Evaluating Trading/Investment Strategies

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A bank trading room would like to develop a disciplined, historically tested investment strategy for trading energy contracts.

The chief dealer is excited about a new trading system developed by an in-house trader for the Natural Gas market. The MIM can evaluate trading systems and provide the ability to test technical, fundamental, or event driven strategies, optimize parameters and compare results for different parameters.

The following is a strategy tested by a London money center bank in trading natural gas futures.

The following is a query to "back test" a trading system based on 1 contract of NG on the NYMEX. This type of query, the "order block", has become a favorite analysis tool for traders, investors, and portfolio managers for testing new trading strategies quickly and efficiently.

1: ORDER
     1.1: Buy 1 contract of NG
         Enter on the close
         Exit on the close
     WHEN
         20 day average of Close of NG crosses above 40 day         
         average of Close of NG
     AND
         Date is not NG expiration_day
      EXIT
          20 day average of Close of NG crosses below 40 day 
          average of Close of NG

2: ORDER
     2.1: Sell 1 contract of NG
          Enter on the Close
          Exit on the Close

      WHEN
           20 day average of Close of NG crosses below 40 day 
           average of Close of NG
      AND
           Date is not NG expiration_day
      EXIT
           20 day average of Close of NG crosses above 40 day
           average of Close of NG

The results of the P&L query:
P&L Summary Statistics

Statistic                               Combined                      Long                     Short            
 
Number of Trades                           53.00                     25.00                     28.00
Number of Closed Trades                    52.00                     24.00                     28.00
Number of Winning Trades                   25.00                     13.00                     12.00
Percentage of Winning Trades               48.08                     54.17                     42.86
Max Consecutive Winning Trades              6.00                      5.00                      3.00
Avg Consecutive Winning Trades              3.12                      2.17                      1.71
Percentage of Trades at New High           38.46                     45.83                     35.71
Number of Losing Trades                    27.00                     11.00                     16.00
Percentage of Losing Trades                51.92                     45.83                     57.14
Max Consecutive Losing Trades               6.00                      3.00                      5.00
Avg Consecutive Losing Trades               3.38                      1.83                      2.29
Percentage of Trades at New Low             0.00                      0.00                      3.57
 
Average Trade Length                       47.53                     49.72                     45.57
Average Winning Trade Length               66.69                     64.57                     69.17
Average Losing Trade Length                29.07                     30.82                     27.88
 
Total Number of Contracts                  53.00                     25.00                     28.00
Maximum Number of Contracts                 2.00   11/30/1990         1.00   09/28/1990         1.00   11/30/1990
 
Average Profit per Trade                  553.85                   1560.83                   -309.29
Average Profit per Winning Trade         4561.60                   4842.31                   4257.50
Average Profit per Losing Trade          3157.04                   2317.27                   3734.37
Ratio Average                               1.44                      2.09                      1.14
Profit Factor                               1.34                      2.47                      0.86
Pessimistic Return                          0.90                      1.37                      0.49
Performance Ratio                           0.10                      0.35                     -0.05
 
Average Profit per Period                   1.73                      2.80                      0.23
Compound Average Profit per Period          0.40                      0.69                     -0.08
Percentage of Periods at New High          30.65                     29.67                     18.37
Standard Deviation of Profit Return         8.48                     10.79                      9.95
Sharpe Ratio (est.)                         0.20                      0.26                      0.02
ZStat                                       2.27                      2.48                      0.23
Standard Error                            931.59                    492.86                    869.45
Standard Error Ratio                        0.00                      0.01                      0.00
Geometric Error Ratio                       0.02                      0.04                      0.00
 
Biggest Win                             12600.00   04/18/1997     11010.00   07/20/2000     12600.00   04/18/1997
Biggest Loss                           -19180.00   11/22/2000     -4980.00   07/28/1998    -19180.00   11/22/2000
Maximum Drawdown                        60140.00   11/28/2000     27520.00   02/08/2000     46850.00   11/22/2000
Maximum Drawdown Per Trade              20920.00   11/22/2000     18960.00   12/30/1996     20920.00   11/22/2000
Maximum Open Loss in Winning Trade       3890.00   11/05/1998      2640.00   02/08/2000      3890.00   11/05/1998
Maximum Open Equity                     84850.00   12/06/2000     84850.00   12/06/2000     49020.00   02/24/1997
Minimum Open Equity                         0.00   03/19/1991         0.00   11/30/1990         0.00   03/19/1991
Maximum Closed Equity                   60960.00   03/29/1999     41440.00   11/20/1997     35320.00   02/12/1998
Minimum Closed Equity                  -36969.99   11/22/2000    -28310.00   11/22/2000    -36069.99   10/25/2000
 
Final Equity                            47880.00                  56540.00                  -8660.00
Final Open Equity                       84850.00                  84850.00                      0.00
Final Closed Equity                    -36969.99                 -28310.00                  -8660.00
Commission                                  0.00                      0.00                      0.00
Slippage                                    0.00                      0.00                      0.00

P&L Trades

 Tr   Type       InDate      OutDate   Num      InPrice     OutPrice         Move        %Move       Profit    CumProfit
 
 1.    Buy   09/28/1990   11/30/1990     1         1.93         2.44         0.51       26.357      5100.00      5100.00
 2.   Sell   11/30/1990   03/19/1991     1         2.44         1.39         1.05       43.108     10540.00     15640.00
 3.   Sell   04/29/1991   08/07/1991     1         1.37         1.29         0.08        5.822       800.00     16440.00
.
.
.
32.    Buy   04/18/1997   06/17/1997     1         2.08         2.16         0.08        3.748       780.00     67430.01
33.   Sell   06/17/1997   07/31/1997     1         2.16         2.18        -0.02       -0.834      -180.00     67250.01
34.    Buy   07/31/1997   11/20/1997     1         2.18         2.71         0.53       24.391      5310.00     72560.01
35.   Sell   11/20/1997   02/12/1998     1         2.71         2.29         0.42       15.510      4200.00     76760.00

 
Analysis:  The above query shows a few of the summary statistics of this particular trading "system" evaluated over the life of the NG contract at the NYMEX. The top portion show summary statistics and the second portion shows trade-by-trade information, including dates of trades and cumulative profits and losses. With the MIM, this type of analysis is now almost instantaneous.