The Automated Trader

The pain of News Corp

2011-08-28T23:29:00.002+10:00

Of course, the worst month(s) come as soon as I have scaled up the capital haha.

Oh the joys of trading !

(August doesn't look crash hot either)

Time to scale up

2011-07-03T11:13:00.006+10:00

June was disappointing, with a result of -2.17%, bringing our first monthly loss since January.

So overall for the half year we are +34.23%.

Starting from next month, I will be scaling up the system, so from July 1st, starting capital will be US$60,000. I'll probably start the trade log and %chart again, but the monthly profit chart will be able to show percentage performance regardless of the capital base.

I have also made a change to the position sizing of the system, to make the system more aggressive. We are now allocating more capital to each trade, 25% instead of 20%, which means we are maxed out at 4 positions.

May performance

2011-06-02T12:03:00.004+10:00

Quiet month in terms of number of trades, but we hit our numbers. +4.53% for May which brings us to +36.40% YTD.

I've also been busy designing a new system, called TPO, another US stocks, mean-reversion based automated system, which is currently being papertraded. I couldn't trust any of my backtests with this one as it really does require intraday data to be accurately tested. So we'll run it for 6-12 months on IB's papertrader and see how the numbers stack up.

April performance

2011-05-01T10:44:00.006+10:00

April was a steady month, without being spectactular, with a result of +4.30%.

There were 20 trading days in April (US markets were only closed on Good Friday), the system had some activity on 8 of those days. From these 8, only on one occasion were we fully invested.

Six months in

2011-04-01T09:01:00.008+11:00

+8.53% for March and +27.57% for the first quarter. We've hit the 6 month mark so I've added a few more charts.

While results have been promising, I would expect the payoff ratio to even out over time and the hit rate to edge closer to 70 than 60%.

On March 15th, IB's margin risk controls didn't seem to kick in so I found myself holding 21 positions, well beyond my maximum of 5 or 6. So I just closed all positions (out of panic) 3mins into the session and ended up +$1499 for that day.

Monte carlo analysis shows that performance for March 15th, had the number of positions been restricted as per the system, could have been anywhere between -$200 and +$2258 depending on which stocks I bought, with the median being $799.

So while the broker error didn't leave me much to complain about(!), it did show that automated trading systems still need monitoring. Especially if your system buys weaknesss and you can see the futures are down 2% in the pre-open!

Correlation between volatility and performance

2011-03-25T17:38:00.002+11:00

As a system (AGT is what I call my system) that trades intraday, its no surprise that it performs well in times of volatility where the intraday range expands, which is what typically happens during bearish times.

So it has got a bit of an insurance mechanism built-in to protect from Black Swans. But unlike the techniques employed by funds like Universa, AGT is not too shabby during uptrends either.

The peak of the GFC, which is from September 15th 2008 (Lehman Brothers collapse) until March 9th 2009 which was the bottom, when the VIX went crazy, is also the time AGT went nuts, and tacked on 83% in under 6 months.

When it rains, it pours

2011-03-01T21:23:00.004+11:00

January performance

2011-02-12T10:31:00.001+11:00

December performance

2011-02-01T02:50:00.001+11:00

RYAAY and performance thus far

2010-12-01T15:53:00.004+11:00

I have noticed that this system trades RYAAY a fair bit more and disproportionately compared to the percentage of the stock universe this ticker represents (I trade about 50 stocks).

Looking at the chart, it's not hard to see why. RYAAY does like to gap around.

Overall, while the performance so far for the last two and half months is unlikely to lead to an onrush of investors wanting me to trade their money, the system has so far been performing in line with expectations.

This system, by design, thrives on intraday volatility. The more volatility there is, the better it performs. As we all know, intraday volatility is the highest in bearish times. In makes much more moderate profits in times where the market is slowly going up.

To illustrate this, let's look at 2009 performance.

From 1st March to 31st December the general market rose almost 50%.

My system in that time "only" returned 27%.

However, in January and February, where the market fell about 10% per month, the system made 30%+ in each of those months.

Note that I only include the market performance for the purposes of comparison. It is not a benchmark we are trying to beat. To make -5% when the market is -20% is not a good year for me. I aim for absolute returns.

COST did wonders for me, S not so!

2010-11-01T10:43:00.002+11:00

And we're off! Finally!

2010-10-02T13:01:00.007+10:00

Finally got this system trading on a live account! After more than a year of testing, coding, and paper trading.

I'm still amazed at seeing the trades execute by themselves and though I don't need to, some nights I just sit and watch the system to do its thing.

For interests sake - had I started at the beginning of the month, I would have done 14 trades and end of month result would be +$2,472, or 9.62%.

US mean reversion system

2010-05-22T12:32:00.003+10:00

I haven't been able to paper trade this new system of mine as initially attended because LOO and MOC order types simply don't work on IB's paper trader.

The guy at IB told me that I "can't expect" the paper trader to be able to execute such specific order types - but he would fully expect that I would have no problems with a live account.

So instead of paper trading this system I will start live trading with a small account until I'm happy that performance is broadly in line with expectations before scaling up.

The above table shows performance of the system so far this year, from 1 Jan through to 21 May. Monte carlo simulations were run 1000 times.

Re-defining equity

2010-03-19T01:36:00.003+11:00

Since the last update, five trades have been closed out. Three losses and two winners. Overall slight dip in closed equity since that October chart.

Portfolio is currently fully invested in the market.

I've also decided to use another method to determine my position sizing. I previously was using the TradeSim method which is available cash + open positions at the price paid. While the intention of this method is to be conservative (not count chickens before they hatch) in practice I have found it to be rather aggressive and to take on more risk than necessary as you are increasing your size in what could be the beginning of a drawdown.

Big winning trades are usually closed out when the market is correcting or experiencing a downturn of some sort, which is precisely when you DO NOT want to be increasing your position size.

The other obvious alternative to this is to use pure open equity marked-to-market, which I think is too aggressive and will result in too many fluctuations. Plus I don't really count open equity as my own.

So what I have opted for is what I consider to be a middle ground and to calculate my total equity as available cash + open positions at their trailing or initial stop loss levels (whichever is the greater). I think this method is conservative initially but as your winners start moving and stops are raised, it allows you increase your position sizes more dynamically.

The downside is I have not been able to test this method. But common sense tells me that it won't get me into too much trouble.

I have also been reading some of Ralph Vince's work, and I have been impressed. There are some areas which I have marked down for re-visiting down the track once I have time.

In other news, I've been busy trying to automate my US mean reversion system through Amibroker and IB.

Quarterly Portolio Update

2009-10-24T14:51:00.005+11:00

There were no trades closed this quarter. The system is fully invested in the market and has been for several months now.

Just thought I'd put in an equity curve - probably not the best you've seen!

Start up date was the 9th October 2007 with $66,000 in capital.

Since then 51 trades have been closed.

We are still in the middle of a drawdown - max.DD stands at 40.56%.

System flaw

2009-10-22T14:51:00.006+11:00

The gap fading system that I was hoping to trade on US stocks has run into a bit of trouble. Actually alot of trouble. The problem is that it can't be traded, and here's why.

I believe the opening auction system works differently in the US compared to the ASX. In the local market, the most liquidity for the large cap stocks especially, always occurs at the open and at the close (usually higher at the close).

BHP or CBA, for example, each of which routinely turnover hundreds of millions of dollars per day , would do about $2-10million right on the open.

But over in the US, even some of the high turnover NYSE tickers like WYE and JNJ, you only get 100 shares going through on the open! And these guys turnover the same or more than BHP or CBA. What i noticed in the course of sales is, about 5-10 seconds after the open, the party finally gets started and you see the 10,000 share and 20,000 share parcels start going through. Which is useless for a system that is supposed to buy "the open" as you wouldn't be able to catch this liquidity using "limit-on-open" type orders.

The NASDAQ opening auction system must work differently to the NYSE because they seem to have much higher opening liquidity across the board (in the hundreds of thousands range, so still not the millions I was hoping for).

