Market Volatility

The chart above shows the small ordinaries index on the Aussie market. The small ords is made up of around 300 stocks but excludes the top 100 stocks (ASX100). So all the big banks and giants like BHP & RIO are taken out of the picture. All the so called blue chips are stripped out of the picture - I usually don't hold too many blue chips in a portfolio.

The chart is weekly. The top chart shows weekly movements in the Index close price. The most volatile time on the chart occured this year, with a move of -8.46%, followed by a +7.3% reversal. This must have been very challenging for short term traders and certainly woke up some long term trend followers!

The bottom chart shows 52 week ROC (adjusted). The switch from below the 0% line to above it is clearly shown back in 2003. The white horizontal line on this chart goes back 52 weeks.

The red bars on the middle chart show when one of my systems turns off. The green lines show when the system is on - colour is very useful on charts!

Now to state the obvious. We are at a potential turning point. We appear to be drifting sideways with some wild swings in either direction.

I am not going to try and predict the future from this chart because that is not the way I trade, except to say that it is pretty obvious that the market is more volatile now than it has been.

This post was inspired by Andrew's Humble Money blog and his post on The Return of Volatility.

regards
stevo

System Performance - 2 views of the same picture

I am a bit slow this month!
The first chart shows monthly performance based on open equity, whilst the second chart shows quarterly performance of closed trades.

Both charts show 2 views of the same portfolio. The closed trades chart (although the yellow bars of the chart include any open trades in mid December) is similar to the charts that TradeSim generates. The chart only looks at closed trades. It ignores the daily gyrations of the portfolio and only looks at profits made when the stock was sold.

So the top chart shows how much was given back before profits were taken, whilst the bottom chart totals profits made on closed trades. It's hard to imagine that the charts show the same portfolio and that the data was taken from the same source.

I am really only concerned with the closed trades profits. Note that the bottom chart shows quarters whilst the top chart is in a monthly time frame. I prefer quarterly (or yearly) charts, since I am looking long term performance.

stevo

A minor selling spree

Not quite a selling spree, but 4 sell signals in one week kept me busy on Monday.

The best trade was OMH above.

I also did ok on MGX, and lost a little on SSM and AVX. I would be around 50% cash. Fortunately the winners thrashed the losers this time. OMH was nice.

With a little bit of luck I won't have to do much whilst travelling (all the more likely with a weekly system), although I will have internet access in most locations I am staying.

stevo

Just taking it easy

I am getting a bit of sailing in of late. It's not much of a photo but there was a bit of swell around and the wind was good enough to fly a hull on some flat water once I ditched the other guys (they were hungry) at Patonga.

Systems are off at the moment. I did't get any sells so, trading wise, there isn't much to do. If work doesn't want me for a while (people keep wanting to have meetings) I will get in some sailing. I will be all December in Europe - my preference would be to stay in Sydney on a beach somewhere.

stevo

Yilgarn Mining exit

YML is a trade I exited this week. This one is outside the All Ords stocks, something that I do from time to time if there is enough turnover.

This one could easily move 10% in a week, and sometimes more than this in a day. For those that think they could trade it short term best of luck! I was in it for 9 weeks.

stevo

A couple of good months

The green bars show monthly portfolio changes. The red line, with Y axis on the right hand side, shows cumulative gains. All costs (inlcuding quarterly tax payments) are taken into account, as well as dividends. The results are adjusted for capital additions and withdrawals.

Not a lot to say really - things are ticking along ok. The market has been incredibly strong, with the odd wobble to remind us that it can't last forever. My preference is to look at closed profits only, but I only sold one stock for a small loss in October - BTA (see chart below. A portfolio may rise substantially and then give some back. I look at closed profits on a quarterly basis.

If a portfolio goes up 30% and then settles back to a 20% gain on closed profits have we lost 10% or gained 20%? If a portfolio goes up 20% and we exit there is no 10% loss and we are "happier" Open profits are not money in the bank. It is a never ending process.

stevo

Yearly % profit charts in Amibroker

This is something for system testers.

There is a really nice bit of code at the AmiBroker Knowledge Base



The chart above was produced in Amibroker. The Knowldege Base explains a bit about it.

