Posted on Sep 03, 2019 by Michael M
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In part 1 of this series, we talked about how a market-savvy systematic trader would approach a period of drawdown in a trading strategy. Specifically, they'd: do the best job possible of designing and building their trading strategy to be robust to a range of future market conditions chill out and let the strategy do its thing, understanding that drawdowns are business-as-usual go and look for other opportunities to trade. Of course, at some point, you have to retire strategies. Alpha doesn't persist forever. In our own trading, we don't systematise this decision process. We weigh up the evidence and make discretionary judgements. All things being equal we tend to allow things a lot of space to work out. However, in this post, we review a systematic approach which can aid this decision making... In particular, we concentrate on the following question: "what is the difference between the empirical distributions of live and backtested returns?" Let's dive in and explore The Cold Blood Index! Becoming Cold-Blooded.... Johan Lotter, the brains behind the Zorro development platform, proposed an empirical approach to...

Posted on Aug 28, 2019 by Michael M
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Imagine you’ve tinkered for days or even weeks, perfecting a strategy idea that’s showing a whole lot of promise. You’ve meticulously tweaked a mouth-watering Sharpe Ratio out of your backtests….it even survived costs. YES! Systems go, let’s trade it. Imagine this new strategy enters a drawdown.…maybe a lengthy one....maybe from day one! How would you react to such a letdown? A common response to a long or sharp drawdown is to defer to our self-preservative instincts and pull the strategy entirely. Maybe you'd compare your poor live performance to your promising backtest, turn red and frisbee your laptop out the window. If you enjoy making money trading you'll need to do better. A relatively experienced systematic trader, who we'll call Jack the Quant, would look at this drawdown scenario a bit differently. Yes I know Jack is actually a terribly drawn Napoleon Dynamite Anyway, Jack would rely on: an understanding (and acceptance) of the nature of the markets a sound systematic research process generally chilling the heck out We're going to quickly talk about the latter two. You can learn...