So its back to the drawing board for the short term system. It looks like I may need to turn to intraday timeframes if I want to maintain my 100% overnight cash position and still generate a super smooth equity curve.

The leveraged model

2009-10-03T00:34:00.002+10:00

Considering the maxDD stats were acceptable, even during the 2008 Black Swan, the system will be leveraged up. Here are the charts of CAR and maximum drawdown over a 10-year test (01-01-1999 until 31-12-2008), using 30% margin as per I.B.

The beauty of trading short term

2009-09-30T23:16:00.003+10:00

You just can't beat that super smooth equity curve.

This system uses a different entry to the one in the system posted below (US stocks) but was tested over the same universe of stocks.

Seems to have more of an edge. High Pfactor, lower maxDD, higher win%, higher payoff, less trades. And did I mention the equity curve?

The performance report shows the system in its inherent form, to provide a fair comparison with the system below. The equity curve and monthly profit chart show the system traded on 30% margin, which is what it would be traded on, if it gets to that stage.

US Stocks

2009-09-22T16:46:00.004+10:00

I've recently been looking at US stocks and the potential to trade short term systems there is amazing due to the wide range of stocks and their liquidity.

The system that I've come up with is similar to the system described here a few months ago that traded ASX stocks through CFDs. Both systems are based on mean reversion and never hold overnight. But while the ASX system shorted overbought stocks and bought oversold stocks, with several days lookback and magnitude moves considered in the entry criteria, this US system just fades opening gaps and trades long only.

I have found gap fading (particularly going long gap downs) to be a robust edge that has worked well over many different universes of stocks. The idea came from James Altucher's book and also from this trader describing fading extremes as one of his favourite setups.

There are no CFDs in the US but my broker does allow 4:1 leverage intraday if required. The universe of stocks consists of 50 tickers from either the Nasdaq 100 or S&P 100, so I'm looking for liquidity and scalability in the system.

The system makes about 30-100 trades a month and performance is consistent with profitability on average 10 months of the year. 2008 was a tough year, but out of 10,000 portfolios, monte carlo testing shows that 98.59% were profitable last year, with the median portfolio gaining about 10%.

So the previous STMR system will not be traded; and this new one will take its place. I intend to use IB's PaperTrader to simulate it for about a year before committing real dollars to it.

Performance stats below are from 01-01-2003 until 31-12-2008. Position sizing is 10% of equity. Commissions are included (however, slippage, is not accounted for).

FY2009 Performance

2009-07-26T13:36:00.002+10:00

"Don't love open equity. It won't love you back"

The above quote is what a great trader once said to me. Watching open equity get whittled away is something that nobody tells you about when you design long term trend following systems. All you tend to focus on is the bottom lines of profit and maximum drawdown. But the journey to get to that destination is what we all must go through. And that journey can be much harder than you expect.

I was looking at where the system was at the end of FY2008 and PRC I saw was up 82% and the pyramid up about 37%. When they were closed, profit was just 38% and 10% respectively.

You will notice all of a sudden I'm only down just 10% for the year - how come? It's because I've decided to try and focus less on open equity and more on closed equity. Sure I won't have those weeks when i "make" $2,000+ but I won't be "losing" that amount either. For interest's sake, the system was down 21.00% for the year on an open equity basis.

So from now on, no more reports on open equity, and I will only be reporting closed equity on this blog. And since I only close trades every few months, even monthly blogging will not be needed. Perhaps quarterly.

My other system (short-term mean reversion) will be started up on a small scale sometime in the next few weeks/months and its progress will be monitored here.

Thanks to those who have followed and commented on this blog for the past 12 months. Good luck for FY2010.

-0.15

2009-06-16T16:38:00.007+10:00

-0.15. That's the correlation between the above two systems after analysing monthly returns over the past 8 years. One is my longterm trend following system (LTTF) that I have traded for about 20 months, and the other is the low exposure system described in this blog recently. Lets call that a short term mean reversion system (STMR). Due to the low correlation, the combined performance of both systems in a portfolio will perform better than either system on their own, as the table shows.

The graph shows the monthly returns of both systems. As you can see, the STMR system performs better in the past year or so and also near the beginning of the test. It seems to like the volatility that often comes with market crashes. The LTTF system outperforms in between.

Further testing Part 2

2009-06-09T15:50:00.003+10:00

Further testing Part 1

2009-06-09T15:21:00.007+10:00

Since the system has been designed to trade only the most liquid ASX20 stocks, that's only about 10 symbols. And thus it can be argued that 175 trades over 10 years over only a few tickers is not enough to indicate whether or the results are statistically significant or whether or not the system has an edge.

So what I've done here is test the system "as-is" over a broader market, the ASX100. And then I also tested it on the S&P500 stocks and the NASDAQ 100. Note that the 10 year return for the S&P500 is actually negative.

Monte carlo analysis wasn't done on the NASDAQ as there was only the one possible pathway of trades. I know this because I was about a quarter way through the test when I noticed that every single value for each column was the same in each run.

The system is not intended to trade US markets (at least not at this stage) as CFDs are not available there.

Interestingly, 2008 was a great year for the system both locally and overseas. On the ASX100 +2.9%, on my culled universe +6.9%, on the NASDAQ100 +6.4% and on the S&P500 +23%.

Low exposure systems

2009-06-07T11:07:00.004+10:00

What I'm working on now is a low exposure system that can be used to trade CFDs at 10% margin. Exposure is a measure of time in the market and thus a measure of risk, and I think this is the ideal way to trade using margin because it can minimise drawdowns to a great extent.

The aim of the system from the beginning was to restrict all trades to a holding time of just one day. This is what allows for the low exposure and low drawdowns, since you are not holding overnight. So I'm in at the open and out at the close. Initially I looked at intraday stops but they cannot be tested (properly) without intraday data, are more prone to slippage, and require more precise execution and possibly even screenwatching!

Because I want to trade at 10% margin, the maximum acceptable level of system drawdown was 2%. This is sort of already swinging for the fences as it is. One of the things I have learnt over the last 18-24 months is that systems are always traded outside the parameters they are tested in. Always. And the maximum of drawdown of any system is yet to come. But I must admit, having been through a time where there was unprecedented volatility in the markets does give me an increased level of confidence.

The system I'm describing in this post actually begun initially as two separate systems, one long only and the other short only. They traded over different universes and the long system did actually outperform the short system in almost every measure of performance and risk, but when combined, the result was better than the long one alone in terms of CAR/maxDD (my preferred measure of risk-adjusted return), mostly due to the increase in trade frequency.

Another thing I wanted in this system is to have it designed in a way to avoid situations where I have to "choose" between candidates. And because they both trade small universes from the ASX50, and for obvious reasons long and short entries tend to not trigger on the same day, I was able to allocate capital in such a way to make this possible.

The system (both long and short components) methodology is mean reversion and based on work by James Altucher published in his book "How to trade like a hedge fund: 20 uncorrelated strategies", albeit with a few variations.

I'm well aware of the pitfalls of mean reversion, and I heed Jerry Parker's words with caution:

"Mean reversion works almost all of the time. Then it stops and you're kind of out of business. The market is always reverting to the mean except when it doesn't. Who wants a system like we have, "40% winners, losing money almost all the time, always in a drawdown, making money on about 10% of your trades, the rest of them are sort of break even to losers, infrequent profits? I much prefer the mean reversion where I have 55% winners, 1% or 2% returns per month. "I'm always right!" I'm always getting positive feedback. Then, maybe in 8 years, you're kind of out of business, because when it doesn't revert to the mean, your philosophy loses."

The main problem with mean reversion is how long it takes to revert back to the mean and how much pain will you have to endure. With this low exposure system, win, lose or draw, I'm out by the close.

Above is system statistics as given by AmiBroker, with the testing done over 10 years from 01-01-1999 until 31-10-2008. As you can see from the exposure, it spends most of its time, OUT of the market.

