Free Friday #17 – Would you trade this?
As always, happy Friday!
In this Free Friday post, I want to pose a poll question. After reading the post and viewing the graphs please respond to the poll below and I will publish the results in another post later next week.
The question is… would you trade this strategy?
First, let’s go over the strategy. The strategy was designed using GBPAUD spot data and only has three rules to determine entry. The simulation to create this strategy (and hundreds of other strategies) took less than 2 minutes.
- Vix > Vix – Remember  means 1 bar ago
- High <= Close
- Low <= High
The strategy has two exit criteria. A 1.5 times 20 Period ATR profit target and 1.0 times 20 period ATR stop loss.
Here are some simple performance measures
- January 1, 2003 to May 1, 2017 (Last 30% Out of Sample)
- Profit $147,626.20
- Drawdown $8,289.70
- Win Rate 54.50%
- Trades 198
- Sharpe 1.78
Here is the strategy’s equity curve on GBPAUD. You can see the short strategy continues to perform in the out of sample period (highlighted portion of the blue line).
I’ve also plotted how the strategy performed on three other markets. It remains profitable on Crude Oil futures, Canadian Dollar futures, and AUDUSD spot. Generally, we like to see profitability across markets and assets. However, how good is good enough to pass the test?
Next, I want to share the randomized Monte Carlo test. This test re-trades the strategy 1000 times but randomizes the exit for each entry signal. It is a test to see if we have curve-fit our exits and if our entry is strong enough to remain profitable with random exits. We can see the randomized Monte Carlo test maintains general profitability. Some fare better and some worse.
Next I want to share the Noise Test. This test adds and subtracts random amounts of noise (percentage of ATR) to user-selected amounts of data creating 100 new price series with differing amounts of noise. The test then re-trades the strategy on these 100 new price series to see if profitability is maintained on price series with differing amounts of noise. You can see here that as we change the noise the performance degraded a bit and there are some signs of curve-fitting to the noise of the original price series.
Next, I want to share the forward simulator or variance testing results. In this test, we simulate the strategy forward but assume the winning percentage will degrade by 5% (user defined % in test settings). This is a useful test because things are never as rosey as our backtest results. Now we can get an idea of how things can play out in the future if the strategy were to win x% less than it did in our backtest. This is good for setting expectations of where we expect to be in the next N trades as well.
Risk of Ruin was set to $10,000 for this test. So interpreting these results… if the winning percentage in the future is 5% lower than our backtest than 23% of our simulations will have a drawdown of 10,000 or more.
This is all the information I want to provide for this poll. There are plenty more tests and information we can gather (like E-Ratio), but I want to avoid analysis by paralysis. Build Alpha licenses come with access to a 20+ video library where I explain what I look for in all the tests and features offered by Build Alpha.
If you answered yes to this poll and have a BA license then you can now generate trade-able code for MetaTrader4 in addition to the original TradeStation, MultiCharts, and NinjaTrader.
I also hope all you ES (S&P500) traders that email me caught the dip last Friday like the first Free Friday strategy did (pictured below). I posted this strategy on Twitter in 2016 and it only holds for 1 day. I know a few of you have adjusted the logic and I’m hoping you caught the whole move to new highs!
- Free Friday #16 – Market Regime Switching
- Free Friday #15 – Download Data with Python
- Free Friday March 2017 Update
- Free Friday 14 and 14a – MultiMarket Portfolio
- Noise Test – Explained
- Free Friday 12 – Noise Test
- Free Friday February 2017 Update
- What is E-Ratio
- Free Friday 11 – Free Friday 11 – Sample Size
- Free Friday 10 – Sizing with Monte Carlo
- Free Friday 9 – Intermarket Signals
- Free Friday January 2017 Update
- Free Friday 8 – Randomized Monte Carlo
Thanks for reading,