I consider breakout automated trading strategies (ATS) to be working, robust and timeless trading technique, which I really like and which still remains my current domain. During several years of live trading, I have experienced a couple of crucial situations that you should be aware of since the very beginning because they all are really realistic and can happen to you as well. Two of those I would like to point out in today's article. If you will be prepared in advance, your trading will be much easier.
Case Study 1: ATS Stagnation
In a portfolio of every trader you Trade X Confidential will find quite a high number of ATS systems, that have been through stagnation. It really doesn't matter which time frame you trade. And it even doesn't matter how robust the system is or what logic it is based on. From time to time, every system will have a period of stagnation and you cannot predict it or avoid it.
How does this stagnation period look like?
One example from my own portfolio - I have built the strategy in 2011 and have been trading it live since then. The stagnation period came in August 2013, lasted till December 2014. That is 1.5 years going just up and down.
As you can see, the stagnation period has really been long and it brings very strong uncomfortable feeling. Especially the beginners in ATS trading automatically expect the strategy to earn money regularly from the first day live. They don't even want to consider the possibility that the strategy might be in the beginning of stagnation period or even in the beginning of a new drawdown! Unfortunately, this is all part of trading (of any trading style, it is not only about ATSs) and you should be ready for it. Most of my systems, which have gone through stagnation period, have recovered after all and made a new equity high. The fact that the strategy is not profitable for a couple of months doesn't have to mean that it is not working or that ATS breakout technique is not working as such! All you need is to be patient and have a realistic point of view. The thing that can help you is to diversify your portfolio across the markets and reduce the stagnation period, but it is good to be ready for coming stagnation period.
What have I done RIGHT to be always ready for a situation like this? It is simple: massive diversification across the markets and various strategies. This is the most important rule for stable profits in trading.
Case Study 2: Exceeded Backtest Drawdown
In my trading career, I have learnt a tough true: the drawdowns from optimization backtests serve really just for your basic orientation. I have been through situations when a strategy have created new, higher, historical drawdown.
Such situation happened to me with one of the strategies, which I have been trading live since 2011. The strategy has in 2014, which has been the worst year in index markets in the last decade, gone through a solid drawdown that exceeded the one from historical backtests.
Situation like this one is really unpleasant and the lesson is that every time when you set up a realistic drawdown, it is important to look at the equity from OOS periods, or to use Monte Carlo analysis that can offer you more realistic image of what to expect in the future.
And what have I learnt to do RIGHT?
What I do in a similar situation is that in Trade X Confidential drawdowns like this one I reduce the number of contracts on given ATS.
After all, the strategy has recovered from the drawdown - and that can be applied to most of my strategies that have experienced new historical drawdown. You really need to be patient here and in some cases I decide to replace the underperforming strategy for the one which currently has better results. Such situations are not pleasant, but they realistically can happen so it doesn't make any sense to close your eyes and pretend this cannot happen to you. And again, the diversification across the markets is a really good way how to handle these situations better.
Conclusion
The conclusion of this article is that the holy grail really doesn't exist. I have experienced bad times in all trading areas - discretional, options or spreads trading. Sometimes I experience it even when trading ATSs. But the ATS advantage is that in the moment like this you don't waste time - everything is automated so you don't have to sit and stare for hours at your computer screen and waste your time, you can, in the meantime, be productive.
This is one of the big ATS advantages.
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