Commodity Trading Systems; From Hypothetical to Reality - Testing and Simulation
System developers spend many hours behind a computer testing commodity trading systems and concepts. This can become a never ending road of trying to perfect an imperfect art and often can become detrimental to their commodity futures trading.
There comes a time in system testing when we must throw in the towel and say to ourselves, though less than perfect, good is good enough, and trade either our system or one that we purchase.
When a commodity trading system developer decides to change hats and become a commodity futures trader, it is a critical point and often the start of anxiety. Was the system tested correctly? Were the right markets selected? Was the strategy capitalized with enough equity? Were the correct parameter sets used? Was the system inadvertently over-optimized? Are the drawdowns too deep to trade through?
Tushar Chande in his book Beyond Technical Analysis writes, “During testing, vast amounts of data are crunched in milliseconds. In real time, however, you cannot accelerate the clock, and you must live through every drawdown one day at a time.”
This is a sobering reality for many commodity futures traders. The majority of traders may only have one 20 year pull in their trading career. To waste 5 or 10 years of dismal performance or thinking, “I should have done this instead of that” is definitely not acceptable. Worse yet is sticking to with a commodity trading system that fails in the real world and causes the trader to lose his trading stake.
Traits that make a good system developer are often the opposite of those that make a good trader. A developer always wants to improve their methods and make them as efficient as possible in regard to risk and reward. A trader understands that there is no efficiency in making money and takes profits when the market gives it to them, while continually managing their risks.
Most system developers constantly evolve their systems to produce better and better backtests (with hindsight, of course). Commodity Trading Solutions’ strategies, however, were not developed prior to trading, but only after several successful years of trading and analyzing what consistently works in real-world trading.
Unfortunately, there is no perfect system that works in all market environments. The key in trading is to use the right system in the right market environment, but this is an art based on years of experience and insight.
There are, however, some robust methods that can be used to implement commodity trading systems or strategies into the real world and make the crossover from hypothetical to reality as least painstaking and unexpected as possible.
At Commodity Trading Solutions, we focus on two main priorities in implementing commodity trading systems into the real world. The first is on breaking down the robustness of the performance and the second is on managing risk and exposure, including keeping the maximum drawdown within reason.
To break down the robustness of a system, we do two types of tests. The first is to obtain a set of robust metrics on the commodity trading system. The second is to test across a large set of data followed by several subsets.
The metrics that we feel are the most reliable are:
- High positive Mathematical Expectation
- Large average trade
- Low standard deviation of daily returns
- High MAR Ratio
- Low leverage and exposure
- Low or positive tracking error
- High profit/cost ratio
(Note: for any test to be of any value, testing on markets only liquid enough to trade and realistic slippage and commission assumptions must be used.)
Our commodity trading systems are at the core of our commodity futures trading strategies. See how we did at implementing them into the real world.
Commodity Futures Trading Commission Required Risk Disclosure
Futures and options trading involve substantial risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by or from Commodity Trading Solutions LLC that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Information provided on this website is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.