I'm still deciding which stocks to include in the universe when considering trading practicality. Obviously If I buy a stock of which 20% of the opening volume is my order, I will influence the opening price. This has cut my trading universe down and thus my returns significantly, but that's okay. The main thing is that I design something that can actually be traded.

April 2009 Performance

2009-06-03T22:30:00.002+10:00

Short Systems

2009-05-28T02:15:00.005+10:00

Last week I designed a short-only system to trade the ASX300 and it worked great when tested over 2008. But that's it. Didn't do well in the 2000-2002 bearmarket and even with a filter, I found it hard to isolate market conditions in which the system would thrive.

This is mostly due to the upward bullish bias in the stockmarket. So I'm not going any further with it. The system though i will keep, it may show promise in other markets that don't have a directional bias.

Impressive stats though.

Simulation Summary
Simulation Date: 5/19/2009
Simulation Time: 2:41:34 PM
Simulation Duration: 0.67 seconds

Trade Summary
Earliest Entry Date in the Trade Database: 1/2/2008
Latest Entry Date in the Trade Database: 12/17/2008
Earliest Exit Date in the Trade Database: 1/4/2008
Latest Exit Date in the Trade Database: 12/22/2008

Start Trade Entry Date: 1/2/2008
Stop Trade Entry Date: 12/17/2008
First Entry Date: 1/2/2008
Last Entry Date: 12/17/2008
First Exit Date: 1/7/2008
Last Exit Date: 12/19/2008

Total Trading duration: 352 days

Profit Summary
Profit Status: PROFITABLE
Starting Capital: $100,000.00
Finishing Capital: $163,529.44
Maximum Equity/(Date-Time): $63,529.44 (12/19/2008)
Minimum Equity/(Date-Time): ($3,634.90) (1/25/2008)
Gross Trade Profit: $111,239.87 (111.24%)
Gross Trade Loss: ($47,710.42) (-47.71%)
Total Net Profit: $63,529.44 (63.53%)
Average Profit per Trade: $432.17
Profit Factor: 2.3316
Profit Index: 57.11%
Total Transaction Cost: $2,076.41
Total Slippage: $1,970.61
Total Trade Interest: $0.00
Daily Compound Interest Rate: 0.1398%
Annualized Compound Interest Rate: 66.5269%

Trade Statistics
Trades Processed: 2830
Trades Taken: 147
Partial Trades Taken: 147
Trades Rejected: 2683
Winning Trades: 66 (44.90%)
Losing Trades: 81 (55.10%)
Breakeven Trades: 0 (0.00%)

Largest Winning Trade/(Date-Time): $9,217.47 (12/19/2008)
Largest Losing Trade/(Date-Time): ($3,806.15) (5/15/2008)
Average Winning Trade: $1,685.45
Average Losing Trade: ($589.02)
Average Win/Average Loss: 2.8615

Trade Breakdown Long and Short Trades Long Trades Short Trades
Normal Exit: 147 (100.00%) 0 (0.00%) 147 (100.00%)

Total Trades: 147 (100.00%) 0 (0.00%) 147 (100.00%)

Trade Duration Statistics Winning and Losing Trades Winning Trades Losing Trades
Maximum Trade Duration: 191 (days) 191 (days) 55 (days)
Minimum Trade Duration: 1 (days) 1 (days) 1 (days)
Average Trade Duration: 30.46 (days) 48.77 (days) 15.53 (days)

Consecutive Trade Statistics
Maximum consecutive winning trades: 7
Maximum consecutive losing trades: 20
Average consecutive winning trades: 2.64
Average consecutive losing trades: 3.24

Relative Drawdown
Maximum Dollar Drawdown/(Date-Time): $13,942.15 (5/28/2008)
Maximum Percentage Drawdown/(Date-Time): 12.5000% (5/28/2008)

Absolute (Peak-to-Valley) Dollar Drawdown
Maximum Dollar Drawdown: $16,623.15 (14.5900%)
Capital Peak/(Date-Time): $113,907.06 (4/7/2008)
Capital Valley/(Date-Time): $97,283.90 (6/2/2008)

Absolute (Peak-to-Valley) Percent Drawdown
Maximum Percentage Drawdown: 14.5900% ($16,623.15)
Capital Peak/(Date-Time): $113,907.06 (4/7/2008)

Capital Valley/(Date-Time): $97,283.90 (6/2/2008)

March 2009 Performance

2009-05-05T00:09:00.002+10:00

February 2009 Performance

2009-03-30T12:00:00.001+11:00

January 2009 Performance

2009-02-02T23:36:00.001+11:00

December Performance

2009-01-27T12:25:00.003+11:00

Closed equity is unchanged as no trades were closed during December. I'm mostly cash at the moment, and only holding 2 stocks, GOLD and NVT, which has been the case for the past few months.

November Performance

2008-12-16T11:29:00.002+11:00

October Performance

2008-11-17T13:01:00.001+11:00

September Performance

2008-11-17T12:56:00.002+11:00

Portfolio Update 22/08/08

2008-08-24T19:43:00.002+10:00

No action to take next week in terms of buying or selling.

Closed equity column was added to the closed trades spreadsheet.

Due to an increasing workload, this blog will no longer be updated on a weekly basis.

I will endeavour to update it monthly.

Portfolio Update 15/08/08

2008-08-16T17:28:00.002+10:00

BKN aka "Dog of the Year" is to make a re-appearance in my portfolio as of next week.

Closed equity takes a jump as both PRC positions were winners.

Portfolio Update 08/08/08

2008-08-12T21:56:00.003+10:00

Two thirds of my position in PRC was closed out yesterday.

CPB was added to the portfolio.

Portfolio Update 01/08/08

2008-08-03T13:36:00.002+10:00

PMM triggered a buy and will be added to the portfolio.

Portfolio Update 25/07/2008

2008-07-26T01:28:00.002+10:00

I will be adding to my position in PRC next week.

No other (new) securities have triggered a buy.

Closed equity makes a new low.

Portfolio Update 18/7/2008

2008-07-20T00:36:00.002+10:00

Several positions to be closed next week, as per green highlighted symbols on the spreadsheet.

Portfolio Update 11/07/2008

2008-07-14T00:36:00.003+10:00

Nothing to buy or sell next week.

Most positions are getting quite close to their trailing exits.

Portfolio Update 04/07/2008

2008-07-07T08:25:00.001+10:00

Out with a bang!

2008-06-27T22:59:00.003+10:00

This is the last update for this financial year and the dollar gain marks my best week yet.

RIO and ABB have triggered exits.

The proceeds will go towards pyramiding my positions in WPL and ORG.

Starting from next year, I will put in a performance summary on my weekly updates, to make it easier to monitor the system's performance.

It's worth mentioning that I have noticed some divergence between the market performance and the system performance the last 6 weeks as per the attached chart.

Welcome 2008-2009, lets make this one a big year!

Portfolio Update 20/06/2008

2008-06-21T02:59:00.002+10:00

Portfolio Update 13/06/2008

2008-06-13T23:43:00.005+10:00

RIO came very close to its trailing exit, which is sitting on $133.82.

Portfolio Update 06/06/2008

2008-06-06T22:10:00.002+10:00

Portfolio Update 30/03/2008

2008-05-31T00:21:00.002+10:00

I will add to my position in STO next week.

Some funds became available as I made a decision to liquidate DXL at a small loss as it will be delisted sometime next week.

The one that got away

2008-05-24T11:13:00.003+10:00

The whole reason I got into systems testing and design is to answer the elusive question - how much (profit) do you give back in order to ride the longer term trend?

With CEY (shown above), it's obvious the exit was too tight.

But that's okay -- I'm interesting in using the exit which works best MOST of the time, over hundreds of different trades and over long periods of time.

There will always be exceptions, but you have to be willing to let those go, and move on to the next trade.

But congrats to anybody who caught this one, its a real winner.

Portfolio Update 23/05/2008

2008-05-23T22:19:00.002+10:00

Percent risk and Profit

2008-05-16T21:33:00.003+10:00

The other week I did a few TradeSim simulations on my system to see the relationship between risk and returns.

