New book by Larry Connors Click here Improve your trading - See how
Futures and forex
traders who deploy a computerized trading system to help them trade
are a special breed of investor. They tend to go beyond the basic research when
analyzing which trading system to use and trust.
But here’s the problem:
The same zealous traders also tend to get excited about the equity curve of a
trading system. What is sometimes overlooked is that after they get in and start
using the trading system, what happens if the road gets bumpy and losing trades
replace the winning trades? Should you ditch the system, or stick with it?
I will show you a possible solution to that problem. The technique is called
Time Window Analysis. Moreover, the techniques I will discuss are applicable
to any researchable investment vehicle.
First let me tell you a little about myself. After college graduation in 1986, I
began my futures career on the floor of the Chicago Board of Trade working as a
runner on the grain floor. I progressed to doing grain market research and then
began handling client business in 1988. From that time on, I have been involved
in some capacity of futures trading system administration or management. I
haven’t seen it all, but I have seen a lot. Over the years I have written
articles for Futures Magazine, and SFO Magazine. My articles have
also appeared on FutureSource.com and Bondheads.com. I currently oversee
operations for an Introducing Broker headquartered in California, called Trade
Center.
What I am going to teach you is one technique to evaluate the performance of a
trading system so you, the investor, can better understand what to expect in the
future. These techniques are applicable to any investment; the limitation is
getting your hands on the data. Those who develop and market trading systems are
very keen to looking at Time Windows.
While it does get more complex than what I am about to say, most investors want
to know the basics about an investment or trading system:
| Time Period | 1 Month | 3 Months | 6 Months | 12 Months |
| Profitability Odds | 64.71% | 90.63% | 96.55% | 100% |
From the table above we can see that this system has a 64.71% probability of being profitable in any 1-month period. Any three-month period is 90.63% and so on.
The big key is seeing how long it takes
to make it to the 100% mark. With this valuable piece of information, I know
that I need to wait at least twelve months for my system or account to get back
to even or profitability. Obviously, this is not a certainty or guarantee, but
this information is critical in both the planning and maintenance of a system
investment. Thus, if the current drawdown is a little over seven months long, I
need to plan on sticking with it for about five more months.
Example # 2
While some systems can be successful, they do take some fortitude.
| Time Period | 1 Month | 12 Months | 18 Months | 36 Months |
| Profitability Odds | 54.93% | 86.26% | 94.40% | 100% |
From the table above we can see that this system has a 54.93% probability of being profitable in any 1-month period. Any twelve-month period is 86.26% and so on.
The chart above shows us that when the big drawdown comes; you need to be able
to sit with it for three years.
Example # 3
This system is up about $4005 on a $30,000 investment for 2006. Better to
plan NOW for how to act when the drawdown comes, because it will come.
| Time Period | 1 Month | 3 Months | 6 Months | 12 Months |
| Profitability Odds | 75.68% | 91.43% | 96.88% | 100% |
From the table above we can see that this system has a 75.68% probability of being profitable in any 1-month period. Any three-month period is 91.43% and so on.
What have we learned? Hopefully this shines a
light where perhaps there was none and hopefully this can be used as a corollary
to other investments above and beyond futures and forex trading systems. Have a
plan for what to do when something ugly, bad or costly happens. Obviously, you
can’t just close your eyes and wait out a twelve-month bludgeoning because the
Time Window says so, but you can go into an investment armed with some
information that gives you the edge. Ands isn’t the edge the difference between
winning and losing in just about everything?
For more information about Trade Center or to reach Scot Hicks, go to:
www.tradecenterinc.com.
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The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY 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 PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
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