Graphical analysis of trading system's simulated track record. Step Two algorithm, AUD/USD.

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Written by Forex Automaton   
Monday, 05 October 2009 10:55

This AUD/USD back-testing analysis concludes the series which began with EUR/USD. Simulated track records of six best Step Two algorithmic traders are studied graphically. For a more numbers-oriented approach to performance, see the article explaining the trading system optimization process which led to the selection of these six robots. This is the sixth, final report in the series and by now, the main area needing improvement is already clear: just as the system undertrades the less volatile currencies, it overtrades Aussie.

 

Money management for the individual markets

separate

joint

Pattern analysis for the individual markets

separate

Step One

You are here: Step Two

joint

test-only

Step Three

Table 1. Various modes of the trading system operation. The present report deals with performance of selected Step Two algorithmic traders.

A run of the back-testing program created simulated track-records for just the six independent "virtual traders" (forex robots), each of them being an incarnation of the same algorithm, differing by the setting of the adjustable knobs. The robots had been selected on the basis of Step One vs Step Two performance comparison, and are believed to balance risk with return well while taking advantage of the multi-market capital allocation available in the Step Two algorithm. (The article linked above gives details of the traders' input parameters and the performance figures of merit). The algorithm learns continuously, using only data from the past of the time series. Therefore, every trading step, even during the simulated trading, tests applicability of the past experience to the present moment. In Step Two mode, co-existing trading opportunities in markets other than the market under study may influence which trades are placed. There is a competition between the markets.

AUD/USD during the simulated time period (2002-2009),  including system training

Fig.1. AUD/USD bar charts for the period under study. Day scale. The chart includes training time when no trades could be placed.

As in all other studies posted here so far, the trading is performed on one-decision-a-day time scale, with 1:100 leverage, risking no more than 10% of the trading capital at any point in time. Historical EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF and AUD/USD (Fig.1) day scale data are used, covering the time interval from August 20, 2002 to August 21, 2009, with the actual trading starting in April 2006 (when the initial "training" of the system was completed). This report covers the trading in AUD/USD, for all six traders.

Forex trading system track record chart. AUD/USD. Trader 510 2.1 Forex trading system track record chart. AUD/USD. Trader 552 2.2 Forex trading system track record chart. AUD/USD. Trader 553 2.3 Forex trading system track record chart. AUD/USD. Trader 584 2.4 Forex trading system track record chart. AUD/USD. Trader 588 2.5 Forex trading system track record chart. AUD/USD. Trader 622 2.6

 

Trader position

long

short

Market agrees

yes

   

no

   

Fig.2. Performance track record charts. Day scale. Bars in the charts are color-coded according to the type of trading position held, as explained in the table. Black corresponds to no trading position. The time period, same for all traders, is chosen to best show all trades of all traders.

 

Forex trading system track record chart. AUD/USD. Trader 553.  August 15, 2008-March 1, 2009. 3.1 Forex trading system track record chart. AUD/USD. Trader 553. March 1, 2009 - August 21, 2009. 3.2

 

Trader position

long

short

Market agrees

yes

   

no

   

Fig.3. Performance track record chart for T553, arguably the one of the six traders with the best AUD/USD performance. Day scale. Bars in the charts are color-coded according to the type of trading position held, as explained in the table. Black corresponds to no trading position. 3.1: August 15, 2008 to March 1, 2009. 3.2: March 1, 2009 to August 21, 2009.

 

Discussion of AUD/USD performance

As was already noticed for EUR/USD, USD/JPY, GBP/USD, and USD/CHF, the selected robots trade only during the period of highest volatility. No trades have been placed in 2006. Despite this fact, the robots seem to over-trade in 2008. For example, looking at T553 in Fig.3, I can't help the feeling that a lot of trades could have been avoided without hurting the performance. This is in contrast with EUR/USD where the system barely trades at all during the same period.

I dislike the fact that the system does not trade unless the volatility is extreme, and then trades too much. The core problem is now easy to identify: the way the entry and exit parameters are formulated, unlike the stop-loss parameter, is not adjusted for volatility. In other words, the threshold is applied to a quantity (relative expected price change) which is large when volatility is large and small when the volatility is small. That this quanity is a relative price change does not change the fact that the threshold effectively favors high volatility. The reason I end up with strategies trading only high volatility is because I try to minimize the risk, and the risk is minimized by minimizing the number of trades, by being selective about them.

 

Going back to my studies on the financial panic response of EUR/USD and AUD/USD, I conclude that there was roughly 4 times more volatility (variance in logarithmic returns) in AUD/USD during the peak of the panic in the Fall 2008, then there was in EUR/USD. In terms of RMS, this translates into factor 2. That gives you a feel as to the significance of the problem.

This is not too difficult to fix by changing the way selectivity threshold is calculated. This problem is also completely different from the problem of obtaining the market direction forecasts on which the trades are based: it has to do with what fraction of the trade ideas that get accepted, not with the composition of the pool of trade ideas subject to this filter.

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Last Updated ( Monday, 04 January 2010 12:26 )