Stocks & Commodities V. 31:7 (10–17): Trading The Equity Curve by Oscar Cagigas

Stocks & Commodities V. 31:7 (10–17): Trading The Equity Curve by Oscar Cagigas
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Trading The Equity Curve by Oscar Cagigas

Getting Lean And Mean

Trading The Equity Curve

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.

Creating a simulated environment

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):

Australian dollar (AUD A0-FX)

Eurodollar (EUR A0-FX)

Gold (GC #F)

Lean hogs (HE #F)

Copper (HG #F)

Heating oil (HO #F)

Coffee (KC #F)

Palladium (PA #F)

Platinum (PT #F)

Brent crude (QM #F)

Sugar (SB #F)

Silver (SI#F)

Swiss franc (USDCHF A0-FX)

Treasury bonds (ZB #F)

Corn (ZC #F)

Soybeans (ZS #F)

10-year Treasury notes (ZN #F)

Dow (DJ #F)

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.

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