Anyone that has been reading this blog might realise that I was successful at the auction I went to a couple of weeks ago - see the weekender picture below.

stevo

Somewhere north of Sydney

The beach is just down the path.

stevo

Long term focus and another exit

I exited BTA last week. I thought it might have some promise but it just drifted slowly down till it lightly touched the exit point.

Since my sell off a couple of months ago I have been buying through September. There has been a lot of life in the market, especially resource stocks. The strength of some stocks has surprised me - YML, MGX, OMH hold some promise. My very limited research tells me that they are all involved in iron ore in WA. I also picked up MIS in the super fund - yet another iron ore company.

I am definitely overweight in materials and energy stocks at the moment. What happened in the market just a couple of months ago is a distant memory.

stevo

Sydney Ferries

There are some things in life best avoided.

Smooth sailing?

This is not my boat!

I took the picture though. We had the mainsail reefed and huge westerly gusts (40 knots plus) made for an exciting test run in a friend's new yacht. It was pretty hot (29) and the helicopters were pulling water out of the river trying to put out the fires raging through Kuringai Chase National Park. Hanse yachts are made in East Germany somewhere.

I find such big boats a little overwhelming, my meagre sailing skills have all been in something that weighed less than 500kg (and often less than 100kg) not 18000kg. I think I will be sticking to my Hobiecat, more fun for way less cash.... and then there is the issue of not wanting to tie up good trading capital in a depreciating asset.

I am always drawn to water - surfing, swimming and sailing. Sailing is the area that I have the least experience.

September was a real turnaround month on the markets. The portfolio plunge for August was partially recovered in a very strong market. I guess that the one lesson that I learnt (again) was to not count open profits as in my own pocket.

Mrs Stevo found a little weekender on a beach somewhere north of Sydney. I guess at least land, especially waterfront land, tends to hold it's value. I will see how I go at auction - they are a bit like trading aren't they?

stevo

Simulated trading, discipline and knowledge

The top chart is a TradeSim run of the main system I use and the bottom chart is actual performance from 2003. They look pretty similar if you can mentally adjust the Y axis.

There are a number of things that I will mention;
1. I trade more than this one system so comparison with only one system is probably not totally accurate.
2. I pull money out and put money back in. The lift in the current year is because I put more money in.
3. I have pretty much pulled most of the profits out for various frivolous pleasures - the TradeSim run did not pyramid profits. I pumped more money in early this year.
4. Discretion is designed into the system - every run I do on TradeSim will give a slightly different result.

I think that TradeSim is an excellent product. The data for the run above was output from AmiBroker (thanks Glenn for the code which is available on the Yahoo site). The system used for the test above was actually designed using Metastock. The software doesn't necessarily make us better traders.

I read Way of the Turtle and the last couple of pages crystallised the thought that has been lingering in the back of my mind for some time.

The best way to trade systems is to write, test, optimise, walk through individual trades and immerse oneself in the process to design a system that suits the individual. 

The more confidence one has in the system the more likely it is to work.

Giving a system to someone, even with a lot of coaching, will probably only work if that person pulls apart the system, changes aspects of it, and puts it back together. 

Many don't have the time, effort or capital to put into the process.

Enough lecturing,
stevo

Waratahs

For any Aussies out there this is probably one of the best known flowers. We were up at the Brisbane Waters National Park, just north of Sydney, today and the Waratahs were out in force.

stevo

Getting a handle on performance

Looking at the monthly chart above I had a lot of open equity in July and I gave a bit back. Around 12.5% - I can live with that. The results above also take into account all costs, tax payments, accounting fees etc, as well as any dividends and bank interest.


The closed trades equity curve, from January 2003 to present, above paints a different view and probably reinforces the idea that it is dangerous to count open profits as my own!


Monthly profits - again just looking at closed trades profits, although the September bar reflect open trades profits. This chart is the same way TradeSim plots monthly profits on simulations.

I sold a lot of stock last month whilst on holidays up north, not the most ideal spot to be trading. A couple of years ago I spent a month in Europe and didn't need to exit any trades. Trading weekly makes it a lot easier to go away for a few weeks. August 2007 however wasn't a good time to take a week off, but I did enjoy myself.

The main thing is that I followed the system, whilst I know of others that thought that they would wait till the price went up a bit before they got out, or worse still, they ignored the system! Both approaches leave me speechless. I give myself quite a bit of flexibility by using a weekly time period already, but to actually break my system rules is unthinkable.