As the graphs show, from a pure profit perspective, 2.5% fixed percent risk per trade delivered the best results.

But if you want to consider the risk undertaken to make the return, as I do, then the system which position sized using 1.5% fixed percent risk per trade was on top.

Portfolio Update 16/05/2008

2008-05-16T21:27:00.002+10:00

Portfolio is fully invested as of this week.

Portfolio Update 09/05/2008

2008-05-10T10:56:00.002+10:00

Nice to see the open profit move in the right direction.

Next week I will add to my position in SGM.

Portfolio Update 02/05/2008

2008-05-03T09:26:00.002+10:00

Next week, I will add ORG and STO to the portfolio.

I will also add to my position in PRC.

Portfolio Update 25/04/2008

2008-04-25T12:27:00.004+10:00

Four stocks triggered a buy for next week. The most I've had in several weeks.

PRC, ABB, DXL, and RIO.

PRC I already hold and will not add to my position at this stage as it does not meet my criteria (based on percent profit) for a pyramid trade.

The other three will be added to the portfolio.

Note that RIO and DXL are under takeover, but I have decided that from now on, I will apply the least amount of discretion to the system as I possibly can. But still if stocks like HER and JBM trigger, ie. those that have been in a tight trading range for several months, this is the only case in which I will not purchase the stock.

If I get a selection of stocks to choose from, I will rank the stocks in terms of ascending stock price, and start at the lowest priced stock, working my way upwards. This added a slight benefit in backtesting.

Portoflio Update 18/04/2008

2008-04-22T07:56:00.003+10:00

OST has triggered an exit.

Nothing to buy next week.

Portfolio Update 11/04/2008

2008-04-13T09:02:00.005+10:00

WHS has triggered an exit.

PCR will be added to the portfolio next week.

Portfolio Update 04/04/2008

2008-04-05T11:11:00.002+11:00

Nothing to buy next week.

CEY Exit

2008-03-31T22:20:00.001+11:00

As requested by Michael.

Portfolio Update 28/03/2008

2008-03-30T12:04:00.004+11:00

No entries to take next week.

Maximum drawdown on closed equity has reached 27.25% which greater than the maximum drawdown seen during testing.

I have made a decision to keep the system open until it reaches 2*max.DD which was seen in testing. This would be 26%*2 = 52%.

I have been reminded that backtesting is not an exact science, and some allowance needs to be made for the system as the biggest maximum drawdown may well be in the future.

The pain realised during this drawdown, I have concluded, will be less than the pain realised if I was to close the system now right before the market takes off again.

And if the system does reach the newly defined shut off point, I will live to trade another day.

My system switch

2008-03-28T19:13:00.002+11:00

Last weekend I did some backtesting using my new system switch.
The results were less than promising.

The test period I chose initially was one where I feel is a particularly good period for running backtests. Its from 01-01-1998 until 01-01-2003. The market index (XAO) returned 6.7% pa annualised.

Monte carlo analysis was done over 5,000 portfolios. Starting with $50,000, the averages were:

Without switch:
Number of trades: 179
Profit: $294k
Maximum drawdown: 7.95% (worst 17.5%)

With switch:
Number of trades: 88
Profit: $70k
Maximum drawdown: 13% (worst 31.9%)

As you can see, the number of trades taken were halved compared to no system switch, but obviously the trade expectancy did not make up for this, and as such the CAR was reduced significantly.

The switch, though I haven't tested it sufficiently as yet, I suspect may help my system when in a prolonged bearmarket. A quick glance of the long term performance of the market will tell you that stocks do not spend most of their time in a prolonged bearmarket.

So my conclusion at this point is to just weather the drawdown and keep on trading the system. The only assumption I am taking here is that at some point, maybe after 1,2,3 years, is that the market will assume its long term bullish bias. I have no reason to believe otherwise.

In the meantime, I am developing other systems that will compliment my long term trend following system. I am looking at the forex markets due to its low correlation to equities.

I am still playing with the switch trying to make it work. Results will be posted here when the tests have been done.

Portfolio Update 21/03/2008

2008-03-22T17:37:00.004+11:00

CEY and NCM have triggered exits.

Nothing to buy next week.

Portfolio Update & Sector analysis

2008-03-16T14:21:00.005+11:00

No buys were triggered for next week.

I'm starting a bit of work on sector analysis, and relative strength between sectors. The purpose of this work is to see which sectors are outperforming the market.

This sort of analysis can be used instead of (or in addition to) an index on/off switch, because such a switch used alone may keep you completely out of the market for a prolonged time in a bearmarket. This may not necessarily be a bad thing but it may deprive us of trading opportunities.

Take a look at property trusts during 2000-2002. Nothing staggering but a fairly significant outperformance of other sectors and of the general market.

The problem with this sort of stuff is that it's hard to backtest anything to do with index switches or sectors because you cannot really purchase historical index/sector constituents from anybody, as far as I am aware.

And it would take a hell of a long time to construct them yourself.

Or maybe we can purchase them from Standard & Poors?

Any suggestions?

Portfolio Update 07/03/08

2008-03-09T23:11:00.003+11:00

NCM is to be purchased next week.

Portfolio Update 29/02/2008

2008-03-02T12:25:00.003+11:00

Four stocks came up for next week: AGM, HER, JBM, and WPL.

But none will be purchased as the first 3 are under takeover and WPL hasn't met my pyramiding criteria (based on percent profit).

So looks like tomorrow I will get 10mins more time having lunch as I don't have to place any trades!

Portfolio Update 22/02/2008

2008-02-24T11:28:00.002+11:00

Three stocks came up for next week: RSP, WHS, and WPL.

RSP is under takeover from Xstrata, so only the others will be bought.

WHS has criminal spreads (and liquidity) but I'm trying to stay as close as I can to TradeSim these days, so all stocks that trigger will be bought as long as I have the cash and the companies are not under takeover.

If I have a choice between stocks then I will use the "bang for buck" principles and rank them in order of ascending stock price as this has added about 2%p.a. in backtesting.

Portfolio Update 15/02/2008

2008-02-16T11:37:00.003+11:00

Four candidates triggered an entry for this week, JBM, HER, OST, SGM.

The latter 2 will be purchased next week as the others are under takeover.

Nice to see some green in the portfolio this week!

Portfolio Update 08/02/08

2008-02-10T19:06:00.000+11:00

BPT has triggered an exit.

The weekly scan didn't identify any candidates for next week.

Portfolio Update 01/02/2008

2008-02-01T23:23:00.000+11:00

Two candidates for next week, HER and CEY.

The former is under takeover, but CEY will make another appearance into my portfolio.

The capital return from CEY was banked this week.

Portfolio Update 25/01/08

2008-01-26T23:10:00.000+11:00

Again the system has not triggered any buys for next week.

FLT to go next week. BPT came very close.

When to pull the plug

2008-01-20T11:02:00.000+11:00

"Don't focus on making money; focus on protecting what you have" - Paul Tudor Jones.

It is common for those trading with mechanical systems, to have a system stop. This is the point where the system switches off, and is usually when the drawdown surpasses the maximum drawdown seen in backtesting.

The reason for this is, a larger maximum drawdown than seen in testing, is a sign that the system is trading in unchartered territory, and is trading in market conditions not seen in testing. This means that you are pretty much trading blind, and you can no longer have confidence that if you follow the system parameters, you will achieve the results seen in testing.

In the last 15 years (since 1992) we have only really seen one market, and that was between 2000-2003. The peak saw the All Ordinaries (XAO) at 3,450 which was roughly 01-07-2001 and the trough was 2,666 which was roughly at 01-03-2003. So in this 21-month period, the market lost 22.7%.

