IndexTrader Benchmark

Importance of Benchmarking
As traders, we can sometimes fall into the relevancy trap, focusing on and trading only those strategies developed by our own hands. We want our efforts to be rewarded. The best way to do that is to actually trade the strategy. However, for most traders who inadvertently fall into the twin traps of curve fitting and data mining, their best efforts fall far short of what is necessary to succeed in real markets, with real money. This is why it’s always important to benchmark your strategy efforts against well established and robust methodologies. Methodologies that have worked well in the past and in all likelihood will work well in the future. Please refer to the following link to read a more detailed discussion on the importance of benchmarking.

In my opinion, one of the best publicly available strategies to benchmark against is the Turtle strategy. However, the Turtle strategy is possibly not appropriate for benchmarking an index strategy when it’s well known indices, due to their back-filling mean-reversion behaviour, do not trend very well!

But be that as it may, since I’m not aware of any suitable publically available robust index strategy, I’ll run IndexTrader against the Turtle Strategy and see what we can learn.

Benchmarking IndexTrader vs Turtle
Benchmarking should comprise two parts;

  • Robustness Analysis and
  • Performance Analysis

In this case I’ll start with the Performance Analysis as I beleive it will confirm why the Turtle strategy is inappropriate for trading indices and hence being used as a benchmark.

Performance Analysis
Let’s look at the numbers.  On a positive note both strategy’s are profitable. On a negative note the Turtle strategy, as expected, has a less then desirable equity curve!    

Let’s go through the metrics I focus on to see what we can learn.

My number one objective as a trader isn’t what you’d expect. Yes, I do want to make money. However all my energy and concentration is purely focused on surviving the markets. Nothing else comes a close second. I think of myself as a Risk Manager first and foremost rather then a trader. Anyone can make a profit in trading. What many cannot do is manage a string of losses. Banking profits is effortless. Winning trades generally take off, look after themselves and don’t give you any grief. They’re effortless. However losses are a totally different story. Suffering, recording and funding losses is exhausting, both on your trading account and on your confidence, damaging both your mental and trading capital. It damages your trading soul. It’s what can drag you down and cause all sorts of strife. It’s the pain of trading.

So my first priority is to ensure my risk-of-ruin (ROR) is at 0% and that it remains stable. Not fluctuating. Not shifting upwards. In my opinion ROR is the most important concept in trading. Nothing comes a close second. If you’re not familiar with ROR then I’d suggest you stop trading immediately and become familiar with it. A good place to start is my book The Universal Principles of Successful Trading (Wiley 2007).

Looking at each strategy’s ROR there is both good news and bad news.

For IndexTrader with 50 units of money combined with a positive expectancy of over 50% the good news is that the model has a 0%ROR. In addition it’s a robust strategy so in all likelihood its 0% ROR will remain stable and not shift upwards. So a big thumbs up there.

However, for the Turtle strategy trading the indices, even with 50 units of money, its low 5% expectancy produces a 20% ROR. Definitely a thumbs down! Definitely bad news. But as I’ve discussed the Turtle Strategy, being trend following, is really not appropriate for trading a mean-reversion sector like the indices.

Since the Turtle strategy has a 20% ROR on global indices it’s pointless to continue with a direct benchmark.

The mathematics have spoken and we have to listen. The Turtle strategy is inappropriate for indices and unfortunately is not a suitable model to use as a benchmark for IndexTrader.