Getting Lean And Mean

Trading The Equity Curve

by Oscar Cagigas

A trading system that brings in consistent profits is a keeper. But if it stops giving you the results you want, is it best to stop using it? We take a look.

When a trading system’s equity falls below its moving average, most traders will deactivate their system to limit its damage, or remove any component of a portfolio that is not performing as well as the others. But there is another way to reduce risk, drawdown, and the possibility of portfolio ruin.

In this article, I will demonstrate several tests you can perform to trade the equity curve of your system. I ran several tests using a simple trend-following trading system of my own that is Donchian-based. The system itself is not relevant for this article, since you can use any trading system. The portfolio I chose to trade is a mix of randomly selected commodities as follows (eSignal tickers are in parenthesis):

When traded individually, some of these commodities generate losses in the system. When one or several of these markets starts losing traction or desynchronizing with the system’s logic, I try to identify techniques that can be applied to reduce the system’s risk.

Image 1

FIGURE 1: BENCHMARK SIMULATION. From January 2004–January 2012, the system produced about $450,000 in profits.

…Continued in the July issue of Technical Analysis of Stocks & Commodities

Excerpted from an article originally published in the July 2013 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2013, Technical Analysis, Inc.

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