General Theories on System Development (Appendix)

In January, I did a two–part blog post with this same title. I also had some additional notes that got saved into a draft and were never published. These additional notes follow for organizational purposes and in the longshot case that someone out there could possibly benefit from any of this (originally from Dec 2012).

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I make this claim because some people do believe certain characteristics apply to one ticker and not another.  If the tickers are indices then it should be more robust since these are averages of many tickers.

At this point in my young system development career, I’m just not convinced about patterns applying to one ticker and not another.  I really want in the case then certainly they should be able to apply to one index and not another–and it should… If I’m not convinced about the pattern then I should evaluate long and short trades together and if performance is not satisfactory then it’s time to junk this system and move onto the next one. [1]

Furthermore, the more conditions I have to add to a system to get it to backtest well, the less likely it is to perform well in live trading.  This is curve fitting. Since I am so new to system development it might still be worthwhile to go ahead and add additional conditions because only in doing so will I truly develop a feel for the range of performance to be seen.

If I were to add another condition then I would consider a filter to take long (short) trades only when the market is in an uptrend (downtrend).

Alternatively, I could proceed to do maximum adverse (favorable) excursion analysis to see if adding stops and/or profit targets might improve performance.

Should I choose to do neither, then I will table this system for the time being and move onto something else.

Finally, some things to look for when trying to test trading strategies include:

• Long vs. short performance
• Impact of trade delays
• Effect on return-to-risk ratio / max drawdown (reassess subjective function from RRR/MDD to PF + % profitable )

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Lord help anyone spending a lot of time trying to understand [1]!