Somebody once asked me, “If you had to decide about a trading system by only looking at one performance report, which is it?” My first reaction was thinking this question is silly. Many factors must get considered when choosing a trading system. Besides many performance indicators and ratios, there are things such as the average annual return, greatest drawdown, the Sharpe ratio, margin requirements and robustness.
Although despite the extensive information that must get considered, there indeed is 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 got correctly created, I can almost use this report alone to decide about trading it. The report is called the “Start Trade Report.”
A Trading Systems Start Trade Report
A trading systems’ Start Trade Report can give the most robust, three-dimensional view possible. It cuts many pitfalls that come with traditional analysis and gets right to what matters. It also cuts all the nonsense that comes up when looking at real-time performance.
I know what traders are thinking. I can hear it now. “Wait a minute, how can real-time performance be argued with?” Well, let me give an example that clearly 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 earned profits of more than $25,000 a contract.
Now, if a trader were using position sizing he might trade 2 or 3, or more, of these, but here’s the problem: had they started a week or even a day after this trade got first entered, they would have missed it! 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 greater, more preposterous amount! They may have started just one day apart!
Discrepancies like this can create confusion. One broker’s real-time accounts can inexplicably appear far removed from the real-time accounts of another broker, even when using the same trading systems.
Misleading Trading Systems Reporting
This phenomenon can also get used for dishonest or disingenuous purposes. A trading systems vendor could use potentially cherry-picked past starting dates to suit his purposes. He can choose a time right before a huge winner, or a series of winners. Manipulating the data this way can cause it to look as if the system needed little starting capital and the return on invested funds was enormous. Choosing this date would mean that the first wins financed the rest of the trading.
Although what if trading had started on a different date? What if that investor started on a date right before a series of losers? He might have needed two, three, or many more times the starting capital than would be needed had he started on a different date. His returns on the invested capital would be much less. In the worst-case, he might have lost his investment before earning the profits shown.
Even if a broker or vendor shows an average of several of his accounts, this can still be a narrow view and offer less than the needed information. Theoretically, he could still cherry pick the starting dates of all three or four accounts, using each to show as much profit as possible. Alternatively, he could have so few accounts to average from that the data has what statisticians call “too small of a sample size”—not enough data to draw any valid conclusions.
An even worse offense would be if a disingenuous brokerage or vendor were to push some day trading systems because of the high frequency of trades and commissions by using cherry-picked “real time” accounts to “prove” that his strategy worked.
The point I am making is there are countless ways that incorrect or intentionally altered start dates can affect performance, with hypothetical reports and real-time performances. Traders need to rely on something better and more robust than much of what is now available.
A Trading Systems Solution
What is the answer? Well, in my opinion, the answer 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 entered his new trades. For example, if there were 2,000 trades over ten years, the Start Trade Report will retest the system 2,000 times, each time starting on the date provided for each new trade.
The Start Trade Report also resets the equity back to the original amount with each test. Doing it this way is needed because when using position sizing, traders may skip some trades at first when the equity is still small. Results should not include trades that would not be taken. I have sometimes seen brokerage firms report on trades generated by my system that, based on their account size, many of my clients would not have placed. I have seen, for example, a $3,500 losing trade using 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 when based on the starting capital of the traders.
This report can also allow traders to evaluate performance based on the margin required instead of the starting account size. This feature allows traders to see the spectrum of ALL the possible results.
Trading Systems Start Trade Report Summary
Here are a few things that a Start Trade Report can show traders:
- What percentage of the first 12 months was profitable based on the 2,000 starting dates?
- What was the average first-year performance of the system when averaged over the 2,000 possible starting dates?
- How much money would my account have needed to contain if, theoretically, I started on the worst possible date?
- What would be the typical account size required to trade this system based on the 2,000 possible starting periods?
- What would be the typical amount that I went below my starting point? What about the largest amount possible during the 2,000 dates?
This report allows traders to filter out much of the garbage found in regular performance reporting. The Start Trade Report can filter many errors in reporting “live” performance based on either a sample size that is too small or from cherry picked starting dates.
I hope traders can see this information is valuable. I 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 surprising to them how much confidence it can build. From my early days of trading, this report was the one who gave me the most peace of mind. Start Trade reports comforted me when there were drawdowns. It allowed me to know whether we were in the typical ranges of the bell curve, or whether we were going through something extreme. It also gave me a realistic range of results to expect in the first year of trading.
We think providing traders with these reports will not only give them an edge but build their confidence immeasurably. Confidence is a valuable attribute for a trader to have when the inevitable drawdown comes. In my experience, it is thanks to these reports that I can remain calm during the challenging times.
By: Dean Hoffman
FUTURES TRADING IS NOT SUITABLE FOR EVERYONE AND PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF SUBSTANTIAL LOSS IN FUTURES TRADING OR WITH ANY TRADING SYSTEM OR PROGRAM. CAREFUL EVALUATION OF YOUR PERSONAL FINANCIAL SITUATION MUST BE DONE PRIOR TO DECIDING TO TRADE IN THE FUTURES MARKETS OR ANY GIVEN TRADING SYSTEM OR METHODOLOGY.