Thursday, 10 November 2011

Fit For Purpose

The recent indices markets' activity reminds me of the joke about the old lady who gets knocked down by a truck. The driver stops, sticks his head out of the window and looking back yells: "Watch out!". The old lady who is not hurt, but is lying on the road, yells back: "Why? Are you coming back?"

Investors are having a tough time because indeed the truck runs over them and then comes back and does it again.

Today's market was one of those. The overnight ES was quite weak and after the RTH close, continued the weakness shown in RTH. During the European session, the wind changed as the ECB and Italy acted. The news and rumors turned the market around causing a violent rally taking the ES from it's session low of 1218.00 to over 1242.00 in a very short time. Talking of shorts, it looked like the shorts were caught and that fueled the rally.

In the Workshop, we saw how to create an algo and then how to optimise it and make it robust so that it's fit for purpose. I very strongly emphasise that an algo must not just look profitable in optimisation and forward walking. It must be tradable, and the test for that is the SIM trading. The whole process of creating an algo is time consuming, as the testing must be rigorous. As any weaknesses or omissions are found in the trading logic, the creator needs to make adjustments and then retest. There must also be a protocol to both monitor the algo's performance and to keep it profitable.

The trades below are the Hybrid trades based upon one such algo. Tuning the algo to specialize in a specific time of the trading day is also a worthwhile thing to do.

No comments:

Post a Comment