I am reading "Way of the Turtle" by Curtis Faith and am pleasantly surprised that it is very readable, although I am only up to Chapter 3. Outcome bias is mentioned in Chapter 2 - the tendancy to judge a decision by it's outcome rather than by the quality of the decision at the time it was made. Holding on past the sell signal may have given a better outcome in hindsight but was the wrong thing to do in terms of following a trading system. I am sure that a lot of dot.com disciples that still hold some worthless dot.com company might, in hindsight, agree with me.

stevo

AmiBroker testing and Excel

Many system testers focus on optimising variables like moving averages. But it is also possible to get a better understanding of position size, risk and other trade parameters.

The following charts were generated from Amibroker optimise runs. I optimised a number of criteria, %Risk, minimum position size $, capital and maximum number of trades held - all at the same time. What results is a lot of data that I then transfered to Excel. Using Autofilters and pivot tables in Excel I can fix some parameters, as well as exclude others, and create 3D charts as shown below.


I had some fun with colours - the default ones set on my version of Excel didn't really work for me.


So in the one spreadsheet I have, amongst other things, a large number of 3D combinations to consider. I lose the ability to rotate the charts but I did customise the colours to my liking. It's a little time consuming generating pivot tables and determining what values to include / exclude, what parameters to fix and what value to fix them at but I feel I am only scratching the surface with Excel.

regards
stevo

3D rotating charts video

Rotating the charts in Amibroker makes it a lot easier to work out what is going on.
stevo - unfortunately the video didn't post.

The Good, the Bad and the Ugly

I picked the best (the good) and worst (the bad) percentage losers for the week. The Ugly is the peak to trough drawdown that I will suffer, probably around 12% once the dust settles. Such is trading. As ASX.G (or more correctly Peter Bernstein in Against the Gods) mentions "the disutility caused by a loss will always exceed the positive utility provided by a gain of equal size."

Tell me about it!

It was nice to sell into a rising market on Monday, always with the thought in the back of the mind that maybe I am selling at the very bottom of the recent market action. Such is trading.

stevo

Stevo's Luxury yatch

Maybe I exagerate just a little.

I had a lot of fun on some Hobiecats off the little beach we are staying at in the Whitsunday's. Then I took out the smallest boat in the fleet with the biggest sail - not a good match! The photo does not do the 15 to 20 knot gusty conditions justice. I had some great runs, but not in this craft - it had a tendancy to tip over just when things were getting interesting.

stevo

Sailing & green turtles

I'm not talking about the markets either.

You will notice in this picture that I am not actually on the craft! I few green turtles moved very rapidly when they saw me coming.

The Markets - business as usual.

One of the indices that I use in my trading systems is the Small Ords. The top red line is a one week Rate of Change line.

Drops greater than 3% in a week have occured every year for the last 3 years. Prior to 2005 we had a dream run from 2002 to 2005 without any one week dropping more than 3%. Even 2002 (not a good year) did not have a week with a 3% drop. Before 2002 3% drops were fairly common.

So, to put the recent market weakness in perspective, it's business as usual for the markets. I can't see any black swans yet!

We have had it so good since 2003 so it's nice to see how our systems perform when the markets turn south.

stevo

JBH - goodbye

Another exit earlier this week. The system above was one I developed for slower moving stocks like QBE and WOW.

I was hoping that the market would stay reasonably calm this week since I am heading for a tropical island for a week - work related of course. It looks like I will have to place some sell orders next week after the DOW dropped 387 points last night.

stevo

Monthly Performance

Percentage gains - a slight lift on the last day of the month helped a little, as did some quite volatile stocks that are ignoring the current market conditions, such as DYE, CSM & MRX.

I include all expenses and income. I also adjust for all changes to capital - withdrawals and capital additions. I don't go back further because I only got my cashbook under control last financial year, although dollar value gains are reported for previous years in previous posts.

stevo
Note that although I mention some stocks above my systems would not be buying them now. I have had an individual buy a stock that I mentioned and then blame me when he lost money! We are all responsible for our own actions and decisions.

Obsessions, Yellow Roses & BNB

The 3 aren't related! I exited BNB this week for a small gain of 15%. It's the only exit signal I got last weekend.

