Comprehensive assessment of the suitability of a mechanical trading system for real trading in the Forex market
Kryukov P.A., Kryukova V.V.
г. Kemerovo
The generalized indicator of point estimation of the suitability of the mechanical trading system for the real trading, the threshold values of which determine its gradation: suitable, limitedly suitable, unsuitable, is considered. The structure of the indicator includes the indicators of the strategy efficiency, obtained at the stage of trading system development.
Introduction
In the scientific literature there are no specific proposals for the use of a generalized assessment of the suitability of the mechanical trading system (MTS) at the stage of development. In our opinion, such an assessment is necessary, it will improve the effectiveness of developed trading strategies at the stage of operation MTS.
It seems that the evaluation of the suitability of the MTS should reflect the generality of the optimization results, forward testing and assessment of the significance of the trading strategy (TS). The result of this assessment is the assignment of MTS to a certain category: suitable, limited suitable, unsuitable. The whole set of indicators used for generalized assessment can be divided into groups according to the specified stages of MTS development.
Obviously, a suitable MTS must be effective. To evaluate the effectiveness, indicators derived from the trading terminal are used. An effective strategy must be sustainable. The stability of the trading system is understood in three senses: profit on a wide range of variables, profit on a wide range of markets, profit on a wide range of market conditions (upward, downward, sideways trend). In the case when trading is carried out with one instrument (in one market), we will understand stability as achievement of the average annual profit not less than 15% (average value of the bank deposit) in a wide range of market conditions (rising, falling, sideways trend) and the TS ability to adjust to new market conditions as a result of optimization without updating parameters (coefficients) of the market model.
Description of the suitability index structure
Composite suitability index is the sum of points obtained by each strategy performance indicator over a long period of virtual trading. The threshold values of the indicator determine its gradation: MTS is suitable, limitedly suitable, unsuitable for real trading. The set, thresholds and the maximum value of the indicators in points are given in Table 1. Indicators of strategy effectiveness are used:
– profitability (ratio of total profit to total loss) as a percentage; the ratio illustrates the profitability of the strategy for a specific period (year);
– number of transactions as a percentage reflects the ratio of all deals for a certain period compared with the total number of trading days in the year (252), that is, the share of actual transactions from the number of possible transactions at the rate of 1 deal per day; this indicator characterizes the uniformity of transactions in time and activity of TC;
– win rate characterizes the share of winning from the total number of transactions;
– maximum drawdown in percent - the largest loss from the local maximum as a percentage of the deposit, the risk indicator;
– average annual profit in percent - is the ratio of net profit to the amount of deposit for the period (year);
– TC's ability to adjust to new market conditions as a result of optimization without updating the parameters (coefficients) of the market model;
– probability (significance) of the average profit/loss per trade in percent;
– upper limit of the confidence interval of the probability of a winning deal in percent - MTS performance (percentage of profitable transactions).
Table 1. Values of the TC efficiency indicators in points
Composite index of MTS suitability for real trading is calculated by adding up points: a point is added if the value of the indicator is not less than the threshold value. In particular, the ability to adjust is assessed as follows: yes - 15 points, no - 0 points. The threshold values of the indicators and evaluation in points were proposed by the author (Kryukov P.A.), based on the experience of trading. The total sum of points is 100.
Table 2. Gradations of suitability category
The proposed assessment of the suitability of the MTS allows you to quickly perform calculations, to obtain in a complex of many indicators of generalizing information and on the basis of this information to make a reasoned conclusion about the possibility of using the TS in the real trade.
Comprehensive assessment of MTS for the EURUSD currency pair
With the help of the introduced indicator the assessment of suitability MTS for the EURUSD tool. MTS has implemented a trading strategy, the formal basis of which is a statistical model for analyzing and predicting the dynamics of the exchange rate - an indicator of upward/downtrend probabilities. Testing results of the last year price history (1.06.2010 - 1.07.2011) are used. The point estimate of the specified MTS is presented in Table 3.
Table 3. MTS point estimate for the EURUSD currency pair
Conclusions
The MTS evaluation showed a high rating of 85 points. The trading system is suitable for real trading on the foreign exchange market FOREX.
The proposed indicator of complex assessment is universal, can be used for any trading system, implements the possibility of assessing the suitability at the stage of development of MTS, which ultimately contributes to the effectiveness of the real trading in the future.