Walk Forward Optimization

In his book, THE EVALUATION AND OPTIMIZATION OF TRADING STRATEGIES (2nd Edition), Bob Pardo wrote: "I have always viewed Walk-Forward Analysis as an idiot-proof wayof optimizing a trading strategy."

With such a tool available, I'd be an idiot not to use it.

Walk Forward optimization has been available for a while in most of the platforms I use: NinjaTrader, MultiCharts and TradeStation. All allow me to optimize a strategy and then show the strategy unseen data and see how it would have performed. All of the above 3 platforms performs WFO adequately. However, the one that currently provides the most statistical information about a WFO is TradeStation. The WFO in TradeStation is The Grail which TS purchased some years ago now and integrated into TradeStation. The  developer of The Grail working for TS was part of the deal.

A key issue in WFO is the data. Probably the best quality historical data currently available to retail traders at a reasonable price is the IQ Feed and its twin, Kinetick if you are a NinjaTrader user.

As long as I can get the data issue resolved, I can use one platform to do my research an another to do the trading. Why would I want to do this? For a number of reasons including:
1. Preference
2. Running multiple algos on the same underlying and needing different broker accounts for each algo of the same symbol
3. Spreading risk between brokers (This is an issue for me since MF Global and PFG Best - I dodged both those bullets but am nevertheless gun shy).

Optimization is meaningless unless the WFO test is passed.

A good walked forward algo should have stats such as the ones below from one of the longer term flobots I run currently run on the ES:

Again, passing all these tests is no guarantee of future profitability bt it is the best way I know of getting a great flobot. The repeated profitability and good stats in the Out Of Sample data as the WFO rolls forward gives me the confidence of robustness.

Lastly, Happy Holidays to everyone. Snow has finally arrived here in the Haute Savoie. The house is full of family although not everyone is here this year - 4 are in Oz - I am jealous that they can go to the beach.

Trading Without Stops!

Long time readers of the blog and students know that I advocate exiting a trade when the trade tells me to exit not some arbitrary stop. I advocate having a drop dead stop as a "safety net". Using normal stops, for me, has been a losing strategy. You are not only betting on direction but also betting, unnecessarily, that a nearby price will not be hit before the direction you are betting on happens. It only needs one big enough order to make a blip that elects a stop.

My risk management tool is your entry price and entry size and then doubling down. My size has to fit the distance of my drop dead stop multiplied by the number of contracts I may have on after doubling down "x" number of times. The drop dead stop and the "x" is defines in my trading plan after testing.

Today's pic is an example of what I mean. I was long the Bund at 140.29 for a bounce from oversold (outside in trade) that didn't happen immediately. I doubled down at 140.20 and looked to scratch after I saw that the trend had changed.  My drop dead stop was more than 25 ticks below the low the trade actually made.

Your trade plan could be a little different. For example, look for profit only after the initial entry but look to scratch if you have to double down. Backtesting will show how this can be profitable if the right metrics are chosen.

Become an Expert on the Open

I often tell the story of a guy in Los Angeles that I knew in the 1980s. T-Bonds was the market in those days. Well, this guy only looked to do one trade at the open. He did that trade and then had breakfast and hopped into his Porsche and went to the beach.

Doing the same thing over and over again makes you very good at it, eventually.  How long that "eventually" is depends on how much research and testing you do and how structured a trading plan you create. Market Profile for the "where" and a bar chart for the "when" makes the "eventually" a much, much shorter time.

My trade today in the DAX is a good example. The pic tells it all. I have a number of elements in my trading plan and this is one of them.