Did you ever lease a trading strategy? If you did, you know that the biggest challenge is distinguishing the working trading strategies from the rotten ones. In this article I will show you how to tell the difference between trading strategies that work and one that don’t.

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Always check out the developer, not only the trading strategy.

Oliver Haller, alphamonda

Check out the Developer of the Trading Strategy

As you know, alphamonda is leasing trading strategies. Before I started this business I also leased a few from others. What helped me a lot was getting to know the developer to understand a bit what he is doing. Thus I recommend:

  • calling or writing your developer to discuss how he creates his trading strategies and tests them for robustness;
  • checking his homepage to see what you can learn about his development process and strategies.

The more transparent a developer is the higher the likelihood that his trading strategies are for real and not just ones that worked in a back test. Certainly you cannot expect that you will get access to the code, but already a high level overview of the development process and the trading strategy will help a lot.

Get the Track Record of the Trading Strategy

Besides the developer also the trading strategy should have a track record which should ideally be verified by a third party. Such verification can come in different ways. Since we use Striker as a platform to license our strategies, they are the independent third party that verifies the strategies for us. Only after several months of actual live trading Striker will offer a trading strategy to be licensed. So they and also you know that it worked not only in a back test, but also in live trading.

Also if the developer trades a portfolio of his own strategies, this is a good sign. alphamonda and also its team members do. Also here we look for independent verification of the trading results of alphamonda. For this we use FundSeeder a platform that is just made for that. After 6 month of live data they start publishing my account on their Leaderboard. You are  able to find it under: TA4613559. Only someone who has experience with actual live trading will be able to develop strategies that perform well also for others.

Ask for Performance Reports and Trade Lists

For each trading strategy you should be able to get a performance report of the back test and also a trade list in a file format that can be read by other programs.  As an example you can see the top of a performance report below:

If you want to download sample files please click the button here.

Download zip File

This will provide you with a zip file with a performance report in HTML format and a *.xml file which can be read by other programs.

After you downloaded such files you then can review the performance report and also upload the xml file into your own software and study whether the trading strategy is actual the right one for you.

Example Performance Report Break-out Strategy

Example performance report

Review the overall Portfolio Performance

Upload the *.xml file for example to the Market System Analyzer. If you already have your other trading strategies loaded in Market System Analyzer you can check the performance of the whole portfolio and not just the single strategy alone.

When doing so I especially look at one parameter: the not profit / drawdown ratio for the strategy based on its original trades and also for a Monte Carlo Simulation. Only if at least one of these two parameters improves, I will include the trading strategy into my portfolio, since my main target is always to reduce drawdowns.

Conclusion

If you want to verify a trading strategy you will need to check out the developer, the historic and live performance of the strategy and how such a strategy fits into your current portfolio. Only if all these elements are working out to your satisfaction you should consider licensing a trading strategy.

In case you wonder whether algorithmic trading can work at all, you can also check out a respective post here.