Wednesday, June 25, 2008

Trading with Discipline

Michael Bryant in says:
To be profitable in the futures markets, you need an "edge," a trading method that gives you an inherent advantage over the markets. A mechanical trading system is the best way to get that edge. With a trading system you can:
Back test the system to evaluate its performance over a wide variety of market conditions.
Paper trade the system in real time to get a feel for how it works and how to trade it before putting real money at risk.
Trade based on objective trading signals without emotional bias.
Automate the order placement and execution to reduce errors and eliminate the fear of "pulling the trigger".
Among professional money managers who trade the futures markets, known as Commodity Trading Advisors or CTAs, those who trade with mechanical trading systems outnumber so-called discretionary traders by a ratio of six to one (source: SafeMoneyMetrics Stark Managed Futures Indexes). The pros use trading systems because they work.
My company offers a day trading system to trade Nifty Futures. The market opens at 9:55 AM and closes at 3:30 PM. All trades are taken after market opens and closed at 3:15 PM. There are no overnight positions, hence there is no overnight risk.
While it is easy to backtest a system and provide attractive profit numbers, real time performance is what matters. When you actually started trading the system, did it make money ? Now, The system was offered for public use in April 2008. Here are the performance numbers for April, may & June 2008. These are actual trades, not just simulation.
April 08 Number of trades: 54 Gross Gain + 276.6 Net Gain + 114.6
May 08 Number of trades: 55 Gross Gain - 142.9 Net Gain - 307.9
June 08 Number of trades: 44 Gross Gain + 625 Net Gain 493
(upto June 25)
The net gain is calculated after deducting Rs 3 per trade for slippage & commission.
Net gain in three months: 299.7 points
This works out to 1200 points for a full year. What was the simulated performance ? It was 4100 points for 11 months. Thus, there is a strong possibility that the system may perform better in the coming months as reversion to the mean kicks in.
But, let us assume that the full year will provide 1200 points. What are the financial returns on such a performance ?
Margin for One Nifty : 700
Reserve to take care of losses : 800
Investment required to trade 1 Nifty : 1500
return in one year: 1200
There is 80% return on capital if current three month performance is extrapolated.
Now, remember that past performance is no guarantee for future results. But it helps to know that the system made money on simulated testing, then it made money in actual, real time trading. Surely, it is better than a method that has no track record ?
System trading has many advantages. It also has one disadvantage: systems will decay as market conditions change. The way to overcome this drawback is to continually test new ideas & strategies.
More information on the Nifty trading system is available at : . The system is called Day-Vinayak, or Day-V.