Somebody once asked me, “If you had to decide about a trading system by only looking at one performance report, which report would you choose?” My first reaction was that this was a silly question. There are many factors that must be considered when choosing a trading system. Besides many performance indicators and ratios, there are things such as the average annual return, maximum drawdown, the Sharpe ratio, margin requirements and robustness.
However, despite this wide array of information that must be considered, there is indeed 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 is properly created, I can almost use this report alone to decide about trading it! So what is this report? It is a “Start Trade Report”.
A trading systems Start Trade Report
In my opinion, a Start Trade Report can give the most robust, three-dimensional view possible of a trading system. It cuts through many pitfalls that come with traditional analysis and gets right down to the genuine heart of the matter. It even cuts through 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 made profits of over $ 25,000 a contract.
Now, if a trader were using position sizing he might trade 2 or 3, or even more, of these, but here’s the thing: had they started a week or even a day after this trade was first made, they would have missed it entirely! 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 only started one day apart!
This can create tremendous confusion. One broker’s real time accounts can inexplicably appear to be far different from the real-time accounts of another broker, even when using the same trading systems.
Misleading Trading Systems Reporting
This phenomenon can also be used for dishonest or disingenuous purposes. It is possible for a trading systems vendor to simply cherry pick the best historical starting date to suit his purposes. He can choose a date right before a huge winner, or a series of winners. This can cause it to look as though the system needed little original 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.
But what if trading had started on a different date? What if that trader had even started on a date that was right before a series of losers? He might have needed 2, 3, or even 4 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 scenario, he might have lost his entire 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 meager view and offer less than the needed amount of information. Theoretically, he could still cherry pick the starting dates of all 3 or 4 accounts, using each to show as much profit as possible. Alternately, he could have so few accounts to average from that the data suffers from what statisticians call a small 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 they have the ability to generate, and then use some of his cherry picked “real time” accounts to “prove” that his strategy worked.
The point I am making is that there are countless ways that incorrect or intentionally altered start dates can impact performance, both in hypothetical reports and real-time performances. Traders need to rely on something better and more robust than much of what is currently available.
A Trading Systems Solution
What is the answer? Well, in my humble opinion, the answer to this 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 made his new trades. For example, if there were 2,000 trades over a period of 10 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 makes sure to reset the equity back to the original starting amount with each test. This is necessary because when using position sizing, traders may skip some trades in the beginning when the equity is still small, but, it is not correct to look at the results of trades that a trader would not have 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 taken. I have seen, for example, a $ 3,500 losing trade in 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 at which times based on the starting capital of the traders.
This report can also allow traders to evaluate performance based on the margin required rather than account size. This feature allows traders to see the entire spectrum of ALL the possible outcomes rather than just one.
Trading Systems Start Trade Report Summary
Here are a few things that a Start Trade Report can show traders:
1. What percentage of the first 12 months was profitable based on the 2,000 different starting dates?
2. What was the average first year performance of the system when averaged over the 2,000 different possible starting dates?
3. How much money would my account have needed to contain if, theoretically, I started on the worst possible date?
4. What would be the average account size needed to trade this system based on the 2,000 different possible starting periods?
5. What would be the average amount that I went under my original starting point? What about the largest amount possible over all 2,000 different dates?
This report allows traders to filter out much of the garbage found in typical performance reporting. The Start Trade Report can filter out many errors in reporting “real time” performance based on either a sample size that is too small or starting dates and accounts that are “cherry picked.”
I hope traders can see that this information is invaluable. I honestly 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 will be surprising to them how much confidence this report can build, not to mention the comfort. Ever since my early days of trading, this report was the one that gave me the most peace of mind. It was the only report that comforted me when there were drawdowns. It allowed me to know whether we were in the normal ranges of the bell curve, or whether we were going through something extreme. It also gave me a realistic range of outcomes to expect in the first year of trading.
We believe that providing traders with these reports will not only give them an incredible edge, but also build their confidence immeasurably. Confidence is a valuable attribute for a trader to have when the inevitable drawdown comes. In my personal experience, it is thanks to these reports that I am able to remain calm even during the worst of times.
To get a copy of the Start Trade Report please send us an email.
DH Trading Systems
This trading systems article was written by Commodity Trading Advisor Dean Hoffman. For more about the Relativity trading system please click on the links.