Trading system based on a proprietary indicator Part 1

This is a new concept. I will do three parts to analyze the trading system in a better way and compare it with a benchmark. The idea is introducing the trading system, showing the backtesting (last 5 years), comparing with the 10 years backtesting, studying the system vs the benchmark and applying money management to see how the performance and risk parameters change.

Brief explanation of the trading system

The system is based on a proprietary indicator as you can see in the title. The idea behind this system is mean reversion. The levels are chosen from the study of the returns’ distribution. Does it sound familiar to you? In addition, a strict risk management system has been applied. The maximum loss allowed is 0.5% as we will see in the next points. The trading system trades 1000 shares in each trade (in the future I will apply money management) The initial portfolio

 

Results after the last 5 years (backtesting)

     Backtesting statistics from RStudio and Excel, own elaboration

As you can see the system makes 95.86 euros on average per trade. I would like to make clear that the system traded 133 trades and the commissions are not included. The maximum profit in a trade was 1650 euros while the biggest loss was limited to 100 euros.  The return was 12750 euros which is the equivalent of 63.75% in 5 years (around 12.75% per year). As you can imagine, considering the strict risk management, the losing trades percentage is higher than the winning trades percentage. But the average winner is higher than the average loss. The Sharpe Ratio is 4.32, which confirms the profitability of the system.

                                  Max Drawdown, own elaboration using RStudio

This is the measure that I like the most. The system only loses 925 euros in the worst trading period. If we check in percentage terms, it represents a 3.53% loss. According to the asymmetrical leverage rule with a gain of 3.57%, we offset the loss. This shows the importance of risk management.

      Trading system track record, own elaboration using RStudio

Here you can see how the portfolio has been performing. The most important is its consistency.

As a curiosity, performance comparison with different initial capital

With these numbers, we would be tempted to invest 5000 euros or less. The system doesn’t require a lot of capital. The main problem with a 5000 portfolio is that we will struggle because the costs are not included and we couldn´t trade 1000 shares each time.

Conclusion

This has been the first part of a series of posts about the same trading system. In my opinion, the performance and the risk metrics are good. In the next post, I will review the 10 years backtest. The purpose of that is to check that the system hasn´t been overfitted for the last 5 years and show how it performed in a longer period. I hope that you like it.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved