Trading system based on proprietary indicator, Part 3

This is the third part of the series of posts about the trading system based on my own indicator. We will see how the commissions affect the performance of the system. I will compare with the benchmark in the future.

Comparison table

Comparison table including the backtesting with the commissions included and deducted from the portfolio, own elaboration

As you can see there are big differences between the backtesting without commissions and the ones that include them. The daily average return differs in the amount I chose as a broker fee. In this case and considering the size and the price of the security, I decided that the commissions will be 40 Euros per trade (20 Euros per side, buy and sell) Obviously the maximum and minimum daily profit differs in the amount of the broker fee. (There is one problem that I haven't fixed in the 10 Yrs backtesting and 10 Yrs backtesting with Fees. The max profit differs due to an early error in the data) The skewness and kurtosis are exactly the same. The returns have been significantly affected by adding the commissions and taking out the value of the portfolio.In the case of the 5 Yrs Backtesting the return is almost half due to the commissions. Considering that the system trades the same size all the time, this issue was expected. The advantage of that is that as soon as the portfolio grows, and even if the loss is the same amount as the beginning, the loss represents a lower percentage of the portfolio. I chose this way as a risk management in which I risk more in the early years while the portfolio is growing. Probably I should link the trade size with the value of the portfolio but depending on the system or the period studied can generate worse performance and could be riskier. The Sharpe Ratio is affected as well because the returns are lower. Another important point is that including the fees the max drawdown is worse than the one shown before. Depending on how we invest our savings, we should run an extra spreadsheet with all the cost related to the investments. 

Graphical description of how the fees affected to the different backtesting

5 Years test

    Differences between the portfolio with and without commissions, own elaboration

Sometimes a chart represents an idea better than the words. Here we can see the impact of the commissions in the system. The difference in the last trade is almost 5000 Euros. The system returns 37.15% which is the equivalent to 7.43% per year. It´s a good return considering the risk taken. The system without including commissions returns more than 12% per year.

10 Years test

     Differences between the portfolio with and without commissions, own elaboration

The differences are bigger in the 10 years study. The difference between both systems is 28000 euros. At this point is better not to do these numbers, giving away this amount of money is crazy. The best aspect is that after fees it returns an incredible 425%.

Sum up

I hope you like it. You shouldn´t focus on the effect of the commissions or the performance. The most important idea is considering all the cost related to running the trading system or the investments. In this case, I simplify the idea considering that a broker executes the trade on your behalf. If you trade on your own, you should add the market data, the brokerage commissions, and the trading platform costs. There is another point that I haven´t commented, the taxes. Sadly the trading costs and the taxes (if you make money) will reduce your profits.

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