The testing of my system over this period, and this is a monte carlo analysis over 20,000 portfolios, showed the following results:

Simulation Stats
Number of trade simulations: 20000
Trades processed per simulation: 287
Maximum Number of Trades Executed: 70
Average Number of Trades Executed: 56
Minimum Number of Trades Executed: 40
Standard Deviation: 3.92

Profit Stats
Maximum Profit: $23,967.45 (36.31%)
Average Profit: $1,690.05 (2.56%)
Minimum Profit: -$14,030.01 (-21.26%)
Standard Deviation: $4,899.62 (7.42%)
Probability of Profit: 61.96%
Probability of Loss: 38.05%

Percent Winning Trade Stats
Maximum percentage of winning trades: 56.60%
Average percentage of winning trades: 37.07%
Minimum percentage of winning trades: 20.34%
Standard Deviation: 4.61%

Maximum Peak-to-Valley Percent Drawdown Stats
Maximum Absolute Percent Drawdown: 25.6386%
Average Absolute Percent Drawdown: 10.9312%
Minimum Absolute Percent Drawdown: 2.8526%
Standard Deviation: 2.8416%

So from the 20,000 portfolios, the worst portfolio lost 25.6%.

So if the live system reaches a drawdown of 26%, and these values apply only to closed equity, then the system will be shut down.

Now the obvious concern here, if we turn the system off, when does it turn back on?

We have to remember that historically the stockmarket has shown a strong bullish bias, and we have no reason to think this fact will change. As we can see from the chart above, the downtrends are usually sharp corrective moves, lasting 1,2,3,4,5 years, but then the market continues to go up again.

The reason long term trend following systems work so well (in the long term! mine is a bad example, LOL) is because they take advantage of this historical bullish bias that the stockmarket has shown. My system even works well in what you would call a very average market.

Between 1998-2003, the market averaged a return of under 7%p.a., well below its longterm average of about 11%p.a. Here are the stats for my system through this time:

Simulation Stats
Number of trade simulations: 20000
Trades processed per simulation: 1070
Maximum Number of Trades Executed: 182
Average Number of Trades Executed: 167
Minimum Number of Trades Executed: 151
Standard Deviation: 4.29

Profit Stats
Maximum Profit: $536,473.93 (812.84%)
Average Profit: $339,851.99 (514.93%)
Minimum Profit: $194,702.54 (295.00%)
Standard Deviation: $49,123.14 (74.43%)
Probability of Profit: 100.00%
Probability of Loss: 0.00%

Percent Winning Trade Stats
Maximum percentage of winning trades: 60.39%
Average percentage of winning trades: 51.50%
Minimum percentage of winning trades: 43.86%
Standard Deviation: 2.18%

Maximum Peak-to-Valley Percent Drawdown Stats
Maximum Absolute Percent Drawdown: 19.0027%
Average Absolute Percent Drawdown: 10.3125%
Minimum Absolute Percent Drawdown: 4.6984%
Standard Deviation: 1.9226%

So that's an average of about 35%p.a. Backtesting is not an exact science, but I'm more than happy with 20-25%. If I want to achieve these results I need to be in the market for a decent period of time.

So what I am looking at designing and testing over the next few weeks, is a system switch based on the index (XAO). It won't be designed to cash out at the top and buy back in at the bottom like a champion, but rather to keep my system out of a prolonged bearmarket. If I can achieve comparable results while enduring less pain (drawdown), they why not.

Some will say I should have implemented this from the beginning. Well, you live and you learn. And at the end of it all, it's only money.

Portfolio Update 18/01/2008

2008-01-19T13:18:00.000+11:00

Doing a bit of selling next week, as portfolio moves to mostly cash.

And for once, there are no candidates for next week!

I used to get 20-28 stocks to choose from in the October/November period.

As for MIN i was hoping to ride it longterm, but the market has a mind of its own.

Though it may look like it did a BKN, actually CEY gave a capital return of $1.88/share during the week. But I am exiting the stock as I want to trade as closely as I can to TradeSim, and TradeSim would have exited the stock, as I suspect it wouldn't tell the difference between a capital return and a Centro!

The sum of $2,350 ($1.88*1,250) will be added to the bank in a column titled dividends, but only once I can see the money in my bank.

Portfolio Update 11/01/2008

2008-01-13T14:16:00.000+11:00

3 sells for next week.

And we have the first closed trade winner in the first parcel of STS! LOL though it wasn't too impressive.

CSM, FLT, and RSP are the candidates for next week.

FLT will be added to the portfolio, as the other two are under takeover.

Happy New Year 2008!

2008-01-05T17:15:00.000+11:00

I'd like to take this opportunity to wish everyone a happy new year.

May 2008 bring us much success and happiness, and take us one step closer to achieving our dreams.

Portfolio Update 04/01/2008

2008-01-05T17:08:00.000+11:00

TGR was added this week.

Both parcels of STS to go next week.

BPT to be added next week.

Portfolio Update 28/12/2007

2007-12-28T21:42:00.000+11:00

Portfolio Update 21/12/2007

2007-12-23T19:29:00.000+11:00

MIN, IPL and FLT have triggered as buys for next week.

I will pyramid my position in MIN.

Portfolio Update 14/12/2007

2007-12-15T15:16:00.000+11:00

Some action needs to be taken next week!

BKN, LRF, and BLY are out.

What happened to BKN was tragic!!

LRF at last a normal exit which can get us out, hopefully at close to breakeven.

Volatile market this week, open profit was +$4,409 after Wednesdays close. What a difference two days can make.

Portfolio Update 07/12/2007

2007-12-08T12:53:00.000+11:00

LGL to be chopped next week.

Backtested equity curves of current tickers

2007-12-01T14:13:00.000+11:00

This backtest was done at the request of faze_2. I used only current tickers as the universe, namely, LRF, BKN, JBH, MIN, STS, BLY, LGL. Starting capital was $50,000.

Not sure what timeframe to test, so I ran the test from 01-01-2006 and instructed TradeSim to close out all open trades on friday 30-11-2007.

Portfolio Update 30/11/2007

2007-12-01T00:07:00.000+11:00

The system has identified 10 candidates for next week: CEY, FLY, HVN, PCG, REA, RSP, CSM, RIO, UGL, and WOR.

CEY and HVN will be added to the portfolio.

Portfolio Update 23/11/2007

2007-11-24T12:12:00.000+11:00

CDD was added during the week and my position in STS was added to.

PWK and NOD have hit their exits and will be sold next week.

Portfolio Update 16/11/2007

2007-11-17T18:49:00.000+11:00

Portfolio Update 9/11/2007

2007-11-10T11:23:00.000+11:00

I will be taking some action next week.

REX triggered an exit, gapped down and closed near the lows like an absolute champion.

I will also be exiting out of the takeover stocks that I inadvertently (foolishly) purchased on the first day, namely CSM, IWL, and COA.

The latter two have already finalised everything regarding the takeover. So I figured if I don't cash out now, then I will end up taking either cash or shares in a few weeks/months time. Might as well put the money to use elsewhere.

The funny thing is, every week since that first week I've been thoroughly checking the candidates from the weekly scans if they are currently under takeover, and there's been none! Yet I got 3/10 on the first week!!

I will be purchasing GMI, RRA, and pyramiding into STS, with the proceeds.

REX and BKN

2007-11-02T22:21:00.000+11:00

Just thought I'd post a few charts so we can get a feel for how the system works.

REX, which is the top chart, is very lucky to still be in my portfolio! Just managed to close above the exit.

With BKN, the ATR trailing exit has quickly followed the price upwards, to lock in increasing levels of profit. However, when the price starts going down, the ATR trailing exit will just stay flat.

So, we can be pretty confident that BKN will be closed a winner.

In both cases, the entry is 4 bars ago, counting the most recent bar as 1. The date is per the spreadsheet (October 9th).

Portfolio Update 2/11/2007

2007-11-02T17:59:00.001+11:00

Customised systems

2007-10-28T11:52:00.000+11:00

Make a list of everything that can go wrong and determine how you will respond to that situation. That will be the key to your success - knowing how to respond to the unexpected - Van K. Tharp

One of the benefits of designing your own system -- as opposed to buying one -- is that you can include the features you want and exclude that which you do not. The system can be, and should be, customised to suit your personal preferences. This also helps you to stick to the plan in those inevitable periods of drawdown.

