Ultimate Algorithmic Trading System

80
COMPLETE TRADING ALGORITHMS
This is the Turtle system in a nutshell, or should I say a turtle shell. The full-blown
Turtle model involves many more calculations, pyramiding, and a totally separate
position sizing and market selection algorithm. Some of these topics will be discussed
in Chapter 8 and a full-blown version (except for market selection) will be provided
at the end of this chapter in EasyLanguage.
Even though the complete Turtle ‘‘approach’’ isn’t being applied here, the two
systems are indeed complete trading algorithms; they both have entry and trade
management techniques. System 1 was designed to capture shorter-term swings,
whereas System 2 was the true trend-following component. Trading the two systems
simultaneously was undoubtedly considered synergistic to the Turtles. The key to
getting the benefit from both systems lies in the LTLF—it must be engaged. If
it’s not, then you end up just trading System 1, the 20-day breakout. A 20-day
breakout will always be closer or equal to the current market price than a 55-day
breakout. Here again is the idea of creating an additional level of diversification
through the use of multiple systems. However, the amount of capital to allocate to
the different systems was left up to the individual Turtle (trader). He or she could
commit 100 percent to either system or 50 percent to one and 50 percent to the
other or some other combination. How to determine how much of each system
to use was obviously a very difficult question to answer, even for a Turtle. Which
system would you use? If I had been a Turtle faced with this decision, I would have
done the research by backtesting both systems and allocating more toward the better
of the two.
As a Turtle you had three choices to make: Trade System1, trade System 2, or
trade a combination of the two. Let’s pretend we are a Turtle and let’s see if we
can make the decision. The research necessary requires each system to be tested
independently and simultaneously to see if ‘‘the whole is greater than the sum of
its parts.’’ Tables 3.1 and 3.2 show the performance of each system, respectively,
across the same portfolio over the same time period. Note that System 1 was initially
tested without the LTLF. In these tests, the maximum loss was set to $2,000 and
$100 was deducted for commission and slippage on a round-turn basis.
Table 3.1 shows the net performance along with individual market results as well.
A profit of more than $430k was generated along with a hefty $220k maximum
drawdown. Make a mental checkmark on the markets that showed the best results.
I have a feeling you will notice a pattern among the best-performing markets
throughout the rest of this chapter. Let’s see how the 55-day breakout faired
(Table 3.2).
Wow! The profit nearly doubled and the maximum drawdown was reduced by
10 percent. If you had traded this system in place of the 20-day breakout, you
might not have received a Christmas card from your broker—less than one half the
execution costs—but your banker would have been happy.
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