I find myself browsing eBay and other online stores looking for CD's to listen to. Right now I have Jackson Browne Solo Acoustic Vol. 1 playing. I use my laptop as a remote and can search for whatever music is ripped to the network hard drive. Ripped to lossless format (FLAC) and played through my Transporter music is much more accessible.

It's only recently that I actually realised that I can be quite obsessed by an idea or an approach. I also realise that my obsessions can evaporate very quickly. My long term trading obsession doesn't seem to be going anywhere, although my desire to do research is quite low at the moment. I have no shortage of trading ideas to try out either.



Yellow Roses from Chicken Skin Music is a track I have always liked although many cannot understand why!

I'll post a picture of my trading room, ala ASX Gorilla ( http://theasxgorilla.blogspot.com/ ) although my room is very mobile these days - the lounge room, the kitchen, the veranda or work. Now where did I put my camera.

Yellow Roses say goodbye,

stevo

Another chart - AZZ exit

I noticed that I haven't been posting too many price charts lately. Here is a trade I exited at the end of June for a 31% gain. I have only had 2 other exits since then, BCF & FAN, and they lost around 9% and 6.5% respectively.

In the chart above the ribbon at the bottom of the price chart monitors a share index. Red means that this system turned itself off 5 weeks ago.

stevo

This blog is worth $1129.08

My blog is worth $1,129.08.
How much is your blog worth?

"Show me the money" Jerry Maguire

Optimising & % trades not taken

I did an 2 parameter optimise on a weekly system I am working on. The axis marked "Monte Carlo" is a dummy variable - the variable is not used anywhere in the system. The axis marked "trades not taken %" is where a % of buy signals were ignored at random.



With this long term weekly system the more buy signals ignored the lower the CAR (Compound annual return %). I could ignore 10% to 30% of the trades without a huge dropoff in performance.

The "Monte Carlo" axis shows the variation of CAR at different levels of trades not taken. If a big trade is always taken because no trades are ignored then this one trade could give a false impression of the system. By testing with a random buy variable it is possible to approach Monte Carlo simulations using a different randomising approach.

Also I randomised the buy and sell price over the week the signal was given (it's a weekly system) so, even at 100% of signals not ignored there was slight variation in the results.

Hope that all makes sense!

stevo

Red Victor One - no Turtles here!!!!

Ok, it's a capital liability rather than a capital asset and has nothing to do with trading - but it just shows how obsessed we can get! Makes my daily drive look very tame.

Stevo

Curtis Faith - Way of the- Turtle

Asx Gorilla put a link to this interview on his site. He makes some interesting comments on consistency and trading.

"It is easier to learn how to do it" "...the tools are much better"

stevo

3D charts & Trade-offs

The 3d plots are from a new system I have been working on and show a 2 variable optimise. The first chart plots Compound Annual Return, whilst the 2nd chart looks at drawdown. I find the 3d charts feature of AmiBroker a very useful tool - that's why I am posting these charts here.

What would be nice is if we could have 4 or 5 dimensional charts! I tried using Excel surface charts to get more insight but the 3d Amibroker charts are more convenient.


One variable (ATR multiplier) didn't have much impact over the range I tested - I could choose pretty much any value in the relatively tight range I tested. This suits me.


As is often the case using the values that give the best draw down result in lower CAR and visa versa. I could trade off CAR for lower draw down.

What was good is that I finally coded up profit target code. The following code was posted on the Yahoo AmiBroker site courtesy of Tomasz Janeczko;

/* a sample low-level implementation of Profit-target stop in AFL: */
Buy = Cross( MACD(), Signal() );

priceatbuy=0;

for( i = 0; i < BarCount; i++ )
{
if( priceatbuy == 0 && Buy[ i ] )
priceatbuy = BuyPrice[ i ];

if( priceatbuy > 0 && SellPrice[ i ] > 1.1 * priceatbuy )
{
Sell[ i ] = 1;
SellPrice[ i ] = 1.1 * priceatbuy;
priceatbuy = 0;
}
else
Sell[ i ] = 0;
}

All I had to do was modify it so that I also tested for a trailing stop. I initially tested using APPLYSTOP code but to set up the system I was more comfortable coding up the profit exit. Because the Sell is dependent on the buy what sounds quite easy does require something like the code above. GP's document on looping was also of value - it's in the files section of the Amibroker Yahoo site. The Yahoo site is a wonderful resource.