So from the word go, from when you begin the systems design process, you should already know what sort of system you want to design, and which features are more important to you than others.

If you like a smoother equity curve, then have a shorter holding period (higher stock turnover) for your positions. This can be accomplished by having a tighter trailing exit (probably at the expense of profits).

If you cannot handle long losing streaks, then a way around this is to design a system with an entry which will give you a higher win%.

I was looking at improving my win% yesterday by using different universes as I currently use the whole market. So I tried the all ordinaries, ASX100/200/300, small ordinaries, and dividend paying securities.

Testing was the first 3 quarters of this year, 01-01-2007 until 30-09-2007, in an attempt to minimise inclusion bias (indices couldn't have changed too much throughout the course of the year). Nevertheless, it's only for relative measure anyway.

Results were as follows:

All Ords (488 stocks)
#Trades: 32
MaxDD: 2.73%
Return: 17.83%
Win% = 59
R/R = 2.06

Small Ords (199)
#Trades: 26
MaxDD: 3.97
Return: 14.58%
Win% = 50
R/R = 2.60

ASX100
#Trades: 37
MaxDD: 17.33%
Return: -15.79%
Win% = 23
R/R = 0.63

ASX200
#Trades: 41
MaxDD: 9.87%
Return: 6.84%
Win% = 37
R/R = 2.58

ASX300
#Trades: 39
MaxDD: 3.39%
Return: 21.51%
Win% = 61
R/R = 2.30

Div paying (645)
#Trades: 37
MaxDD: 4.65%
Return: 23.13%
Win% = 54
R/R = 3.08

Whole market (1951)
#Trades: 43
MaxDD: 4.57%
Return: 23.75%
Win% = 63
R/R = 1.93

The best returns were from the whole market, dividend paying securities, and the ASX300.

So I did 1000 monte carlo runs of each of them with the results as follows:

The format for profit is max/average/min/std deviation/%of portfolios profitable.
And for maxDD max/average/min.

Whole market
Profit: 55/18/-7/9.68/97.8

MaxDD: 17/6/1

Dividend paying securities

Profit: 43/12/-11/8.78/93.5
MaxDD: 17/6/1

ASX300

Profit: 43/12/-14/10.34/88.9
MaxDD: 17/6/1

The last figure on the profit column is one I pay the most attention to. 100% would be ideal.

To give some sort of benchmark the XAO (All ordinaries) was up by 12.5% over this 9-month period.

So it seems from this test that we can't expect an improvement by trading an alternative universe, at least from the options tested.

I will be adding $20,000 of trading capital to the system this week just to make it compound quicker as we are approaching the month of November. November to April is traditionally a very strong period for equities.

From the weekend scan, the full list of possible candidates are as follows:
AQA, BEC, BLY, BKN, CPB, CEY, DWS, FLT, GMI, JBH, LEI, LGL, MSL, MIN, NCM, NOD, RCR, SMX, SDG, UGL, WTP, WOR, WTF.

I applied 3 filters. The chart has to be good. Clear uptrend and not in a trading range.
This narrowed it down to AQA, BEC, BLY, LGL, BKN, MIN, NOD, RCR, SMX.

Then I checked if any were under takeover. None were.
Then I picked the lower price securities or the ones I liked. LGL a gold play I just had to buy it.

MIN and BKN even if they didn't trigger, I could pyramid because i have reached 15% profit (that's what was backtested).

Since I could probably afford 3 more positions, I'm going with LGL, NOD, and BLY.

Here is a website I check to see Broker consensus. It's another filter I've added. I like to see a minimum rating of buy or strong buy.

Remember the system is robust and well tested so it doesn't matter HOW we pick the stocks from the candidates spat out by the scan. All the testing initially was done by picking random trades (monte carlo analysis).

Ranking by price and even pyramiding trades, only adds 1-2%p.a.

Portfolio Update 27/10/2007

2007-10-26T16:54:00.000+10:00

Portfolio Update 20/10/2007

2007-10-19T17:20:00.001+10:00

Seek and you shall find

2007-10-19T16:26:00.000+10:00

The single most important element to being successful in the markets is having a plan. First, a plan forces discipline, which is an essential ingredient to successful trading. Second, a plan gives you a benchmark against which you can measure your performance - Howard Seidler.

It really is amazing how much good information is out there on the internet. And the best part is that most of it is free. All we have to do is look for it. I feel I have learnt a great deal from online forums and other resources available over the internet. This post is simply a list of material that I have used and that others may find useful.

I have started numerous threads over at Aussie Stock Forums, including topics such as:

*System Robustness
*Drawdowns
*Would you trade this system?
*Outside the "Blueprint"
*Systems testing

And read the whole thread. Don't focus on what I write, but rather, on the responses, which are mostly from seasoned professionals.

This is an interview with author and hedge fund manager Robert Pardo. I think it's very good and I found it useful. He covers several important aspects of systems development.

Chuck LeBeau's presentation on exits is another resource I would highly recommend.

On Nick Radge's forum, there is so much knowledge you would not believe.

Tech/a has shared the discussion regarding the full design and development of his system and traded it live and answered questions for the last 5 years. Any question you have on systems development chances are somebody has asked it and it has been responded to. I would recommend reading the whole folder (about 50 threads).

Also, in the Trading Systems section, go to the very end, and read anything by Stevo and OPM and tech/a. A search may be helpful here.

And lastly, I just stumbled across another forum recently, called Elite traders. This thread by Acracy is pure gold. I would regard it as the next level of system development. He goes beyond entries, exits, and money management.

Don't be fooled by randomness

2007-10-16T16:43:00.000+10:00

All great traders are seekers of truth - Michael Steinhardt

The whole purpose of systems development is to find a method of trading that gives us an edge. An edge in terms of trading can be defined as probability of making profit which is greater than random chance.

If our probability of being profitable is the same as random chance, then any gains we make can be attributed to luck. That said, luck is also an important and often underrated factor when it comes to trading. We can see this from the difference in the results between the minimum and maximum of thousands of monte carlo simulations. This is why we should aim to design systems with enough rigidity so that the distribution of results is nice and tight. But this is another topic.

Here is nice definition of an edge: "If you make only bets on which you have an edge, you will win and you will lose but in the long haul your winnings will overwhelm your losses."

A good way to test a system is to compare it to another system which is based on randomness. ASX.G has done significant work on this. I ran one test but it was enough to confirm the work he had done. An random system with 10% chance of entering on any bar and 20% of exiting on any bar returns about 1%p.a. greater than the market, on average. The luckiest bastard made many thousands of percent.

In addition to this, I did a bit of testing to attempt to see whether the edge in my system was in the exit or the entry. And from my work, I can say that entries are very underrated.

The testing period was from 01-01-1998 to 31-12-2003.

The market as a whole underperformed it's long term average significantly during this time, with a compounded annual return (CAR) of only 3.82%p.a.

My whole system returned 38.90%p.a.

My system with my entry and random exit: 28.00%p.a.

My system with my exit and random entry: 7.74%p.a.

Random entry/exit was defined as a 10% chance of entering/exiting on any given bar.

My system with my entry and random exit: 15.95%p.a.

Random exit here was defined as a 5% chance of exiting on any given bar in an attempt to extend holding time to that similar to the original system which is 20 bars. It looks like the trailing stop becomes increasingly important in this instance.

But still, it seems most of the edge lies in the entry.

Speaking my language

2007-10-14T14:50:00.000+10:00

Some people say, "I can't sell that stock because I'd be taking a loss." If the stock is below the price you paid for it, selling doesn't give you a loss; you already have it - William O'Neill.

It's nice to see somebody else speak your language. I was reading this week's BRW and there was an interview (pg.78-82) with a hedge fund manager named Karl Siegling. Below are some of the things he had to say about the way he trades. His fund's gross return is up 75.98% over the last 15 months (inception) and about 32% for the last 6 months for Australian shares.

"A falling share price is not a buying opportunity, but a clear warning from the market that something is wrong. Repeated new highs for a stock are not evidence of a missed opportunity or an overpriced company, but rather an invitation to buy more shares."

