Somebody once questioned me ‘if there were only a single performance report I could look at to make a decision about a trading system what would it be?’ My initial reaction was that this was a ridiculous question. There are numerous variables that must be considered when picking trading systems. There are many performance indicators and ratios. Things such as average annual return, maximum drawdown, Sharpe ratio, margin requirements, robustness, the lists are lengthy, but, there has indeed been one report that I have come to rely on more than any other report. It is a report that has given me more comfort and assurance as a system trader than any other report. If I knew a system was properly developed, I could practically use this report alone to make a decision about trading it! So what is this report? It is ‘Start Trade Report’.
A Trading Systems Start Trade Report
In my view, the start trade report offers the most robust three dimensional view of trading systems attainable. It cuts through so many of the problems in traditional analysis. It even cuts through the nonsense involved in looking at real-time performance. I can hear it now “wait a minute, how can real-time performance be argued with?” Let me give an example with one of my systems Synergy. In May of 2003 Synergy began a trade in London Copper. The trade became the most successful trade of the year. As of this writing, (March 7th 2004) the trade has profits of over $25,000 a contract. If a trader were using position sizing, he might have had on 2 or 3 (or more) of these contracts, but had they began a week or even a day following this trade they would have missed it! Two investors trading the same system with the same amount of money and the same money management rules could show a $25,000 or $50,000 or $75,000 (or more) variation in their accounts! They may well have only started one day apart! This can create tremendous frustration, because one broker’s real time accounts could be far different from other brokers real time accounts with the identical trading systems.
Misleading Trading Systems Reporting
This phenomenon can likewise be used for disingenuous purposes. It is entirely possible for a trading systems seller to cherry pick the best historical starting date for his test results. He can choose a date right before a huge winner (or string of winners). This can cause it to appear as though the system required little original beginning capital and that the return on invested funds was massive. The first winners financed trading. But, what if buying and selling had started on a different date? What if a investor had began on a date that was right before a series of losers? They may have required 2 or 3 or 4 times the starting capital than they might have had they started on a different date. The return on invested funds would be much less, or, they might have lost all their investment before earning the profits shown.
Even if a broker or vendor shows an average of several accounts this can still be a meager view. They could still cherry pick the 3 or 4 accounts and their different starting dates, or they could have so few accounts to average from that the data suffers from what statisticians call a small sample size (This means not enough data to draw any legitimate conclusions.)
The worst offender would be if a disingenuous brokerage or vendor were pushing day trading systems because of the high frequency of trades and commissions it produced and then utilized some cherry picked “real time” accounts to “prove” that it worked.
The point I am making is that there are countless ways that start dates can impact performance, both in hypothetical reports and real-time performances. Traders need to have something robust.
A Trading Systems Solution
What’s the answer? Well, in my view it is the start trade report. What the start trade report does is tests various systems hundreds or thousands of times over the given period. Each test it starts on a new date that coincides with a date that traders could have taken a new trade. If there were 2000 trades over a 10 year period, then it will retest the system 2000 times starting on the date of each new trade every time. It also resets the equity back to the initial beginning amount with each test. This is crucial because when utilizing position sizing traders may bypass some trades in the beginning when the equity is small. It is not proper to look at the results of trades that a investor would not have taken. I have occasionally seen brokerage firms report on trades my system produced that a lot of of my clients would not have taken (based on their account size.) For example, a $3,500 losing trade in a system where most clients would have skipped any trades with risk above $2,000. The start trade report understands to skip trades at the right time dependent on the traders starting amount. This report can also let traders evaluate performance based off of the margin required. What this allows investors to do is see ALL the final results, rather than just one.
Trading Systems Start Trade Report Summary
A few things a Start Trade Report can show traders are:
1. What percentage of the first 12 months were profitable over 2000 different starting dates?
2. What was the average first year performance when averaged over 2000 different starting dates?
3. How much money did my account need if I started on the worst possible date?
4. What was the average account size I needed to trade the system over 2000 different starting periods?
5. What were the average and the most I ever went under my original starting amount? (This is different from maximum drawdown)
This report permits investors to filter out so much of the rubbish seen in typical performance reporting. It filters out so many errors in reporting “real time” performance founded on a small sample size or “cherry picked” beginning dates and accounts.
I hope traders can see that this information is priceless. I seriously do not know how a investor could ever trade any trading systems without it. Investors can see how much comfort and confidence this can build when they have looked at a system in this much depth. When I started trading, this is he report that gave me extraordinary peace of mind. It was the only report that encouraged me when there were drawdowns. It allowed me to know whether we were in the normal ranges of the bell curve. It also provided me a realistic range of outcomes to expect in the first 12 months of trading.
We think that offering investors these reports gives them an incredible edge and develops confidence. Investors need this confidence when the inevitable drawdown comes. In my own individual case, I’m able to stay calm during those times because of these reports. To obtain a copy of the start trade reports please email us.
Dean Hoffman
DH Trading Systems
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.