Ultimate Algorithmic Trading System

on a peak. This demonstrates a lack of robustness—in other words, history would
have to repeat itself almost exactly for this set to be productive into the future.
A parameter set on a high but somewhat level plateau is a better choice.
The TMA looks to be the best by far; it nearly kicked the rest of the competitors
off of the podium. The results are very impressive, with a very high profit-todrawdown
ratio. If you look at the top 10 parameter sets, you will see the almost
exact performance for each. The only parameter that varied was the long-term
length. The overall effectiveness of the algorithm was not affected by variations in
this parameter. It just needs to be sufficiently large. This demonstrates a high level
of robustness. Also notice the ratio of the short- and intermediate-term lengths to
the long-term lengths: 1 to 4 and 1 to 6, respectively. This ratio is not one that is
mainly prescribed when trading the TMA.
The Donchian algorithm looks to be nearly as good nearly as the TMA. It looks
like using the parameter sets revolving around an entry length of 90, an exit length
of 19, and a $3,000 money management stop shows the best results. I was a little
surprised by the outcome; I was looking for an entry length around 55 and an exit
length around 20—the Turtle numbers. Or parameters that fit the N bar entry and
N / 2 bar exit template. The mantra ‘‘Hard to get in, easy to get out’’ definitely fits
these results. Even with such a short exit parameter, trades typically lasted 30 days.
The results also demonstrated robustness among the parameter sets; results stayed
somewhat constant throughout a good portion of the optimization. It’s no wonder
this algorithm is still being widely used.
There you have it! Four very tradable algorithms. You can’t ask for much more
than 60K to 70K annual return for the past 15 years, can you? On a million-dollar
allocation, that works out to be 6 percent or 7 percent a year. Oh, yeah, you would
have had to live through a 20 percent to 50 percent maximum drawdown. Hopefully
that occurred after you had built up your equity. If it occurred right off the bat, then
you would be in a heap of trouble—most traders would jump ship at that point and
never look back.
Since most traders don’t have a million dollars to allocate to trading, they can’t
afford to trade the 35-market portfolio we are currently testing. Even though this
portfolio offers a tremendous amount of diversification, it is simply too large.
The key to getting these systems into the realm of reality is to come up with a
smaller yet diverse portfolio. Portfolio composition, especially to beginning traders,
is as important as a trading algorithm. There are several steps to developing
a complete algorithmic trading plan: algorithm selection, portfolio composition,
proper optimization, and trade management. Position sizing is also an important
component, but that will be covered later. In the next section, a smaller portfolio
will be created by culling from the current large portfolio. After an algorithm
has been developed and a portfolio selected, the next step is proper optimization.
The final step is to develop trade management. So far, we have just used disaster
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COMPLETE TRADING ALGORITHMS
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