There are several stages in the life of any trading system in algorithmic trading. This is an idea when a brilliant idea comes to your mind how you can make money on the stock exchange, then formalizing this idea and transferring it to paper (as we do it described in the article Trader's Tools. Notepad.), transferring the strategy to a technical analysis program in which on the history of the correctness of the ideas embedded in it and the opportunity to earn. And if everything goes well, then the system starts up. Unfortunately, in the world of algorithmic trading, everything is also not eternal and over time, markets change and systems that used to make profits begin to incur losses or work almost to zero. At this moment, another stage in the life of the trading system is added - the removal of the trading system from trading and replacing it with another one.
In our trading, we are guided by several parameters to decide whether to replace the trading system with another one. The main parameter we pay attention to is Maximum Drawdown%. The percentage of maximum account drawdown on historical data is important for understanding whether this strategy is suitable for your level of risk and willingness to tolerate a drawdown of capital. For example, for one of the strategies included in the Trend forever bot, MD% is -9.08%. Taking into account the “shrinkage and shrinkage” coefficient, which is used to give the strategy some margin for the realities of the current market, for example 1.3, it turns out that the MD% at which the strategy will be stopped and withdrawn from trading is 9.
08% * 1.3 = 11.8%. That is, it is very clear and simple: When the account (MD%) falls by 11.8%, the system is removed from trading. The next parameter is the Time for new highs to appear. We all come to the market to earn money, so if the system showed on historical data that the maximum number of periods to a new maximum on the deposit was 600 and taking into account the coefficient for “shrinkage and shaking” 600 * 1.
3 = 780, then after 780 periods the system is also removed from trades, even if it did not reach MD% = 11.8%. And the extreme indicator that we use is the Maximum series of losing trades (first figure). If, as in the example, a series of losing trades shown on the historical sample (taking into account the coefficient) exceeds 7 * 1.3 = 9.1 10 (we always round up), then the strategy is also withdrawn from trading. As a result, we got three indicators, upon reaching which the system stops and is withdrawn from the auction: Maximum Drawdown %: -11.
8% Time to New Highs: 780 Maximum series of losing trades: 10 Here, of course, one can argue which is more important, the indicator Time for the emergence of new highs or the Maximum series of losing trades. We have determined just such a priority for ourselves and, based on our experience with strategies, we have never removed the system by the parameter Maximum series of losing trades. Mainly by MD% or New High Time. I have described the general methods and principles of our decision to withdraw from trading and replace strategies. They are not something exclusive, these are quite common techniques and, if desired, you can find all this on the Internet. Each trader should have individual parameters such as the “shrinkage and shakedown” ratio and the period for backtesting to get MD%, the time for new highs to appear and the maximum series of losing trades. You can also add your options as you see fit.
This makes your system individual, allowing you to earn money on the stock exchange and stop in time when the market changes and the system stops working. .