Financial Market Anomalies |
Trading system testing provides for a detailed analysis of the reasons for the maximum drawdown and peak profit, analysis of a series of profitable and unprofitable trades, etc. To form a money management strategy, you need to use the average values of test results, laying down the risks of a critical situation. Market anomaly is its behavior, which is reflected in the deposit curve, but does not have an unambiguous explanation and the reappearance of the anomaly is unlikely.
- Important! Market anomaly should not be confused with a rare but recurring event. The anomaly is unpredictable and one-time. Stable recurring events classified as anomalies can deprive a trader of a deposit.
When analyzing the test results, it is important to understand whether the value of the peak drawdown is an anomaly (for example, due to a large player entering the market, spoofing, etc.) or the nature of the drawdown has a natural character (for example, drawdown at the moment of statistical data release).
Types of market anomaly
- Technical anomalies:
- plugin (platform) error. Technical failure of the platform (a problem with triggering orders), which led to a drawdown of the deposit. To eliminate errors, testing of the same trading system is carried out not only on different assets, but also on different platforms;
- broker has a problem… Failures (lagging) of quotes, technical server problems, problems with orders can cause a deep drawdown;
- trade advisor error… A bug in the code that is triggered only when a certain situation occurs is a market anomaly reflected in the backtest.
Not only the maximum drawdown is analyzed, but also the maximum profit in order to place real horizons on a real account, and not horizons obtained due to a random error.
- Market anomalies:
- inertia anomaly… The release of statistical reports can affect the quotes in a radically opposite way or not at all. Reason: misinterpretation of financial statements, failure to take into account investors’ expectations and additional fundamental factors. For example, a decrease in unemployment in the US (Non-Farm) does not always mean an increase in the US dollar;
- anomaly of holidays. Traditionally, before weekends and holidays, positions are fixed and business activity decreases. True, this rule does not always apply and depends on the locality and duration of the holiday.
Dealing with the unpredictability of market anomalies is difficult. Therefore, novice traders are not recommended to trade at the time of reporting, the level of risk is up to 5% of the deposit amount per position and no more than 20% for all open positions. If the trading results on the real account deviate from the testing results, the trading system stops.