Analysis of January interest rate action

January 5, 2018 09:20 AM

The method I use for trade calculation, and risk assessment is Monte Carlo testing. This is nothing new but, the way we calculate it helps ensure strategy robustness over time when there isn’t much relevant data with which to work. The test below represents 1,000 runs over various slices of data. All percentages are based on a $100,000 balance for simple calculation.

You can see that these performance statistics are roughly equivalent to those posted, above. However, these are a bit more realistic. One of the most relevant relationships is between the Max Drawdown and the standard deviation of those drawdowns. This provides a much more precise assessment of potential risk. In this case, our average Max Drawdown is  $240 or, (.24%). However, the standard deviation of those drawdowns is $2,060. Therefore, roughly one-third of our Max drawdowns should fall within $1,820 – $2,300 range. I’ve been trading for myself for more than 20 years, and risk is still the first thing I look at in any setup.

On the positive side, the average return nearly three times the standard deviation of those returns. This equals a spread of expected returns somewhere between $940 (.94%) and $1,980 (1.98%). Furthermore, the nearly three to one spread between the average return and the standard deviation of those returns helps determine if we’re getting lucky with a couple of big trades or, locking on to a predictable slice of data.

If this type of analysis piques your interest, the 30-year Treasury bond trade is expected to fire later this week, and its performance has been even better.

Page 2 of 2
About the Author

Andy Waldock, owner of the brokerage firm Commodity & Derivative Advisors and the subscription service, is a third generation commodity trader with over 25 years of experience on all of the main U.S. exchanges. Andy stays abreast of modern programming developments due to the trading programs he employs for his own account and managed money.  He can be reached at