quantitative trading

Posted on Oct 30, 2015 by Kris Longmore

This post builds on work done by jcl over at his blog, The Financial Hacker. He proposes the Cold Blood Index as a means of objectively deciding whether to continue trading a system through a drawdown. I was recently looking for a solution like this and actually settled on a modification of jcl's second example, where an allowance is made for the drawdown to grow with time. The modification I made was to use the confidence intervals for the maximum drawdown calculated by Zorro’s Monte Carlo engine rather than the maximum drawdown of the backtest. The limitation is that the confidence intervals for the maximum drawdown length are unknown – only those for the maximum drawdown depth are known. I used the maximum drawdown length calculated for the backtest and considered where the backtest drawdown depth lay in relation to the confidence intervals calculated via Monte Carlo to get a feel for whether it was a reasonable value. Below is a chart of the minimum profit for a strategy I recently took live plotted out to the end of 2015, created using the method...