Trading system analysis: Then and now

Trading recipes

In 1992, Robert Spear released a backtesting platform with trade management and portfolio capabilities called Trading Recipes. This was a language-driven software tool written for MS-DOS. It was designed to develop, test and execute rule-based mechanical systems.

Trading Recipes featured a modular design that encouraged users to break down a trading system into small, manageable programming tasks. For example, one area was for defining indicators and values, another was for how to enter a trade and yet another was for defining how to manage and exit a trade. Values were arranged in columns. To capture a simple moving average of the past 20 closing prices in Column 1, you would write:

COL1 = SMA[CLOSE, 20]

 

To go long if the previous day’s close was greater than the value in that day’s Column 3, you would write:

IF CLOSE[1] > COL3[1] THEN BUYOPEN 

 

Other features included performance reports, a spreadsheet-like display of values used in your trading systems, numerous pre-packaged indicators and the ability to handle many different trading data formats.

One strength of the program was its what-if testing abilities. Say that a particular sector (stocks or futures) gets hot and that your system starts adding positions across that sector. As the system adds those positions, the portfolio accumulates sector risk. You conceivably could end up with a highly correlated portfolio consisting of, for instance, too many grain commodities. Trade Recipes included purpose-built tools that measured that portfolio risk via a GROUPRISK variable. Other risk management tools were:

  • Equity available at the time each new trade
  • Amount of risk and number of positions across the portfolio
  • Amount of risk and number of positions across a system
  • Amount of risk and number of positions within a sector
  • Amount of risk and number of positions for a particular stock or future
  • Amount of risk and number of positions for long trades
  • Amount of risk and number of positions for short trades
  • Amount of risk and other metrics for a trade under consideration
  • Margin requirements
  • Start-up capital and starting date
  • Current market volatility
  • User-defined metrics

Trading Recipes was a powerful program. Its risk-management metrics remain some of the most impressive in retail market software and it is one of the biggest leaps in the technology for individual traders. Unfortunately, Trading Recipes fell into a trap. Remember the powerful spreadsheet software Lotus 1-2-3? Maybe not. That’s because Lotus, like Trading Recipes, didn’t create a Windows version until it was too late. Trading Recipes wasn’t available in a Windows-platform until 2004-05. By then, many users and potential users had found another trading tool.

Systems for the masses 

Brothers William and Rafael Cruz came to the United States together from Cuba. They trained to become classical violinists together. Although they became quite accomplished, professionally performing classical music was not in their future. Fate had other ideas.

When Bill was 16, a futures broker called Bill’s father, but Bill took the call. He listened. He learned about futures trading and it took hold. For two years, he studied everything he could and when he turned 18, both he and his brother Ralph pooled $2,400 and started trading pork bellies.

They started well but ultimately lost all the money in a month or so. They still believed in trading and knew there must be a better way. They went to the library, got pork bellies data and made hand charts. They then used these charts to test ideas. They added arrows — up for buy and down for sell — to record and test ideas. This cluttered up their charts, so they started writing on clear plastic sheets that they positioned over the charts. This was around 1979. 

In college, Bill met Kip Irvine, a music major with a minor in computers. In those days, it was difficult to get your compositions played. Bill, being a skilled violinist, agreed to play Irvine’s compositions if Irvine helped him automate his trading strategy analysis. However, programming the strategies took a lot of time, and Bill had more ideas than Irvine had time. 

Bill decided that working with a programmer was too time consuming. He needed a way to test his strategies himself without having to learn how to code. This was the seed of the development of EasyLanguage — a collection of intuitive commands and standardized syntax that closely mimicked natural speech.

Bill and Ralph started a company and began hiring talented people to program the software. The original development team included Irvine, Sam Tennis, Peter Parandjuk and Liren Ji in engineering. Ruben Triana and Darla Tuttle were in product management.

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