"I believe that there is no sense, no matter how compelling our fundamental belief may be, in buying into a stock as it is falling in value."

"I believe that the words "contrarian investor" are often used out of context, and that a contrarian strategy of constantly buying and adding to a falling position and constantly selling or shorting a rising market leads an inexperienced investor into making costly mistakes."

"The market can be irrational and sell down a stock for no reason - no reason based on the fundamentals of a business. But it's not for us to say when the market will stop being irrational."

"I will buy shares at, for example, $1, then $1.10, and then $1.12, but if I have just paid $1.12 for a stock then I will not pay $1.10 if the price falls a few days later. That's because I like buying shares that are going up."

So do I, Karl!

Based on these sounds principles, his strong performance comes as no surprise.

Not an exact science

2007-10-13T10:44:00.000+10:00

You've got to know when to hold 'em; know when to fold'em; know when to walk away; and know when to run - Kenny Rogers.

Backtesting is not an exact science, and has its limitations. At times, it can be said that the best computer is the the one between the ears.

One limitation that I only discovered recently was regarding company M&A. I realised yesterday that 2 out the 10 companies that I purchased this week were under takeover offers. So I was wondering how TradeSim handles these situations, because, I want to stick to the plan which was backtested with the least degree of deviation as possible; so I have the most chance of realising similar results.

Well TradeSim is only as good as the data that you feed to it; and data is simply 5 values for each bar. It cannot in any way account for company decisions. So when a company is delisted i.e. stops trading for any reason (merger with another company, script takeover, cash takeover, change of stock code, bankcruptcy), then TradeSim will close the position on the last bar it traded, the trade will be found in the TradeSim trade database as an open trade, and the price will be at the price it last traded (regardless of how long ago that was).

It will be marked as an open trade to differentiate from those trades that were closed out because they hit the protective stop or triggered a normal exit.

So it is upto me how to deal with these company M&A situations. I think at least for now, I will just leave the positions as they are, but will reassess the situation periodically.

I will not be updating the portfolio this week because all exits (as are entries) are delayed by one bar, I will have to check at the close of the next bar, which is next week, to see if any stops or exits were triggered. And I won't be running a scan (exploration) for any new candidates because all my capital is already in open trades anyway.

I notice there's some media articles regarding next week being the 20th anniversary of the 1987 crash. Some commentators say that this may well be a cause of market "jitters" next week. I guess that sort of news sells newpapers.

Exits

2007-10-11T19:50:00.000+10:00

Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance - William Eckhardt.

I can relate somewhat to what Eckhardt is saying in the above quote because I tried profit targets for my system sometime ago. They didn't work very well. What was initially supposed to increase win % in fact did not, but instead, reduced the size of average winners substantially. I was effectively cutting winners short.

My whole thinking behind it was because I don't like seeing winners becoming losses, as this (sometimes) happens in long-term trend following systems, that by definition give back alot of open profits. But clearly, the flip side of the coin of cutting winners short made the trade-off rather unfavourable.

Thinking about it now, the idea did not make sense at all, as I'm cutting (potentially) big winners in an attempt stop small losses. Losses are always small because of the my stop loss. Big winners, however, can often be the difference between a great system and an average one. If I were to remove the best 10 trades from the trade database, returns fall by almost 10%p.a.

What could work is a profit exit based on rate of change (ROC), designed for stocks that rise very rapidly. If a stock rises X% in a N number of bars, then the exit is taken. But more work had to be done here before I can make any conclusions.

Howard Bandy discusses exits in a section of his book. He mentions there are 5 types;

1. By the action of an indicator or recognition of a pattern, similar to what caused the entry.

a. The parameters can be the same as those that caused the entry, but in the other direction.

b. The parameters can be different for exit than for entry.

c. Some other indicator can be used.

2. By the price reaching a profit target.

3. By the time in the trade reaching a maximum holding period.

4. By the price falling back to the level of a trailing stop.

5. By the price falling back to the level of a maximum-loss stop.

He goes onto mention that the fifth type is the worst i.e. the maximum stop loss level. Those that have designed and traded mechanical systems would agree with this. During testing, we try and aim for the highest percent possible of trades exited in profit. Exits taken with a loss, and these are mostly those that hit the protective stop, should ideally be no more than 10-15% of the total exits.

Initial stops don't always help the system. For example, for my system, that I've just began trading live on this blog, I tried several but couldn't find an initial stop that improved the bottom line (doesn't mean there isn't one). I wanted an initial stop to calculate position sizing so ultimately I decided to place the initial stop at the trailing exit.

Maximum holding periods I must admit I haven't put enough research into this area to have an informed opinion but it just doesn't make sense to me. I believe the time in a stock should be determined by its trend. You want to spend the most time in the winners because profit increases as time in trade increases. At the same time, you want to spend as little time as you can in the losers, so you can take the loss and use the money for another trade (an opportunity cost issue). The problem is that you never know beforehand whether the trade will be a win or a loss, so it would be difficult (impossible?) to deduce the optimal holding time which would outperform other types of exits.

Randomly skipping some trades part 2

2007-10-10T18:09:00.001+10:00

I had to learn discipline and money management. I decided that I was going to become very disciplined and businesslike about my trading - Paul Tudor Jones.

I didn't really explain the chart in my previous post as well as I should have.

The test was conducted over 9.5 years. In that time, there were about 2900 trades in the trade database. Those are all the possible trades picked by the system over that time.

Due to capital restraints and position sizing, I only traded between 400-500. I say and position sizing, because this is what keeps the number of trades down. Even if I started with 500k, if my fixed percent risk was 1.5%, I would still be taking about the same number of trades.

As you can see, I'm only taking about 15% of all the trades that are triggered anyway. So it doesn't matter how I pick them or even if ignore a vast majority of the trades, the results aren't affected significantly, as monte carlo runs have shown.

Randomly skipping some trades

2007-10-10T11:09:00.000+10:00

Trading provides one of the last great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a multimillionaire - Jack D. Schwager.

I was having a discussion with tech/a over at ASF the other day. He uses discretion (eyeballing the chart) to choose which candidates to buy from the stocks that have triggered. I thought that's fine -- until I found out that sometimes he doesn't trade at all because the candidates don't pass his filter.

Initially I was thinking that this was playing with fire because such a strategy cannot be backtested with TradeSim. I mean, having 10 candidates and picking any 4 because you have capital to take 4 trades is fine. Discretion can be applied here and shouldn't matter which 4 we pick as this is what monte analysis takes into account -- the different portfolio combinations and permutations.

It has been brought to me attention that TradeSim actually can test for this. This post was inspired by some good work by Stevo. You can actually program a code as part of the EntryTrigger and tell TradeSim to randomly only take X% of the trades that trigger.

So I did just that, to see if my system held up even if I missed some trades. And it does quite nicely. That said, I don't plan to ever do this in practice. You never know which trade will be the big winner.

For the above test, market orders were used to account for slippage and 200 monte carlo simulations were run each time, with the average return tabulated and shown in the above chart.

Every great journey begins with the first step

2007-10-09T11:32:00.000+10:00

I realized that this chipping away approach was what I should be doing, not putting myself at big risk, trying to collect a ton of dough - Tony Saliba.

(Disclaimer: Just to re-iterate that I am NOT giving recommendations to buy or sell any of the securities mentioned in this blog.)

The first purchases were made this morning. We need to remind ourselves that this system is not supposed to work overnight. It's a long term weekly system, designed to make consistent money, over the long term. In fact, even in backtesting, the first year is often not profitable. So I would expect a single digit gain or loss on closed equity in the first year. That said, we should expect some nice open profits at this stage (after 12 months). Professional traders don't consider open profits as their own.

Start up is hard for long term systems because the trades that are closed out first are often the losers, and we need to give winners time to run. From testing, the average holding time for a winner was about 200 days, compared to 60 days for a loss. And the really big winners (which are the trends we are trying to catch) often run for much longer than a year.

