Update on Quid Piker the British Pound Trading System
It has been a year since I published the Quid Piker trading system for British Pound. I guess it is a good time to review the model and discuss about forward expectations of trading systems.
Update on Performance
Following is the net pip gains chart updated up to Jun 30, 2015. As explained in the original article, 1-pip slippage per trade is accounted for. The chart is showing a close up from year 2013. The net gain level is not the same as the one shown in the original article because this chart has loaded only the last 2000 days of data.
Since late 2013 the trading system was not performing until end of 2014. The drawdown is about 600 pips which is consistent with historical occurrences. Since then Quid Piker started to perform again and giving us new peak in net gain again.
How To Estimate Drawdown Duration
Since Quid Piker trades about 200 times a year and has a low winning rate. It is reasonable to expect that it can have prolonged period of drawdown or non-performing period. It is the very nature of low competition trading models as I explained in the article.
So how do we tell if a model is failing instead of bidding its time until the next performing period?
There are 2 ways to figure that out.
First, if you have very long historical data to work with, you can find out from backtesting the usual duration of non-performing periods. This will give you a good sense of what to expect so that you will not be affected emotionally when you experience something similar. If the duration of non-performance has exceeded the longest one on record, you know something is not quite right and you need to monitor the system closely.
Second, if you do not have long historical data to work with, you can always use Monte Carlo simulation to produce possible variations of the equity curve so that you can visualize the potential duration of non-performance.
In the case of Quid Piker, it is acceptable to see it stuck in 10 to 16 months of non-performing period.
Low Competition Trading Edge
It is a good idea to bring up this subject as both discretionary traders and mechanical traders often focus so much on finding high winning rate trading setups. That mentality greatly limits the kinds of trading models you can discover. Do not forget that when everyone is trying to discover some kind of trading edge with high probability, it is likely everyone will discover similar things. When many people implement the strategies based on these similar findings, that edge in its various forms will be discounted by the market.
Low competition trading edges are those trading setups that do not exhibit high winning rate nor spectacular performance like extremely low drawdown. As no one is interested in such trading setups, they enjoy much longer shelf life. The fact is that even when this type of trading setup is rediscovered, which can happen very often, majority of the time people will discard the idea and go for something that performs better.
Quid Piker is a great example why trading is such an interesting business. Once you figure out a consistent way to make money from the market you specialize in, you can enjoy the fruit of your labour for a long time. When you accumulate enough knowledge and understanding of the markets, the insights will follow. The old trader who discovered Quid Piker long time ago did not have computer like we do now. Yet, he was able to draw from his trading experience such keen observation. This proves a trader being able to think independently and critically matters.