable up until I thought its a good idea to just trade no matter what. I don`t know about you but for me 36.18% gain in 41 days of trading (this is where my performance including commissions is actually counted) isn`t exactly something to be proud of. However, given the fact that I`m new to futures trading and not only that but I`m also new to Crude Oil because I never traded the CFD on Oil available with some of my FX brokers, I have to say that I`m partially satisfied with the result. And yes, that drawdown is simply annoying and it should not be there but its the result of discretionary trading. As I was saying in one of my previous posts,  a discretionary trader can do much more than a mechanical system but it does come with a price, and that is that sometimes you can lose focus and forget what you're playing with. And contrary to popular opinion, its not the losing that its doing the damage its the winning. When you win and keep on winning its the time when you should take a break before you start feeling like asking "Jesse who?", btw the only book that I found useful about trading was "Reminiscences of a stock operator" and the only trader that I`ve ever heard of and admire is Jesse Livermore.
  Which lead me to this weekend work of having some fun in the attempt to put in place a completely mechanical strategy for the days when I`m not in the mood. Of course things aren`t that simple as to write a mechanical system that is able to get anywhere close to my discretionary trading  requires many work hours, more than I`m willing to dedicate, and given the fact that I know I will not use it anyway because I like to trade myself I do not consider it a task to be done but more close to lets see what do I get if I get some crunched numbers from my algos and put them in a mechanical system. Unfortunately for me I do not have enough futures historical data  and right now the test is made on 4 months of data which I use for my algos in my  Crude Oil charts. The coding is in progress and slowly advances as I am in the mood to write it, in truth being told I find myself enjoying more the part when I figure it out how to do it than actually writing the code for the whole thing, I seem to lack the motivation of doing so.

The warnings of professional players

As an investor if you are interested in the financial markets, lately, as I`m sure, you keep on hearing about bubbles, and overvalued markets either from people who`s professions directly involves financial markets and hence they must be always fully aware of what's happening in the industry either from professional market players who`s jobs are also to make a living from the markets hence they too are, and must be, fully aware of what`s happening with the financial markets they follow. The reason why these guys started to send warnings, either from a technical point of view either from a fundamental point of view when analyzing the financial markets, and from what it seems to me at the current levels the warnings come from both point of views which makes them so much more worth of being taken in to consideration, is because of the abnormalities they observe in the recent (or maybe not so recent) behaviour of the markets. Every each one of these guys have their own tools that they use to asses the condition of the markets and lately probably many of these "tools" they use warns them about the fact that certain outliers are in play and that the current market conditions are under no circumstance normal. From my point of view an investor should take in to the consideration these warnings very seriously as while the markets usually do not react immediately and actually nobody can anticipate or predict what the markets will do, the professionals of this industry are already in full alert mode and their "game" is currently to ensure that whatever happens their capital will not suffer to much damage even if the markets continue to go up or the crash takes place the very next moment. They have already hedged their positions, reassessed the risks, and adjusted their exposure, a thing that actually might be responsible for the snow ball that is the current growth, and the snowball is still growing. Nevertheless the warnings are valid, the markets will do what they always do, sooner or later the bubble will break and the bigger the bubble the bigger the explosion. Most likely the question for an investor is what to do? Getting out might seems a bad idea when the market is growing like it never grow before - at least on certain instruments, take for example bitcoin. The safest answer to that is probably to take your profits and run until you run out of luck. Many have already done that, perhaps in doing so they are currently regretting however it is certain that they can be sure of the fact that the regret of missing bigger profits is fall smaller when compared to the regret of losing all the profits or for that matter losing more than profits. As I was saying, professionals have no risk, they are...hmmm listening Verdi - March Triumphal if I may say that :)).           

Trading - a complicated and complex process

Every time when a buy or sell decision is made that decision might be wrong and right in the same time. You could be right on short term and wrong on long term or vice versa. Or you could be right on very short term and wrong on short term while being right on slightly longer term but not on long term and so on so forth, hopefully you get the point. That is why trading strategies - profitable trading strategies -  have little or nothing to do with opinions about where the market is heading next and/or market biases, profitable trading strategies are just that, buy or sell at a certain moment to make a profit irrespective of what the market is doing. Clearly defining your strategy edge is the most important thing in trading, nobody knows where the market is going in truth being told - nobody but those who have the tools to drive and direction it but that's insider trading and officially its a crime and its illegal - and such the first thing you need to do when trying to be profitable is to give up all your opinions and biases. While you could have them you should not base your trading on those. The trading decisions you make should have the trading edge behind them, that is the way, the only way to win this game on the long run. Professional traders are hardly millionaires overnight like for example the lucky bitcoin buyers as of now, what professional traders are able to do has nothing to do with luck and everything to do with trading models and statistical advantages which in the long run will be providing and advantage or edge. Of course having a trading edge or advantage is not a guarantee of winning the game unless the process is completely automatic because on the short term a trader might get emotional involved in the process of trading and such overcoming the edge.  As a discretionary trader you can win much more than a programmed robot is able to if based on the same edge. The edge executed mechanically will be far less profitable than the same edge executed by the trader but remember, discretionary trading is based on algorithms, statistics and the edge provided by those and not based on market opinions or hunches about where the market is going, which reminds me of my twitter posts -  they are only hunches and opinions of support and resistance levels and have almost nothing to do with the trading strategy I`m applying on the demo accounts you see in this blog.      