The Total Trading Capital column in the spreadsheet is the money allocated to existing trades minus brokerage fees plus money in the bank. This is what TradeSim uses to calculate position sizing so I will do the same. MIN I paid double in brokerage because I made a mistake with the position sizing and bought less than I should have the first time around.

Waiting for opportunity

2007-10-08T16:49:00.000+10:00

Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading - Mark Weinstein.

This post will have nothing to do with the title but I really liked that quote and has to fit it in somewhere!

There was another tweak I made to the system over the weekend that added a few percent to the results, that I haven't yet mentioned here.

All this time, I had the box in the TradeSim Preferences window "Accept partial trades if inadequate capital", unchecked. This only came to mind when I was thinking about this week's buy orders. After buying 9 stocks, each with a parcel size of about $4,500-4,700 (worked out from fixed percent risk), I would not actually take the 10th trade because i would fall sort of the required parcel size by a few hundred dollars. Then I thought why not take the trade anyway. But that hasn't been backtested. So I ran the tests again, to quantify the benefit (if any).

As suspected, the profit results were greater, by 3-4%p.a. over the various timeframes. Drawdowns were not affected significantly, about 1% higher. I'm happy with that. Number of trades increased by about 20%, naturally, so instead of 149 trades in the 6 year test, there were 179 trades. And instead of 84 trades in the 3.5 year test, there were 101 trades.

So now, the method will allow me to clean up the account if I don't have enough cash to take the full sized trade. This means that my money is in the market more often, which is a more efficient use of trading capital. And 3-4%p.a. is nothing to scoff at. Over a number of years, due to the effect of compounding, the increase in profit is quite substantial.

Maximising performance part 3

2007-10-08T05:53:00.000+10:00

I have found that the greatest traders are the ones who are most afraid of the markets - Mark Weinstein.

I found a flaw in my testing method when ranking trades due to price, well, not a flaw as such, but the study design could've been structured better. Because I was ranking by lower priced stocks, this should mean, in theory, that there is only one possible route of trades to take. So everytime I ran a single portfolio simulation (with original ordering), all else being equal, the results should be exactly the same.

But they weren't, and I soon realised this was due to slippage. The variability would come from the randomness generated by the market orders which would buy a price anywhere between the low and the high of the entry bar and exit through any price between the low and the high of the exit bar.

As this wasn't a sound method of testing, I started again. For the purposes of this test, I ran monte carlo simulations (20,000) this time using default order slippage. Then I ran a single simulation through with the ranking giving preference to lower priced securities, also using default order slippage. So there's only 1 possible outcome. Then I compared this to the average portfolio result generated from monte carlo. The results are as follows.

01-01-1998 to 31-12-2003
Monte carlo average: 37.4%p.a.
With trade ranking: 38.9%p.a.

01-07-2001 to 01-03-2003 (The worst - XAO loses 18%, peak to trough of the bearmarket)
Monte carlo average: 1.5% (non-annualised)
With trade ranking: 13.56% (non-annualised)

01-01-2004 to 30-06-2007
Monte carlo average: 31.1%p.a.
With trade ranking: 44.6%p.a.

I don't think its coincidence that the more recent we go, the more wider the gulf becomes. I suspect it's due to not many stocks back in the 90s getting past my liquidity filter, though this hypothesis has not been tested. You can see this from the trade database. For the 6 year test between 1998 and 2003, there were 1234 possible trades, and for the 3.5 year test between 2004 and 2007, there were 1647 possible trades.

Maximising performance part 2

2007-10-07T11:12:00.000+10:00

To be a money master, you must first be a self-master - J.P Morgan

Thanks to an idea by rnr over at ASF, I decided to run some more simulations in my attempt to find a systematic method that will allow me to make gains similar to those at the higher end of the monte carlo range.

This time I ranked the stocks by their volatility (ATR(10)) and told TradeSim to give preference to the stocks with higher volatility. The results were less than flattering. Out of 50 runs, only 60% produced an annual return greater than the average from monte carlo. And only 4 (8%) produced gains which were significantly higher than average.

These results, unlike those produced by price ranking (see previous post), are inconclusive at best. In fact, if I were to run another 50 simulations, it could well be that the we could conclude that this method provides no edge over random selection.

Maximising performance part 1

2007-10-06T15:26:00.000+10:00

If I wanted to become a tramp, I would seek information and advice from the most successful tramp I could find. If I wanted to become a failure, I would seek advice from men who had never succeeded. If I wanted to succeed in all things, I would look around me for those who are succeeding and do as they have done - Joseph Marshall Wade

In a previous post, I mentioned how I had not yet quantified the benefit of picking lower priced stocks over those with a higher price. This post will address this issue.

From this week's candidates, after excluding 3 with my eye-ball filters, I have 16 left to choose from. From those 16, my capital would only be sufficient for 9 or 10. I had initially planned to trade the way TradeSim does by default (for single portfolio simulations), which is alphabetically. Then I thought it would be nice if I could test what benefit, if any, there is, by picking lower priced stocks.

In theory it makes sense that, say, a $3 stock, would get to $6 much quicker than you can see CSL (currently around $107) reach $220. But, being the trader I have now become, I don't go for hunches or opinions anymore, everything needs to be tested, validated, and quantified.

Using TradeSim, you can test this by using the SetVariableTradeRank function (see manual pg.115). I told TradeSim to rank the trades in the trade database by their closing prices. And then to give preference to lower priced securities. What I wanted to see is WHERE the results fell relative to the average profit values generated by the monte carlo analysis of the same system over the same timeframe.

So I ran 50 single simulations, and the results were conclusive. Of the annual returns from these single simulations, 49 (98%) were greater than the average return of the monte carlo. Also, 19 of the simulations (38%), gave returns that were significantly higher than the average return. Significantly higher was defined as an increase of more than 5%p.a. in annualised returns.

The above simulations were done on the 6-year period from 01-01-1998 until 31-12-2003. I also did some tests on the previously out-of-sample period which was used for the walk forward analysis. From 50 simulations using the ranking function to give preference to lower priced securities, 39 (78%) produced annual returns greater than the average from monte carlo analysis, and 23 (46%) produced gains that were significantly higher than the average return.

So clearly, there is a benefit in choosing lower priced securities, and the bang for buck theory has been verified and quantified for my system.

Now I have a very easy method of choosing stocks. Go for the lower priced share. Though I should clarify that rightly or wrongly I will still do my eyeball filters first! I just can't buy a share with a disgusting chart!

Next week's purchases will be, in order of preference, LRF, REX, SSX, STS, MIN, CSM, COA, PWK, IWL, BKN.

BKN may have to miss out. I'll see how I go with the position sizing. It looks to be either 9 or 10.

**EDIT: It has been brought to my attention that SSX has in fact been delisted (has merged with OneSteel). So the question must be asked, why was it still picked up by the scan? Because the last time it did trade, it did give a valid entry signal. The most recent data loaded for this stock was 3rd August 2007. So, i must keep in mind for the future to check the date the stock last traded. So BKN will be surely included now. Next in line would be JBH.**

Next weeks candidates

2007-10-05T23:48:00.000+10:00

I did what will soon be my routine weekly scan and came up with 19 candidates to buy next week.

BKN, CPB, COA, CSM, HPX, IWL, JBH, LEI, LRF, LIP, MIN, PWK, REX, STO, STS, SSX, UGL, VGH, WPL.

My capital will run out at about 12 or 13 stocks.

TradeSim trades in alphabetical order so I will follow TradeSim in this sense except I will add a few more conditions:

*The stock must be in a clear uptrend. As you can see from the chart above, VGH is not in a clear uptrend and the chart is rather messy.

*The stock must not be trading in a tight range. HPX and LIP fall into this category. To be honest, I do not even know how LIP got past the volume filter. As for HPX, it had very large volume this week but still could not make a higher high. That tells me there's alot of sellers soaking up the volume and the buyers didn't need to chase.

So that narrows our list down to 16 stocks. A few will still miss out. I will update next week with what stocks I do decide to buy and at what prices.