Steps to finding automated trading strategies

Steps to finding potentially successful automated trading strategies

 

Automated trading strategies can provide numerous benefits to investors: they don’t require you to sit in front of the screen to watch the markets, they remove psychological impacts and influencing factors and an investor can choose a trading strategy that is specifically tailored to his risk-preferences and has a validated track-record. But finding the right strategy to follow can pose challenges for investors.  Please keep in mind that trading futures involves a substantial risk of loss. Past performance is not indicative of future results.

The iSystems platform at Optimus Futures offers hundreds of different strategies an investor can choose from and, even more important, it is possible to very specifically screen and filter strategies based on our unique filter criteria. In the following article we walk you through a 4 step process that helps you to screen the available trading strategies based on your needs and investing objectives.

Step 1: Detailed Filter Criteria

The iSystems platform provides a wide variety of different performance metric filters about the available automated trading strategies. To find the automated trading strategy that fits your needs and goals best, choosing and combining the available filters effectively is important.

After clicking on ‘Filter Systems’ you first see a list of currently active filters and in the bottom you can add new filter criteria under ‘Pick a column’. Graphs below are for illustration only and are not meant to imply that ANY profit will be achieved using this.

Find Automated Trading Systems

 

 

After you have chosen filters for screening the automated trading strategies, you can rank the systems by clicking on one of the title rows. For example, if you want to see the systems with the lowest current drawdown, select the column ‘Current Drawdown’ and the list will be sorted by this criterion. This is an easy and effective way to filter out systems that don’t match your criteria so that you focus on the ones that are more likely to be a good fit.

 Automated Trading Sorting

Step 2: Your capital requirements

In the following steps, we take a closer look at the available filters and point out the most important and used ones. The first two define the capital requirements. iSystems differentiates between ‘required capital’ and ‘suggested capital’. The required capital is the absolute minimum that an investor needs to have in his trading account in order to start following an automated trading strategy and it is based on margin requirements and the largest drawdown of the strategy. The suggested capital is based on a set of risk analysis methodologies to minimize the likelihood of significant account drawdowns.

Filtering the automated trading strategies based on capital requirements narrows down the strategies and provides a list with more relevant strategies. We stronly advise you to scroll to the bottom of the page and read the disclaimer to understand the limitations of back tested results.

Step 3: Determine your risk-level

Among the most important aspects when it comes to finding the optimal trading strategy is correctly evaluating the performance and the risk. A big mistake investors make is that they pick a trading strategy based on the best percentage-performance, but then abandon the strategy during the first drawdown because of a wrong understanding of the potential risk and the likelihood of drawdowns.

The ‘annual ROI’ filter ranks the system based on the best annual performance. The ‘tracked annual ROI’ is the annual percentage gain after the back-testing has ended and the trading strategy is forward tested (more about that in step 4).

The ‘worst drawdown’ is the  overall largest drawdown ever measured of that specific system and the ‘current drawdown’ describes the current performance; a current drawdown of $0 indicates that the latest session/trade was a winner.

Advanced Performance Metrics

ROI and Drawdown by themselves are not that meaningful when it comes to finding the optimal trading automated strategy. A strategy with a great ROI could also have a higher likelihood of large drawdowns, which could then cause more risk-averse investors to abandon a trading system too early.

The advanced performance ratios such as the ‘Sortino ratio’, the ‘Sterling ratio’ or the ‘MAR ratio’ compare risk and potential profits to build a more meaningful metric. To understand what each of the ratio does, we provide an example for each one of them.

By combining ROI, drawdown and the advanced performance metrics an investor can chose the automated trading strategy that fits his level of risk-tolerance best and meets his investment objectives.

Automated Trading Ratios

Step 4: Backtested, tracked and live systems

In the life of an automated trading strategy, there are usually three phases. The first one is the back-testing phase, which describes the period during which the developer creates the code for his system and evaluates how the automated strategy would have performed in the past.

Then comes the tracked-phase when the completed automated strategy is forward tested under live market conditions. Since many automated strategies have the ‘curve-fitting’ problem, which means that the developer tweaks the parameters of his system until the back-test shows a positive performance, the transition to a forward tested and tracked strategy is very important to evaluate how the system can handle different market conditions.

The iSystem platform provides the filter ‘tracked annual ROI’ and ‘tracked P/L’ to evaluate how forward testing a strategy impacts the performance. By comparing the total P/L and ROI with the tracked performance data, an investor can very efficiently evaluate curve-fitting effects and the impacts of different market conditions.

Automated Trading Returns

The live-phase of an automated trading strategy begins once the first investors starts following the strategy with his trading account. iSystem also provides specific live filters, such as ‘live P/L’, ‘live sessions’, ‘first live trade’ and ‘Has clients?’which  show whether an investor is currently subscribed to a strategy and the performance in that specific period.

The screenshot below shows the detailed view of an automated trading strategy. The white monthly performance numbers are back-tested statistics. The change from white to orange shaded number shows the transition from back-tested to tracked performance.  And the green fields are the periods of live trading with investors following the strategy.

Automated Trading Performance

Finding your optimal automated trading strategy is a process

The initial phase of finding the right automated trading strategy should be done with care to avoid the common mistakes most investors makes and which then often lead to misinterpreting the performance of their chosen automated trading strategy and surrendering too early. Our iSystems platform and the available filters allow you to screen the available strategies very effectively and help you to choose the one that fits your investment objective and risk-tolerance best.

You still have questions about automated trading strategies and the platform? No problem. Call us toll free and we assist you with all your questions. Call us toll-free at 1.800.771.6748. Or just send us a message through our contact form.

 

Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. The high degree of leverage that is often obtainable in commodity interest trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Optimus Futures, LLC is not affiliated with nor does it endorse any trading system, methodologies, newsletter or other similar service. We urge you to conduct your own due diligence.

 

 

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