Eureka!  You’ve just found the holy grail of market indicators.  The indicator of indicators which over the past few days has perfectly called each 30 minute top and low in the e-Mini S&P futures… Now what?  Time to put some real money on the thing and retire to the islands…. Not so fast!

Your strategy may be looking good over the past few days, or even months or years.  But to really get comfortable with it, wouldn’t you rather know how it has done over many, many years?  And once you’ve done that, wouldn’t you rather see it work for a period of time on the current market before putting real money to work?

If you answered yes to either of those, welcome to the world of trading systems – because backtesting and forward testing are two of the biggest advantages of trading systems.  The ability to see what would have happened, and what is happening – BEFORE putting real money to work.  And then, the kicker… tracking your live account versus the trading system to see how you’re doing with that live money once you’re ready to take that next step.

Backtesting

Backtesting is just what it sounds like.  Observing how a system would have performed going ‘back’ in the past, using historical prices to see when a system would have gotten in and gotten out, bought and sold, been stopped out, and so forth.  By running the system backwards in time, an investor can compile all the different trades and calculate how much the system would have made and lost month by month, year by year – and from there calculate the statistics such as annual rate of return, maximum drawdown, volatility and so forth we all use to gauge a model’s abilities.  On the iSystems platform, every model is backtested as far back as possible, ranging from 2001 to 2007, and shows in the equity curve graph and month performance table with a white background.

backtesting

(Disclaimer: Hypothetical Model Account Performance)

Forward Testing

So you’ve got the pretty annual return numbers, average winning amount, average losing amount, etc. – now what?  The next step is forward testing the system to see how it reacts and how the code working in real time, on live data.  Not that we don’t trust computers… but we don’t.  Who knows what sort of 1s and 0s could have swapped places and put some weird results into our backtested results.  Better to see the thing working in real time to confirm that the risk controls are as they should be, that the algorithm can handle the live data feed, and so forth.

On the iSystems platform, whenever a system is approved and added to the platform, forward testing begins.  This out of sample test can help confirm the effectiveness of the trading strategy on today’s market climate and expose any problems inherent in the code.  The forward testing shows in the equity curve graph and monthly performance table with a peach background.

forward-testing1

(Disclaimer: Hypothetical Model Account Performance)

Live Trading

The only thing left now is tracking the live trading.  It’s putting real money to work and seeing what the real profit and losses are on each trade.  And here’s where the iSystems platform really shines.  You see – the platform tracks the actual fill prices for every client trading a particular system, then averages all of those prices to arrive at an average fill price, which it then uses to calculate the hypothetical profit or loss on a model account (an account starting at $20,000, for example).  But that’s not all – the platform actually shows investors all of the good and bad fills too, listing the worst fill price and best fill price across all clients; and lists that side by side with the forward testing price (the price the computer ‘thought’ it was filled at).  While they’re usually pretty close, there can be times where they are quite far apart too… the important part is having that data point, and being able to see how the live trading is tracking the backtest and forward test.  The live trading shows in the equity curve graph and monthly performance table with a green background.

live-trading

(Disclaimer: Hypothetical Model Account Performance)

Putting it all together:  Wouldn’t it be nice if you could put all of these – the backtest, the forward test and the live trading fills onto one composite track record – with the different fill environments highlighted different colors to quickly and easily see the differences on the equity curve chart.  We sure thought that would be cool, and that’s exactly what the iSystems platform does.  The iSystems platform creates one track record containing all three types of fills.

It uses the live trading results to calculate monthly returns for any month in which any client, at any firm, is trading the system for the entire month.  If there are no clients trading it in real time, it uses the forward testing, what it calls the tracked fills, for those months in which there are no client fills that month, or for the entire month.  Finally, iSystems uses backtested fills (what it calls computer generated fills) for those months occurring before the system was loaded onto the iSystems trade servers.  The resulting track record and monthly results are hypothetical in that they represent returns in a model account.  The model account rises or falls by the single contract profit and loss achieved by the system in whichever data set is available, and begins with the suggested capital listed, then is reset to that amount each month.  The percentage returns shown reflect the inclusion of commissions, fees, slippage, and the cost of the system; giving what we believe to be the most complete view of system performance available.

Here is a glimpse of what an equity curve looks like highlighting backtesting, forward testing, and live trading using the different shades of color for the LAG_CRUDEOIL_4 system.

isystem-equity-curve

(Disclaimer: Hypothetical Model Account Performance)

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IMPORTANT RISK DISCLOSURE
You should fully understand the risks associated with trading futures, options on futures, commodity trading systems and retail off-exchange foreign currency transactions (“Forex”) before making any trades.  Trading futures, options on futures, Forex and commodity trading systems involves substantial risk of loss and is not suitable for all investors.  The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.  You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources.  You may loss all or more than your initial investment.  Opinions, market data, and recommendations are subject to change without notice.  Past performance is not necessarily indicative of future results.
The returns for trading systems listed throughout this website are hypothetical in that they represent returns in a model account.  The model account rises or falls by the average single contract profit and loss achieved by clients trading actual money pursuant to the listed system’s trading signals on the appropriate dates (client fills), or if no actual client profit or loss available – by the hypothetical single contract profit and loss of trades generated by the system’s trading signals on that day in real time (real-time less slippage, or if no real time profit or loss available – by the hypothetical single contract profit and loss of trades generated by running the system logic backwards on backadjusted data (backadjusted).
The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month.  The percentage returns reflect inclusion of commissions, fees, slippage, and the cost of the system.  The monthly cost of the system is subtracted from the net profit/loss prior to calculating the percentage return.
If and when a trading system has an open trade, the returns are marked to the market on a daily basis, using the backadjusted data available on the day the computer backtest was performed for backtested trades, and the closing price of the then front month contract for real time and client fill trades.  For a trade which spans months, therefore, the gain or loss for the month ending with an open trade is the marked to market gain or loss (the month end price minus the entry price, and vice versa for short trades).
The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of the investor’s participation (whether or not all signals are taken) in the specified system and money management techniques.  Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.  NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.  ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT.  IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING.  FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS.  THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
The information contained in the reports within this site is provided with the objective of “standardizing” trading systems account performance and is intended for informational purposes only.  It should not be viewed as a solicitation for the referenced system or vendor.  While the information and statistics within this website are believed to be complete and accurate, we cannot guarantee their completeness or accuracy.  As past performance does not guarantee future results, these results may have no bearing on, and may not be indicative of, any individual returns realized through participation in this or any other investment.
EFLOORTRADE HAS NO OPINION ONE WAY OR ANOTHER AS TO EXPECTED FUTURE PERFORMANCE OF THESE SYSTEMS.  THEREFORE, IT IS THE CLIENT’S OBLIGATION TO MONITOR TRADING SYSTEMS IN THEIR ACCOUNTS AND TO DETERMINE THAT THE TRADING SYSTEMS SELECTED ARE PERFORMING AS EXPECTED.
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