Monday, February 7, 2011

Risk / Return, Profit Stats & Trading Systems

Investors often talk about Trading System X vs. Trading System Y -- and how a certain approach has a steadier pattern of returns versus another.  Note, however, that even long-term performance can disguise or hide the potential pitfalls of some trading systems.  For instance, a trading approach can have a great 100% return over 12-months, but individual trades can possess some scary drawdowns.

Many of us have seen these types of systems, and they eventually have a bad decline that forces a "closed trade" and/or marked-to-market recognition of the risk that was always there.  There have been many stories like this over the years.  Some of these traders use a martingale-type of approach (letting losses accumulate or even increasing exposure and/or doubling losing trades).  These methods can "hide" risk in the short-term -- but if overused -- will lead to large losses at some point. 

Many analysts study the risk / return figures on individual trades -- as well as the percentage of profitable trades -- to get a handle on overall risk.  These statistics can yield information about a trader's overall risk management approach.  In addition, hopefully, there is a real edge to the trading system's approach.

I have been a trader for over 15 years, and recently started to post trades on third-party tracker, Collective2.  Our most-established program, zFutures, is a diversified futures program -- and now has almost 200 trades tracked and more than 6-months worth of history on Collective2.  It is notable that this has been a good period for the futures markets, but we are pleased that potential investors are happy with the program's trade statistics.  In particular:
  • The ratio of Average Profit from (Winning Trades) / (Losing Trades) is close to 2.
  • The percentage of winning trades is currently over 50%.   
We recently started publishing our z-Trader Short-Term System on Collective2 as well.  This program focuses on the S&P (e-mini) -- and we note that the trade statistics are similar to zFutures (profitable trades almost 2x losers; and winning trades around 50%).

We don't claim to have a magic formula, but we do believe that we have an edge in the futures markets.  Our programs are based on robust research methods, including machine learning, on many years of historical data.  We use a systematic and computerized approach to managing trades and managing risk.  The financial markets are a competitive arena -- and a disciplined approach, combined with constant diligence - and constant research - are all necessary to earn excess returns from the financial markets.

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