Ultimate Algorithmic Trading System

If filterTrade = false then
If close > myTopBand then
Buy this bar on close
If close < myBotBand then
SellShort this bar on close
If marketPosition = 1 and c < myAvg then sell this bar on close
If marketPosition =-1 and c > myAvg then buyToCover this bar on close
Before hitting the TEST button, let’s quickly go over the pseudocode. The only
code that was added was the Boolean (true or false) typed variable filterTrade
and its calculation. On every bar, it is initially turned off. The only way it is
turned on is when the distance in terms of dollars between the upper band and
the moving average exceeds $2,000. If filterTrade is on or true, the trade entry
logic is bypassed, thereby skipping the trade. Why did we just use the top band
and the moving average in our risk calculation? Shouldn’t we use the bottom band
and the average for short trades? One calculation is all that is needed since the
distance between the top band and the average is always the same as the distance
between the average and the bottom band—in this case, two standard deviations.
Ready to hit the test button? Table 2.9 shows the results of version 2 of the
algorithm.
Mission accomplished! Or was it? The maximum drawdown was reduced from
to $381K to $103K—a whopping 73 percent. However, as we all know, reward is
proportional to risk and the total profit dropped from $1.3M to less than $600K, or
more than 50 percent. Was it worth it? What if we used $2,500 risk instead, or what
if....Youcanseehowthisstuffcanbecomeaddictive.Wecould optimize the pertrade
risk amount at the portfolio level or at the individual market level. Does it
make sense to have a different risk level for crude oil than gold? If the equity curve
looks better, why not? We could even eliminate all the markets that show a negative
expectancy. We could work all day on different portfolios and what-if scenarios
and create one great-looking equity curve. But who would we be fooling? If it was
the 1980s or 1990s, the public. If we were unscrupulous and wanted to sell this
miraculous algorithm, we could mislead the public with the guarantee that every
number shown was generated by an exact trading algorithm. The general trading
public of the latter part of the twentieth century didn’t know any better and didn’t
understand the term ‘‘with benefit of hindsight.’’ Nowadays, with the computer
power and data at our fingertips, we would be fooling ourselves because the trading
public now has the same computers and data and has been fully educated on ‘‘with
benefit of hindsight.’’ We can still fall into this same old trap, though, if we don’t
fully utilize the tools at our disposal.
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STOCHASTICS AND AVERAGES AND RSI! OH, MY!
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