MultiStage (v7) System Results - Part Three

This series on performance results of the MultiStage Trading System is being presented here for two reasons. First, I hope it is instructive to see what sort of metrics I look at when reviewing a series of backtest results. I did a 7-part series of posts on Quantitative Trading to discuss some basic concepts as well as my testing methodology, so this series is designed to discuss how I might review the output.

Second, my hope is that this series of posts might answer many questions that have been posed by potential Covestor followers. Covestor.com allows investors to "mirror" my trading account automatically. If you open an account with Covestor you can link it to my account and everything that happens in my account will be reflected in your account... not just to follow, but to mirror with real money.

I will stress, as I have many times, that backtests and real results are not the same thing, but hopefully we can learn from past markets what has worked, and consider that it may work in the future. That being said, these results and this analysis at least gives some idea of how my current system, and the one I use for my Covestor trading, would have performed in the past.

Now, on to some results. One of the things I look at when reviewing results is how the equity curve has presented itself over the long haul. This is important to me, as a long term investor and short term trader. It gives me some idea of what to expect. If my equity curve starts to look dramatically different than what has been seen in the past, something might be wrong with the system. Here are a few more metrics that go along with the most recent post of monthly returns:

Average Monthly Return: 12.7%
Best Month: 60.2%
Worst Month: -3.8%
Winning Months: 96.7%
Monthly Std. Deviation: 12.9%
Average Annual Return: 568.9%
Best Year: 723.1%
Worst Year: 61.1%

Okay, when you're done drooling let me say a couple of things. First, these numbers aren't really attainable. It's a little silly to think that we could average 568% per year. Trust me, if I could you wouldn't be reading this blog, cause I wouldn't be writing it. But these numbers ARE meaningful.

There are many reasons the numbers aren't attainable, but the primary one is liquidity. It's simply not possible to compound at these rates before you run out of liquidity in an issue, and ultimately in a market. I will post more about why real results vary in the future. The meaningful part of this is the trends. I am very interested in consistency in profits. It's valuable for me to see that I can pull in some sort of profit each month, with very few exceptions.

This also gives me some idea of what success looks like, which I can use to compare with current trends. Let me give you an example: If I remove the extremely volatile years (2000,2001,2008) the average month drops to about 9%. If I examine only the quiet years (2005,2006) the average month is about 4.2%. So, last month (November) yielded 4%, and I know that's typical in times of lower volatility. Monitoring like this helps me keep an eye on whether the approach is ceasing to work as it has in the past.

Good Trading...