CL Morning Levels of S/R

Expectations on short term from now are that it should go to 57.69-57.79 area first

 

 

Monday

With no bulls appearing Friday after the jump up, Oil was supposed to find some bulls up until now today. The market went down, from this trader point of view is still prone for a jump up sooner rather than later. The pretty picture is bellow, it has broken a support/resistance area however its still in cards for a buy wit the next support at that nice dotted line you see on the chart.

How is it going?

Its going up and its going fast. While on a daily basis lately I`m not trying to shock anymore on a longer term the results add up fast due to the miracle of compound interest. See performance page.
      Trading might not seem a real business and that's because its very different from the usual stuff people do however precisely because of that reason it can be very rewarding. Its a zero sum game, a zero sum game with a lot of players and probably 90% of all players cash go to the 10% players that win. To be in that 10% of people on the long term its almost like having international monopole on a regular business - markets are international, most futures contracts are available on Globex which is available 24 hours a day around the globe. The best part of everything is that while very complicated to win, once you do, you pretty much don`t need anything else and the business its quite simple, of course with the mention that you need to trade in an real environment on an exchange that provides equal chances to all participants by providing order anonymity in an honest environment. Without employees, without a lot of paper stuff, approvals or other impediments that business owners face on a daily basis preventing them to focus on the actual business development, trading requires only one thing: to win. The actual business size (trading business) can be as large as the market is or as large as the winner trading strategy edge is not eaten up by lack of liquidity and with day trading you can only have a business with probably maximum 6 zeroes. However, if any of you reading this thinks he`s in that 10% do not despair, you can grow your trading business to a number with seven zeroes by switching from day trading to lets say month trading. Of course you will probably have a smaller growth percentage at that point but that`s life you will have to learn to live with it and perhaps the only way to expand your business at that point is by making your small one man trading company become a regular company with employers and stuff and investments outside of the trading world -you can spend a lot of money on useless stuff like buying a new car every week but it will become boring I guess and a trader will want more. Which makes me think that in the end money matters only up to a certain point and from there the trader will search for other motivations to advance. Where to advance, nobody knows but that is the force that pushed the trader to be a trader and to win the game and such he/she would search for another game to win.
     The performance of this trader is only 6 weeks old which is far from meaning anything however since things are going far better than you could expect should you be interested in investing in this trader trading business do not hesitate to drop me a mail as the only thing that is still missing from going from blogging about trading (which is under no circumstance a recommendation or invitation to trade, read the disclaimer and think of 10-90 numbers) to actually "business it".          

Traders be warned

After "fooling around" enough to question the continuation of the down move we had this week Oil decided to break the levels of support/resistance that have been formed this week and jumped back up almost to previous week high probably on some news of which I am currently not aware right now and quite frankly it does not matter either. What matters is if it will continue up or no. The answer to that question depends on the next move because as of this moment it is obvious that we will have some resistance at the current levels and maybe a little higher. That resistance, strong or weak as it is will most likely make some of the lucky bulls (yes insiders too - these one know what happens before everyone else and they are like flies)  that got early in to this up move to mark their profits just enough for the always late bulls to get on board. The sustained move after the range is on the upside and is this one even though its not made on lower volatility but in what seems to be specific for Oil - volatility breaks which leads to the title of this post - traders be aware, while you can "wake up" with a large gain out of nowhere if you do not really know what you are doing you can also have your cash depleted as soon as you can say "Oil" - so to speak. That being said the expectations are for a retracement followed by some late bulls and from there it remains to be seen. Support is between 57.75-57.90 and the late bulls will get on board only above that - be my guest if you like but read the disclaimer first. And, almost forgot currently a weaker resistance is formed at 57.65-57.68 probably subject of change soon as the price is being decided. Pretty image bellow