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Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading, + Website by Kevin J. Davey

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CHAPTER 6 Preliminary Analysis

Now that we have examined the primary ways to test a trading strategy and produce a trading performance report, I’ll share with you what I think is important in these reports. A typical summary performance report is shown in Figure 6.1. A complete TradeStation-produced performance report spans at least seven pages and includes hundreds of calculated parameters, trade lists, and performance graphs. The amount of information supplied is frankly overwhelming. Most of the results, it turns out, are not all that important when time comes to evaluate the trading system. Maybe a performance metric for “drawdown—coefficient of variation” matters to some people but certainly not to me.

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FIGURE 6.1 Sample Performance Report

As with most aspects of trading, I try to keep my performance report analysis simple. A few numbers are typically all that I need to conduct a cursory review of any trading system. Once I find something I like, then I will delve deeper.

First, a few ground rules are in order. The performance report should be based either on live data or on a walk-forward test. Optimized back tests should not even be analyzed, as their results are bogus and misleading. Next, there should be multiple years of data, with a multitude of trades. A good rule of thumb is 5 to 10 years of data, and 30 to 100 trades for each trading rule in the system. Third, ...

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