There are a few issues here. I’ll address them in separate posts.
First, let’s talk about systems that show equity curves dipping into “negative territory.”
The way C2’s equity curve works is that we first calculate the trading-results only (i.e. profits/losses from each trade). Let’s call this the “pristine” equity curve. Then, in a second phase, we “overlay” various costs that need to be applied. These costs can include things like: System Subscription Prices, AutoTrading Fees, Broker Commissions.
The reason for this two-step methodology is that it allows us to be flexible and show different commission rates to different people (perhaps you live in a country with one set of brokers rather than another). Or it allows developers to change their subscription fees, and have the equity curves adjust ex post. Or it allows users to select a “C2 Preferred” broker and see how the per-trade fees decrease, but the monthly trading fee increase. Etc.
In other words, it gives flexibility and allows users to visualize different scenarios.
The downside is that, under some of these scenerios, it allows equity curves to show as “negative” numbers, which of course is impossible in a world of one single trading account trading one single strategy in the exact same notional dollar amount.
When you see an equity curve dip into “negative” territory, what it really means is that: if you include system fees, plus autotrade fees, plus commissions – using the combination of these that you have chosen to view – you would be underwater.
(Technically speaking, by the way, if the “pristine” trading-only equity curve ever goes down to zero, the system can’t open any new trades. So that part happens to mirror real life.)
I know that many people who post on these forums have an opinion, typically strongly felt and loudly voiced, about how they would do things differently and much much better when they write their own version of Collective2 software.
But let me suggest that perhaps more is being made of this than is deserved. The equity curves you see here are labeled as hypothetical Model Accounts for a reason: because they don’t purport to show any single real-life trading account, at the quantities shown. These are “Model Account” performance records.
To help think about what this means: Imagine a trading system with a notional Model Account size of $100,000. When portrayed on C2’s"default view" (i.e. expensive commissions, full autotrade fees, full system subscription) it goes into negative territory.
A diabolical shortcoming? A horrifying mistake?
Well, maybe. But what if someone traded the strategy with a $200,000 account? He’d still be able to trade it, even though cumulative results of the system, including all fees, are negative. Or what if he trades two strategies in his broker account – one profitable and one losing? He still might be able to trade the system in question.
Or what if he used a different broker, with more favorable commission rates? He’s still be able to trade it and the curve would look different.
The point is:
This isn’t meant to be trading simulation game, one where we give people a virtual account balance and try to mirror the way a single real-life account works. Rather, the point of C2 is to portray the results of trading strategies in a flexible, accurate way - a way which allows people to make decisions about whether a strategy is worth considering.
So, if there is a customer out there who looks at a downward sloping equity curve that goes negative… and he still wants to trade the system, presumably that’s because he thinks there is something about that system worth trading.
So I encourage all of us to take a breath. Let’s not get too wrapped up in this issue that results can be show as “negative” here on C2. That doesn’t imply you can open a broker account and trade with a a negative balance. Rather, it means the system lost money, when all costs were applied to it. It’s still potentially tradable (in a larger account, or at a different broker, or at a lower subscription cost, etc).
Matthew
