How to Judge a System ?

[vorres 10]

Just a bit about me first: I used to trade options (DIA) untill about 5 years ago through IB, really fun game semi-marketmaking from home, although the hours were odd living in Europe. Arbing things till they were delta-neutral and keeping track of inventory as I was sitting on either bid or ask in about 20 to 30 series of the first two months. Since IB (or better said: exchanges) introduced cancellation costs that game was over. Nowadays it wouldn't be possible anyway because of tighter spreads and penny quotations so no use crying over spilled milk. I have been trying since then doing some intraday-stuff but found out it doesn't mix well with me as a lot of patience is needed for that waiting for the right setup and I have a tendency getting too emotional taking subpar trades.

So what I tried is finding out why I didn't have those problems when I traded options intraday and since then have been trying to develop some simple systems with hard and fast rules. There is some discretionary aspect to these too, but if explained carefully anyone should be able to trade my 'system' almost exactly the same way. So all data come from papertrading at the moment. I hope to go live in six months or so. My problem is however I now got quite a lot of data for one system (two other systems or in the proces of being developed) but what do I look for to know if these numbers are being significant, what other things should I be looking at and how do I finetune my money-management (I know this will have a big impact on my return). The idea is to improve what I got by looking at significant things.

For the moment I have a rather agressive version of money-management that probably needs some adjusting. The system takes short-only trades of the Russel3000 stocks (it refreins from trading under certain conditions) and has been doing quite well despite the bullmarket. I can't however give away the keys to the kingdom as I think this is only scaleable up to 150k (200 k at most) with the current money-management without affecting the markets as it often trades not so liquid stocks.

For the moment I am looking at % return each month, number of trades, max dd, win% and profit factor ...

Any feedback would be appreciated.

 

Edit: this system uses no stoplosses but only time-exit: MOC.

[DugDug 10]

hi - as a market maker your edge was probably in spreading options around fair value and (anybody who tries to back test that is kidding themselves as there are too many parameters and volume and liquidity problems to make it applicable to real life.)

So back to what i think is your question - how to judge a system.

While there are a lot of measures eg; max drawdown, winners v loosers, ratios etc; (buy some of those recommended systematic testing books for more detail)

There is only one that i find that can ensure it works in real life - prior to actually doing it.

common sense - if you are getting crossing the spread each time, not getting set at lows, and selling at highs then maybe it might work. Never trust a system that constantly shows you as getting great fills every time.

Really track and follow a few trades and make sure that they correspond to what did/might/can actually happen in real life.

hope this helps

[vorres 10]

yes, what I did as a market maker can not be tested in anyway that I know off and def. was a totally different ballgame.

Thanks for the rest of your answer however, do you have any books you could recommend cause I am all rather green at this ... I tried allready to enlighten myself by googling a lot and by trying to apply some common sense but any additional info is welcome ...

[Tams 20]

the most important aspect of evaluating a system is to

first separate (remove) the accidental profit

from system profits before calculating your return.