Singapore Stocks Investing and Forex Trading

Trading Tibits: Performance Monitoring

streetpips
Publish date: Thu, 20 Mar 2014, 08:46 AM

After a system is trading live, it is entering a new phase of life. You should at regular intervals monitor trading results and compare with expectations (both risk and returns) of your backtest, to determine if the system is working properly.

However you should definitely not micro manage your system. A good rule of thumb is to monitor the system on a monthly basis and not on a trade by trade basis! So long as the expectations are reasonably similar between actual trades and backtested performance, the system should be performing normally. It is very important to recognise that statistically, trades would be subjected to strings of wins or losses. Do not be overly alarmed.

One simple method to monitor is to check the actual drawdown of your live system and compare it to your maximum drawdown of the backtest. The actual current drawdown exceeding the max drawdown tested is a red flag that the system is not performing as well and market conditions may have changed.

At this point it is important to take note that backtesting should be done over a full market cycle (for example 5 years). It is pretty meaningless to backtest for 2 months and expect the live trades to follow the expectations (risk and returns) of the 2 month backtest.

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