Generally, I try to make the biggest cuts first.  This makes it easier to discriminate since the number of models in contention is significantly reduced.

Immediately, we can eliminate all models that have a zero or negative profit over the last 12 months.  I include zero profits, because these models are unproven.  This combination cuts down the number of models in contention from 530 to 164.

We want models that have had quite a number of trades.  Models with a small number of trades may be quite unreliable because we have not had an opportunity to examine their long run performance.  I have selected a value of 40 trades.  This should be a large enough statistical sample to have some validity.

The risk adjusted return should be greater than 1.  This means that the models should be able to generate profits greater than its losses.  I want a risk adjusted return of 1.1 or greater.  Once these 3 filters are applied, this leaves 19 models out of the original 530.

I can now easily inspect the models remaining.  I want good long term performance.  Typically models that have a good performance record over a long period are better than those with a good performance record over a short period.  So I’ll filter for models that have a system start date of before June 30, 2007.  This leaves the following 10 models:

• Currency-Specialist (GBP/JPY)
• AUDCAD-Mover (AUD/CAD)
• FxFons (EUR/JPY)
• Tecnofinanzas (EUR/USD)
• PipboxerV2 (USD/JPY)
• FXSignaler (EUR/JPY)
• Quants-Carnival (EUR/JPY)
• Quants-VIP (EUR/JPY)
• EspritFX (GBP/USD)

This is a manageable number for further analysis.  My main concern is that the selection is biased towards the EUR/JPY pair, which may result in highly correlated trades which may result in a bumpy equity curve.

In the next article on choosing models, I will model the equity curve using the tools provided in the package, and determine whether I need to revisit any of my model selection criteria.  I am interested in your approach to selecting models, so please leave your feedback and comments.

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Tags: automated forex trading, forex system selector, FXCM, trading model selection, trading models

This entry was posted on Monday, May 5th, 2008 at 12:58 pm and is filed under Automated Trading. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.