Portfolio Update 25/04/2008

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

OST has triggered an exit.

Nothing to buy next week.

Portfolio Update 11/04/2008

WHS has triggered an exit.

PCR will be added to the portfolio next week.

Portfolio Update 04/04/2008

Nothing to buy next week.

CEY Exit

As requested by Michael.

Portfolio Update 28/03/2008

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

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.