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Equity Curve Filters And Compounding
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Equity Curve Filters And Compounding

by The MoleMay 24, 2015

In early 2014 we decided to implement an equity curve (EC) filter into CrazyIvan. The reason for doing so was the realization that CrazyIvan exhibited high dependency, meaning it was cycling through distinct clusters of winning and losing periods. Here is a recent reason example that demonstrates how our EC filter works:

2015-05-24_CrazyIvan-EC_filter

Granted this is a rather idealized occurrence and our EC filter may sometimes activate or deactivate a bit late, which is unavoidable. As there apparently is a high correlation between winning and losing streaks between the symbols CrazyIvan trades and winning campaigns can run for a day or more the EC filter keeps an open cache of open positions in addition to a list of completed historical campaigns. You can find more information about our EC filter here and here.

2015-05-24_CrazyIvan_PnL

Our cumulative P&L graph currently has us at 136R since 1/1/2014. Now it would be a common mistake to assume that this is tantamount to a profit of 136%. All position sizes in CrazyIvan (and Thor) are based on the account principal. So if your are trading a $100k account your position size (i.e. R size) will be 1% of that – hence $1000 (for futures it will usually be a bit less – I’ll cover that another day). As your account grows or shrinks your position sizes grow or shrink accordingly. Which not only keeps your risk or R size in line with your account but it implicitly produces an effect called compounding.

2015-05-24_CrazyIvan_100k

On IB we’ve been seeing slippage of about 0.015R which of course has to be considered. Vankar’s slippage is actually quite a bit tighter as they’re clearing through the institutional branch of FXCM as well as CQG on the futures side – plus you trade 0.1 pip sizes instead of 0.5 pips on IB. However I’m keeping it as an average cost – clearly this will vary from one broker to the next (tip – always always try to negotiate).

Also note that no trades are taken during equity curve wait periods – we still log the trades as the EC filter requires those numbers.  In any case – you can clearly see the impact of compounding – instead of $236k it has climbed to $301k (including avg. commission and slippage). And over time that really starts increasing your leverage. Something to ponder about and this is why I always caution you against taking large risks on a particular campaign. Instead take small risks over time and let compounding work in your favor. Remember – the results above only represent 17 months of trading CrazyIvan – the goal is to maintain a reasonable growth rate over many years to come.

 

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Cheers,


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Scott Phillips

    Mole the slippage on IB is not .15R but .016R on average, according to our real money forward test. Admittedly this was very small sizes so expect that to increase with size.

  • http://evilspeculator.com molecool

    Corrected it – I got it right in the formula however – well, I put in 0.015R, close enough 😉

  • newbfxtrader

    Awesome !

  • RacerXX

    Looks awesome Mole, Scott.

  • wandering196

    There is a reason I keep coming back here!

  • Scott Phillips

    I would add something to this when you are talking about spreads. The interbank market trades only in $1mio units, and mostly over EBS or Reuters. It is not a centralized market with an exchange, just an ad-hoc network of guys. Of course there are institutional level computerized matching engines plugged into this, companies like HotspotFX and KnightFX, for hedge funds and the like, also “prime brokers” again looking to capture the Hedge Fund market.

    The role of a retail broker is to buy a 1 million dollar chunk of whatever from their institutional broker and split it up into small chunks for retail users. This is a valuable service and they should charge for it. Charge for the SERVICE, not take a bet against you.

    If your broker has spreads which are “negotiable” then it may be they are either artificially raising the spreads to increase profit margin, or falt out not trading, just “handling your action” waiting for you to eventually blow up.

    If you have a broker with a vested interest in you blowing up, then eventually you will blow up, because thats what your broker wants. Be EXCEEDINGLY careful in your choice of brokers

  • Scott Phillips

    FYI I just read online somewhere that Vankar has a head broker who goes by the name FuturesTrader71. I watched a webinar by him on BigMikeTrading some time ago and he came across as the real deal, very knowledgeable and legit

  • phylum

    “If you have a broker with a vested interest in you blowing up, then eventually you will blow up, because thats what your broker wants. Be EXCEEDINGLY careful in your choice of brokers”

    Good call, so how do you sort the shit from shinola?

  • http://evilspeculator.com molecool

    He’s not with Vankar anymore. Formed a new IB called Stage 5 Trading.

  • mugabe

    It’s also worth informing yourself of the financial compensation legislation of the country where the broker is based if the broker goes belly up. Think MF Global, for example.

  • http://www.ProfitFromPatterns.com/ Ivan K

    Additionally one can only partially fund the account to just say 50% of what one intends to trade with … alternatively a Letter of Credit or some security may be acceptable by the broker in lieu of cash.

  • http://evilspeculator.com molecool

    I don’t think that flies in the U.S. but I’d be curious to hear a broker chime in on that subject.

  • http://evilspeculator.com molecool

    First step is to always look for a broker that is not running their own trading desk. ECNs are preferable.

  • SirDagonet

    I watched one of FT71s webinars on BMT several months ago… I couldn’t asess his depth of knowledge, but I think he overcommitted what he was capable of delivering to his “students” – he was basically offering to monitor and mentor a LOT of traders.

