Ultimate Algorithmic Trading System

84
COMPLETE TRADING ALGORITHMS
algorithm (entry techniques, capital allocation, and position sizing models) by an
original turtle and a very gifted programmer. As I mentioned in the Introduction,
this is not one of the platforms included in this book, but it is well worth your
time to investigate its capabilities. What this research is implying is that the prior
trade may have an impact on the subsequent trade. In other words, it seems there
does exist a higher probability of a winning trade after a losing trade has occurred
at the macroscopic level on this particular algorithm. This autocorrelation could
be a function of the volatility cycle. After a big run in commodity prices, it is not
uncommon to see a congestive phase. In my opinion, this type of filter works better
with shorter-term higher-frequency algorithms. If you think about it, this makes
sense. A system that trades frequently can skip trades and still catch shorter-term
trends. On the other hand, a system that trades infrequently needs every trade to
add to the bottom line; skipping a single trade might keep you out of the market for
a year. This is the reason the Turtles relied on the ‘‘must-take’’ 55-day breakout.
Let’s test if there is synergy by trading both systems simultaneously. Synergy
occurs when the interaction of elements, when combined, produces a total effect
that is greater than the sum of the individual elements. Synergy does not occur when
combining the total profits of the two systems. Addition of total P & L follows the
commutative law. The synergy that does occur when combining systems is revealed
in the combined maximum drawdown metric. If two systems are somewhat noncorrelated,
then the overall maximum drawdown will not be equal to the sum of the
two individual maximum drawdowns; it may be less. So, it logically follows that
the synergy of combining multiple trading strategies is reflected in the increase of the
overall profit to overall maximum drawdown ratio. The overall profit is a constant
(sum of all total profits) and the overall maximum drawdown is variable. If drawdown
decreases, then the ratio will increase and demonstrate a somewhat synergistic effect.
This combining of systems can be accomplished by trading the two systems
independently of each other in separate accounts, or in a single account. A trader
can also combine the rules into one complete strategy, and trade in a single account.
Many of today’s testing platforms offer both methods. The backtesting method
where both systems are traded independently can be simulated simply by combining
the daily equity streams for both systems. This is a valid method and does reveal a
reduction in max drawdown, if one occurs. The second method requires additional
programming but does help with eliminating the necessity of keeping track of
multiple systems. If more than one system were to be traded simultaneously in
separate accounts, then capital would need to be allocated to cover all open positions
margins. Even if one system is long and the other short. If the systems are combined
into one account, then the net position (Long + Short = Flat) is recorded, and
therefore there is no margin requirement.
Table 3.4 shows the performance of the Turtle system using both System 1 with
the LTLF engaged and System 2 turned on.
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