Evaluating Trading Systems, Filtering out the Noise. Bears Flex muscles in Crude Oil Futures.
In This Issue
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As we dive further into the twenty-first century, many fantasy and futurist ideas from the past have slowly become a reality: watches double as phones, robots can clean our homes, and even though they can't fly yet, our cars can greet us and give directions. Many people believe that the evolution of all this technology has led to a decrease in human interaction, and while that may be true, and a negative in some aspects; there can be an advantage when the emotional rollercoaster that is the human mind is taken out of the equation.
Even for the most logically set minds on Wall Street, psychology plays a huge role in the market. Emotions run high, there are hasty impulses, and often a lack of self-control. Most trading professionals will agree that the human element can, at times, severely impact the trading goals and strategies of the trader, as they strive for profit and attempt to escape the pain of losses. This is where technology can save us from ourselves.
Well-designed, automated trading systems can offer the possibility of neutralizing the main psychological enemies of traders. Algorithmic (Algo) trading systems are written by investment professionals who know the markets intimately and offer a fast and wise decision-making process that eliminates the emotion, procrastination, and irrational decisions that human nature draws out.
That being said, I get too many emails about systems claiming to have the crystal ball or producing results that are too good to be true. Ninety-nine percent of the time, if it is too good to be true it is simply not true...
Yet there are more than a few solidly performing trading systems out there that can help investors achieve higher than average results; many with very little correlation to the stock market, as most systems I deal with are in the field of futures and commodities.
Finding the Right System for your Investment Objectives
So how does one go about evaluating trading systems trying to decide if a certain system or portfolio of systems might be a good fit for his/her investment objective?
You can ask the following pointers/questions to an investment professional, and they can help you filter out and screen possible trading systems for you to participate in:
1. Know yourself! How aggressive or conservative are you? How much risk capital do you have in mind? Do you have apreferences between systems that are day trade only versus long term? Perhaps you would like to avoid selling options as a method?
2. Who is behind the system? Who are the parents of this "trading child"? My common sense inspires me to lean towards investment professionals who are registered with regulating bodies such as the NFA, SEC, FINRA etc. are under more scrutiny to use a balanced approach in marketing their systems and presentation of trading systems. Even if registered, it would be wise to check how much experience they have, their credentials, and their background.
3. Start picking the system apart: Does it have live results? Back test results only? Back test and forward test results? If a system ONLY has back testing results, I personally recommend to stay away until it has either forward/simulated results or much better live results. Any experienced trade system designer would first design the system, test it over sample time data, and then would leave out time data passed the back test sample so he can test the system on the time sample it was not designed based on. So for example, I may test a new crude oil system and design it based on running some tests from 2011-2014. I would purposely leave out 2015 out of the equation so once my system is up and running I can now test it on 2015 to see if the stats are matching to even close to my optimized, back tested results.
4. Draw Downs. ALL systems, managed accounts, trading programs, and such HAVE DRAW DOWNS. Period. The main questions are: how long, how deep and how quickly does the system recover from these draw downs? This will also go back to my first point of this article - how do these draw downs fit your personality and personal risk profile?
5. Results. Are results reported with or without fees? Are the results attractive enough for the risk you will need to absorb? Do you know what the risk is?
The bottom line in investing is that past performance is not indicative of future results, and that holds for trading systems as well. What we try to do is speculate based on historical performance and take calculated risks into the future. The same holds for participating in trading systems.
As the title hints, this is just a basic window looking at trading systems. For myself, I see many advantages of proper trading system as an investment vehicle for investors, and spent many hours designing, evaluating and dealing with systems.
I hope this brief article will allow you to evaluate certain systems from a better perspective as well as asses myself and our Series 3 professionals at Cannon Trading Co, Inc. We would be more than happy to assist you in evaluating most trading systems out there.
Disclaimer - Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
From our friend Jim Wyckoff
Jim has an excellent daily newsletter where he reviews different markets, alerts you for potential trades and much more. Included is his great bi-weekly newsletter with charts and a little longer term outlook. We recommend checking out his website, educational CDROM, and services at jimwyckoff.com Click on image below to enlarge
The Nymex crude oil futures bears had a good day Wednesday by scoring a bearish "outside day" down on the daily bar chart--whereby the daily high was higher and low was lower than the previous session's trading range. The bears have gained downside technical momentum and are on the verge of producing a bearish downside "breakout" from the sideways and choppy trading range as depicted by the support and resistance lines seen on the chart. A downside breakout from that trading range would open the door to a fresh leg down in prices.
Source: Moore Research Center, Inc.
|Date||Reports||Expiration & Notice Dates|
|7:30 AM CDT - PCE Prices-Core(Aug)
7:30 AM CDT - Personal Income & Spending(Aug)
9:00 AM CDT - Pending Home Sales(Aug)
|LT: Sep Copper(CMX)
Oct Natural Gas(NYM)
|8:00 AM CDT - Case Shiller 20-City Index(Jul)
9:00 AM CDT - Consumer Confidence(Sep)
|FN: Oct Natural Gas(NYM)
LT: Sep Butter(CME)
Sep Butter Options(CME)
Sep Milk Options(CME)
|6:00 AM CDT - MBA Mortgage Purchase Index
7:15 AM CDT - ADP Employment Change(Sep)
8:45 AM CDT - Chicago PMI(Sep)
9:30 AM CDT - API & DOE Energy Stats
11:00 AM CDT - Grain Stocks
11:00 AM CDT - Small Grains Summary
2:00 PM CDT - Dairy Products Sales
|FN: Oct Copper(CMX)
Oct Gold & Silver(CMX)
Oct Platinum & Palladium(NYM)
Oct Soymeal & Soyoil(CBT)
LT: Sep 2,5 Year Notes(CBT)
Sep Fed Funds(CBT)
Oct RBOB & ULSD(NYM)
Oct Sugar 11(ICE)
Sep Fed Funds Options(CME)
Oct Lumber Options(CME)
|6:30 AM CDT - Challenger Job Cuts(Sep)
7:30 AM CDT - USDA Weekly Export Sales
7:30 AM CDT - Initial Claims-Weekly
9:00 AM CDT - Construction Spending(Aug)
9:00 AM CDT - ISM Index(Sep)
9:30 AM CDT - EIA Gas Storage
3:30 PM CDT - Money Supply
4:00 PM CDT - Auto & Truck Sales(Sep)
|FN: Oct Sugar-11(ICE)
|7:30 AM CDT - Ave Workweek & Hourly Earnings(Sep)
7:30 AM CDT - Nonfarm Payrolls(Sep)
7:30 AM CDT - Unemployment Rate(Sep)
9:00 AM CDT - Factory Orders(Aug)
|FN: Oct RBOB & ULSD(NYM)
LT: Oct Live Cattle Options(CME)
Nov Cocoa Options(ICE)
|9:00 AM CDT - ISM Services(Sep)
||FN: Oct Live Cattle(CME)
* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.
** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.
*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!