Lingering Quandaries about System Development (Part 3)

This series details the ongoing conceptual conflict that impedes my education about System Development.  In http://www.optionfanatic.com/2013/01/22/lingering-quandaries-about-system-development-part-2/, I discussed potential ways to avoid apples-to-oranges comparisons using the subjective function RAR/MDD.  Today I continue with discussion of challenges faced by systems that trade multiple tickers.

One reason I might want to implement multiple tickers is to generate more trades and more opportunity for profit.  Suppose I develop a trading system for SPY with a PF of 2.20 that generated 70 trades over the last 14 years.  On average, that is only five trades per year.  While the high PF suggests I will likely get good bang-for-the-buck, it’s always dangerous to risk too much at once lest this be the trade that takes me to MDD.  With my bet size limited, the only way to generate acceptable profit potential might be more trades per year.

To proceed with a plan for trading multiple tickers, one thing I could do is expand to a basket of ETFs.  In Jeff Swanson’s post “The Ivy Portfolio” (http://systemtradersuccess.com/the-ivy-portfolio/), he mentions use of these five ETFs:

BND – Vanguard Total bond market (4-5 year)
DBC – PowerShares DB Commodity Index
VEU – Vanguard FTSE All-World ex-US
VNQ – Vanguard MSCI U.S. REIT
VTI – Vanguard MSCI Total U.S. Stock Market

If SPY alone generated five trades per year then increasing to a 5-ETF basket like this would dramatically increase the number of trades per year.

Suppose I backtest my system on this ETF basket and get solid results.  Suppose, too, that I have performed walk-forward analysis (not yet discussed in my blog) and observed solid results.  Should this give me the confidence required to trade this system live?

The answer to this question, and more, when we return!