Live Test Update: A Renewed Focus On Strategy Performance & Anomalous Markets
After Day 20, Starting Account Value: $10K, Current Account Value: $21K.
Important: There is no guarantee that these strategies will have the same performance in the future. I use backtests to compare historical strategy performance. Backtests are based on historical data, not real-time data so the results shared are hypothetical, not real. There are no guarantees that this performance will continue in the future. Trading futures is extremely risky. If you trade futures live, be prepared to lose your entire account. I recommend using these strategies in simulated trading until you/we find the holy grail of trade strategy.
Yes! We made it to the first milestone in the Live Test: we’re up $20K to a total account value of $30K! We haven’t reached our goal of $60K, but we’re closer than we were a few weeks ago.
Celan Bryant, Previous Live Test Update
Well, that was me a few weeks ago, but things have changed. I hit a peak on Day 13 at $32,644, which was then followed by an $8,500 loss on Day 14—it was brutal.
These are the results from the first 20 days of the hunt:
Here’s another view of performance over the Live Test:
Needless to say, I’ve lost some confidence. But, confidence in what? I haven’t lost confidence in my manual trading, which has only gotten better. I haven’t really lost confidence in ATS strategies, many of which are performing well (see latest forward test results).
What I’ve come to realize is that I’ve lost confidence in my ability to optimize a portfolio of strategies. More to the point, I've lost confidence in my ability to manage risk and/or sustain the drawdown required to trade multiple strategies at the same time. In other words, my strength is strategy development and performance, not size or scale. If I had the size, I would simply trade all of the best strategies in the forward test (top strategies made $378K so far this year). Of course the conundrum is that I don’t want to allocate more funds unless I can establish some sort of track record. And, as much as I love ATS strategies, I will be the first to say that even though the forward test portfolio made $182K since the beginning of the year, past performance is not indicative of future performance.
So, before I can allocate more funds to this effort, I need some reassurance that those strategies that have been profitable over the last 3 months in the forward test will continue to be successful. That is ultimately the goal of the Live Test: to test the viability of certain automated strategies, not portfolio optimization.
I’m not a big fan of stoicism, but there is something to be said for focusing on what you can control. In that vein, motivated by the loss on Day 14 and the churn I’ve been in over the last three weeks, I think a change in focus is in order.
Soccer or Pickle Ball?
I’ve become a fan of pickle ball. I didn’t mean to, but somehow the Pickle Ball TV channel always defaults on my TV before I turn to Netflix. I watched the channel for two weeks before I realized that I wasn’t looking at tennis. Needless to say, I’m hooked. It is tennis on speed.
Due to my background in tennis, I would probably be better at playing pickle ball than soccer. Likewise, due to my background as a trader, my focus should be on strategy performance, not portfolio optimization. Over the last few weeks, as I’ve been trying to sort out what’s happened on the Live hunt. I’ve realized that I’ve been playing a different game—a game of soccer—create the best ‘team’. If I’m honest, that’s not my strength.
It can be tempting, especially after a big win in the forward test portfolio, to run as many strategies as possible, but issues arise with regard to conflicting trades (on the same instrument), prioritization and account drawdown. What begins as a desire to hedge can turn into an irrational addiction for more trade action followed by overexposure and regret. At some point, I had to realize that I was putting my desire to ‘trigger a position’ ahead of my desire to make the most profit.
The ‘soccer’ mentality isn’t bad if you’re good at it, but a team approach requires deeper pockets. It requires the ability to apply scale and take advantage of volume more so than edge. It’s thinking like the casino: “if I make enough trades, and the odds are on my side, I will make a profit.” It’s not a bad game, in fact from what I’ve read, it’s a game that most quant funds play, but you have to have a large account to sustain the drawdowns. You also need to have multiple instruments and/or instruments that trade in uncorrelated markets.
These things are all possible, and I’m looking at a platform that will help with portfolio optimization for perhaps the next Live Test, but not for this one. For this Live Test, I need to focus on what I’m good at—strategy performance.
Timing is Everything
I’m going to walk through exactly what I’ll be changing at the end of this post (for those looking for more detail). At a high level, I want to focus on trading the best strategies at the right time. So instead of trading 15+ strategies on MNQ, I’ll be trading 1-2 of my best core strategies on NQ, and possibly 2-3 of my best ‘non-core’ on MNQ. The selection process is more aligned with strategy performance and timing than portfolio optimization.
I think this will also give us the ability to truly test the viability of a strategy. In other words, at the end of this test I would rather speak to the success or failure of one strategy than I would about portfolio optimization. We don’t really need a good team as much as we need one to three really good players (thank you Shiva—you had that revelation a few months ago). I don’t know if this process will work, but it ensures a successful hunt whether we hit $60K or not.
I’ve discussed the importance of timing in previous posts, but I have yet to really use timing to my advantage in the Live Test. For example, earnings season increases volatility. Election cycles influence government spending, which drives GDP. Even holiday cycles can influence market dynamics, and anything that impacts the market is going to change how your strategy (manual or automated) works. This is one reason why many strategies in the core portfolio are focused on taking advantage of market extremes. It also gives an opportunity to look at certain days or weeks that may provide anomalous trading signals/opportunities.
I believe this is where I went wrong with Day 14 of the Live Test. The ability to identify these anomalous opportunities will not only prevent taking a position based on a false signal, but it will allow us to trade a strategy that may be more suited to that anomalous market. It may even be that this is a time to ‘flip’ the strategy’s command structure. I’ll be testing three such opportunities in the coming weeks. The first has to do with matching algorithms, the second has to do with major economic releases.