  • http://evilspeculator.com molecool

    That is a very fine line one has to walk…. especially if it’s given for free. People have a tendency to especially take free advice for granted – after all there is so much of it out there these days. Thus most are incapable of differentiating what provides value and what is just plain manipulation or marketing. The few good people I have come across go through psychological stages.

    1. Excitement and heavy involvement as popularity grows.

    2. Commitment to serving a great good – e.g. helping retail clients succeed.

    3. Increasing frustration about inability of the majority to abide by a defined set of rules and practices.

    4. Disgust and cynicism sets in.

    5. One either gives up and walks away (e.g. start a sub only business), or one finds a way to deal with the realities of life and the market. The latter usually involves a focus on a select few who show promise, e.g. mentoring, pay2play service, trading room, etc.

    In case you’re wondering – I arrived at stage 4 about 5 years ago… how time flies… My decision was to pursue a hybrid model that would serve me and at the same time actively discourage plain old leeches and chatterboxes who were clearly wasting my and their time.

    http://evilspeculator.com/evil-speculator-2-0/

    Blog traffic in the ensuing years depleted quite a bit but my subscription business and my services grew along nicely. Compared with 2010 we are enjoying a LOT less traffic but much better discourse and we all have grown as traders by leaps and bounds.

  • http://evilspeculator.com molecool

    NetLines indicator ported to NinjaTrader8 :-)

  • DudePlunger

    How is NT8? Did they fix the way price databases are stored, aka got rid of the file based system that has made us want to pull our hair out/

  • http://evilspeculator.com molecool

    * Upgraded to the latest Microsoft .NET 4.5 runtime environment

    •NinjaTrader 8 core and UI is now fully multi-threaded which adds significant performance increases across the entire platform

    •Connectivity adapters now run in their own thread, which permits these events to run independent of the main application thread

    •Changed the way data is saved in the database resulting in significant performance enhancements

    •Replaced the Windows Forms UI with WPF allowing us to take advantage of the latest UI concepts and models

    •Improved optimizations in terms of open workspaces resources to use minimal CPU usage

    •Significant improvements on Strategy Optimization, resulting in 10x performance gains in our benchmarks

    •Added support for concurrent historical bar requests, greatly improving data load time compared to NinjaTrader 7

  • Grant

    Phylum, look for a broker that is an ECN.
    http://www.investopedia.com/terms/e/ecn-broker.asp

    Look for lists online. If you call your broker, they will never admit to having a dealing desk/trading desk, fyi.

  • Grant

    Mole what is the timeframe that you are using? A shorter timeframe may imply a smaller trading range on ave per rollover which will cause the % of the trade lost to slippage to increase. Also, are you using a stop limit on your entry?

  • http://evilspeculator.com molecool

    I trust everyone had a nice long weekend?

  • SirDagonet

    Very nice… Thanks for the post… interesting reading on a down-day…

  • Scott Phillips

    As long as they got rid of that flat file data bullshit

  • Scott Phillips

    I was with mfglobal and it sucked, hardcore

  • Scott Phillips

    Carefully, by acknowledging that it is an extinction risk. Some years ago many of Ivan’s students were wiped out with no recourse by a local broker here

  • Skynard

    /DX is………….Get it now:)

    https://www.youtube.com/watch?v=oMZ7GcnU6XM

  • Skynard

    Shorted /DX

  • Skynard

    All ready to go:)

  • Skynard

    /CL bears need some pressure and break hourly 25.

  • TheRooster

    as someone mentioned – also check if/ how much you are covered by a governmental financial compensation scheme

  • mugabe

    bloody hell

  • mugabe

    I think this idea of partially funding the account is a very good one, and also of regularly draining it when profits accrue but maintaining R values based on the whole value of the notional account.

  • mugabe

    yeah, it’s a *real* risk, especially when they’re just forex brokers (and not a behemoth like IB).

  • mugabe

    In the Alpari bankruptcy this year (UK-based forex broker), customers are gradually getting their money back (up to 50K GBP) thanks to the FCA compensation scheme

  • Scott Phillips

    Ahh that sweet feeling when the market stops punching you in the face 😉 Full boat of positions though

  • Scott Phillips

    Its a risk with IB as well. If the beartards at the slope are actually right, ironically they will have real trouble collecting winning bets with counter party risk

  • mugabe

    yeah, but at least IB’s business is more diversified. if i remeber right, they took a hit with the swissy business, but not a big one: unlike some pure forex brokers that went under.

  • http://evilspeculator.com molecool

    All we needed was a little trending action…

  • OzarkHillBilly

    That def sucks. I believe that there is a special level of hell, or at least purgatory, for all of the financial engineers and wizards that have screwed things up so badly over the last 20 years or so. I admit to believing that the worst is yet to come for most folks.

  • TheRooster

    Mole/ Scott – if you were running multiple systems would you run the EC filter across the subset or individually on each system? My thought is that I should run it on the whole suite as i hopefully any dependency between systems would be addressed this way?