Jan 19, 2012

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 not out of this group, but trading systems have a particular element: It´s a systematic approach. Systematic doesn´t means profitable, however means tractable (see Financial Automation and Control: a new age).


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, standart deviation, kurtosis, skewness or any kind of mathematical model output, like any technical indicator, filters, wavelets, etc)
2 – trading system intern or output variable.

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

One simple choice is pick the systems that are performing well right now, but the performance of the models can depend on specific market conditions, like volatility.

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

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

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

Rodrigo Sucupira Rodrigo Sucupira
Rodrigo is a Automation and Control Engineer - Escola Polit├ęcnica / USP. Interested on Financial Engineering, writes articles about Finance and Technology.
Blog Widget by LinkWithin