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Managing Trading Systems: An Automation and Control Point of View.

Posted on the 19 January 2012 by Rodrigosucupira @rodrigosucupira

Managing Trading Systems: An Automation and Control Point of View.
Capital Market Investments are known as being risky process,requiring an adequate Risk Management (see Financial Risk Management , Volatility vs. Risk, HFT Risk ). Trading Systems are notout of this group, but trading systems have a particular element: It´s asystematic approach. Systematic doesn´t means profitable, however meanstractable.

When I say tractable, I’m referring to the mathematical model,where all the variables and parameters are disposal, ensure tracking.

On the tracking list could be included:1 - properties of the asset traded (mean, standartdeviation, kurtosis, skewness or any kind of mathematical model output, likeany technical indicator, filters, wavelets, etc)2 – trading system intern or output variable.

Owning various models and knowing that we haveto manage them looking maximizing profit and minimizing risk, the automationprocess is monitoring all the systems output performances indicators (profit,return, growing factor, stability factor, sharp ratio, etc) and choosing thesystems and the managed capital of each one, habilitating the systems that webelieve that will perform based on historical comparison of the indicators withthe historical profit result.

One simple choice is pick the systems that are performingwell right now, but the performance of the models can depend on specific marketconditions, like volatility.

The backtesting of this group of systems need more attention,mainly because of the historical data. The group of systems could havedifferent optimization windows and it could present some degree of overfitting.The model optimization need a validation data, as well as any other modeldesign process.

All of this control system is one level above of complexityof a single model, presenting a diverse logic possibility of systems choice. Themodels can be managed based on their strategy groups, isolation trend modelsfrom pair trading ones, scalping, etc.

The more number of trading systems, more diverse and fewerrisk, like any other investment. Sometimes it´s more useful work on diverse kindsof models than on the best one. Models that are not so complex and modern couldpresent high profit, high loses, being a poor model alone, but could be goodmodels for this kind of approach.

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