The MultiStage Trading System that informs my trading is currently in a state of drawdown. When this happens I always have to ask whether this is temporary, or if the system is failing. In order to do that I monitor several metrics to see if this drawdown looks like others that have occurred in the past, or if it is abnormal to some degree.
The other day Woodshedder posted a great note on one of the ways he monitors the health of his “Power Dip” system. I like the way he presented it, so I’ve replicated it here for the MultiStage system. It’s a fairly simple measure, looking at the 20-trade moving average of the system over time. I have been tracking this metric for a long time, as you can see on the far right column of the Daily Trade Log, but the chart makes it a little more clear.
In this case I tested for about 12 years. As you can see, the 20-trade moving average fluctuates between 0 and +5.0% most of the time; but the extremes have reached –6.0% and +10% a few times. The current level is at about –3%, which is stretched, but well within extremes set during previous years.
I also track a longer term view, which shows the moving average of the past 50 trades. In this case the extremes are from about –2% to about +7%, with the current level (average of the last 50 trades) being about +1%.
One final note… The average return per trade over this period (when backtested) is about 3%. That is what makes the average return of –3% rather alarming, so putting this in context helps me rest a little easier.
Good Trading…
No comments:
Post a Comment