Vertical Solutions

Notes on trading system design and the pursuit of automation

Control Charts, 8/18/05

Use Control charts and statistics to tell when a system is behaving outside its historical norms. An automated system can be taught (coded) to use this information to turn itself off.

The Chi^2 statistic is an overall measure of the stability of the system - fewer and lower spikes are better.

The ratio of expected wins to actuals wins for the last twenty trades shows the current win/loss trend.

The rolling 20 trade P&L for the system tracks whether or not the system is making money in line with its historical performance.

Systems can be designed to turn themselves off using the above criteria. As an example, my automated systems turn themselves off if both the ratio of expected wins to actual wins and the twenty trade rolling P&L move 3 standard deviations below their average.

A failure example where both the ratio and P&L move three standard deviations from their norms in rather dramatic fashion can be found here.

Henry Carstens
Vertical Solutions
carstens@verticalsolutions.com