When 90% of Top Strategies can suffer from 90% drawdown, Here is how you pick the sturdiest
I have been tracking several top ranking trading systems in popular copy trading or social trading websites for more than 2 years.
I would spend the time scrutinizing every performance metrics I could gather up like Sharpe ratio, CALMAR, CAGR, Consecutive Losses, Kelly criterion, profit factor and, many others to know on how to tell between a strategy that can go on and on with consistent returns, and from others that can run successfully for a while and get self-destructed within a short time period.
There is a reason to why I study hundreds and hundreds of trading systems’ performances in great detail. I need to know how well I can predict a strategy upfront in its early trading moments, whether that strategy will make it fine or it would just implode and disappear. Then, I would follow each of these systems over the course of time and validate my predictive and causal hypothesis.
It is time consuming and tedious work.
But I am compelled to do it. Now, I am now able to say that my predictive models can pretty accurately foretell the fate of a trading system with a good confidence level. On the other hand, I also would like to know if my own trading system meets such requirements of what a robust system should look like, so that I can work on my strategy further for improvements and mitigate as much risks I could find from it before it's too late in the game.
I would like to build a system that has the hallmarks of the success equation.
So what did I find?
Here is one of my favorite predictive model which is extremely easy for you to do the fact checking quickly and is pretty impressive in its accuracy.
Remember the "90%-90%-9 months" phenomenon
I had found out that that 90% of trading strategy will fail with a catastrophic drawdown of over 90% within 9-months into trading.
Real Equity Curve from a top ranking system flash crash within months
To elaborate, a strategy has to complete the 9-month gestation period of trading in the market before you could take in the strategy’s performance indicators. Which means, the strategy has to complete the initial 9-months trading in order to say the strategy has a 95% percentage confidence level it would be trading the market for years to come. Therefore, even if a system has a nice track record before the 9-month period, it is too early to confirm its efficacy.
Any strategy’s performance below 9-months period is pretty much meaningless. Because I have seen several promising high performing systems, flash crash, just before crossing past the 9-month line. Do note there will always be a small outlier that can crash after 9 months.
Another popular top ranking system rolling over
Here is a sample list of actual high-yielding top ranking trading systems (making gains over 300% within few months since inception) from popular copy trade platforms that saw the +90% drawdown (names of the systems are altered). Most of the systems here were already taken down.
But the message is pretty clear, that you need to give adequate time for the system to run before you can copy or invest. Let a system run for a while. Give it 9 months to a year to tell you they are ready to be followed.
It is always worth to remember the 90%-90%-9 months phenomenon.
Genesis Asset Monitor
Copy trade system at Signalstart
The key advantage of copy service is not having to spend countless hours each day to find trades and manage them.
This forex strategy has already recorded over 200% returns in 2017. It is again projected to repeat this performance in 2018!
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Track record is paramount. Genesis Asset Monitor has a solid record. When we purchase a new car, we do ask about its quality of build and performance. Then, why in trading, you have to trust or believe a software or system without any verified proof? Genesis copy system is changing that.
About the author
Ramesh is the author of 3 trading and strategy building books “Trade Smart with 10/20/30 Rule™” , Making Big on CAD/CHF Forecast in 2018, and “Trade Forex with Confidence” which are available on Amazon. He created 10/20/30 Rule™ for traders to build and test their next money making trading strategy fast.