I will run some TradeSim tests before I take the system I have been working on live. As usual for me it's a longer term weekly system. I think I will call it Chaos, although Chicken & Chips is tempting! There is a small restuarant that does wonderful chicken & chips at Crows Nest and I do like my food. Why not name a system after food I like?

regards
Stevo

It's a blog - not a book

I guess that the posts on this blog don't really flow all that well. Hey it's a blog not a book.

There are some good books around about trading and trading systems Van Tharp springs to mind. Leon Wilson has a book with system testing in it - Breakthrough Trading. Lately I struggle to read trading books!

Dinner time.

regards,
stevo

Another Year .....

I just realised that the 35% plus return I mention below is after all expenses, including accounting fees and activity statements. I adjust for capital I add as well as capital I draw out of the account. I averaged 3% compound monthly growth rate for the year.

I suppose that we all have to wonder what the next year will bring! My main system has turned itself off for this week. I only have to monitor for sell signals on a weekly basis. My ideal situation is fully invested with no sell signals forever.

stevo

Year end performance

Whilst I can't complain about the performance of this portfolio it could have been better, especially when I compare the results above with the results I got out of the super fund (approx. 50% increase at first glance).

One of the reasons for the poorer performance was coming to grips with some large additions of cash to the portfolio. The trade size jumps dramatically and, whilst I might have a big winner it might be off a substantially reduced position size because I bought it when I had less capital. A big winner in the super fund (IPL) helped out, but I picked up QGC in the results shown above using the smaller capital base.

Both QGC and IPL are up over 200%

stevo

A busy month

I have been pretty busy of late in my 9-5 job, but the portfolio, not surprisingly has been doing well. A few sells in the last month - OKN, SGX, MCC (the only unprofitable one) and ERA. OKN was the big winner in the group (up 137%) - see chart below. I put most of the money back into the market.



Also MCC;


Picked up a Nissan 350z (2006 model the dealer wanted to offload for an excellent price). I tried out a few cars, (Audi TT, Porsche Boxter, BMW Z4) but the Nissan has all that I want and I am not paying for the name.

I am listening to Rich Man's Blues by C.W. StoneKing "I ain't got to think about tommorrow because I drive a brand new car". The rest of the song is worth a listen!

Stevo

Small Caps Rule! (and another sell)

Out of Oakton on a profit exit (140% gain) - but it doesn't appear to be slowing down.

The Small Ords index has outperformed the All Ords by around 10% over the last year. Many people focus on stocks they know, many of them in the top 100. The biggest gains are in stocks outside the top 100 (ASX100) - those stocks we probably haven't heard of until they pop up in a scan of the entire market.

Stevo

System design, discretion and a load of fertiliser

When I designed one of the systems that I trade today back in 2002 / 2003 I used data from 1996 to 2002 when backtesting. One aspect of the system includes a profit exit - an exit that is triggers when the price moves up very fast. Incitec (IPL) did this not long after I bought it and the exit was triggered as shown by the $30.40 sell signal on the chart below.

When I developed the system I tested with and without the profit exit, and the equity curve was a little smoother with the exit than without, but there wasn't a lot in it.

The exit rarely triggers so I have been using some discretion. I didn't take the exit signal on IPL above. In this example it paid off. It is possible that this aspect of the system could be dropped altogether, but I will leave it in for the moment. A bull market is not the best time to take profits. The profit exit might be more useful in a less bullish envirnment - like 2000 through to 2002.

I bought into IPL at $26 (I must have been busy that week since it opened at $25.75) Now it is the biggest % and dollar winner in my Super fund portfolio - up 103%. The trailing exit is still valid. It does surprise me that a fertiliser company can perform so well! Who buys fertiliser in a drought? I guess I should stick to trading my systems and leave the fundamentals to those that understand them.

I have another profit exit signal for this weekend. I don't know how discretionary traders cope with all the decisions that would have to make.

Stevo

ALE property group (LEP)

Another sell.

Whilst I took a slight loss on the trade the dividends offset the loss for a slight gain. I sold LEP on Monday.

Stevo

Monthly Performance for 2007

I am sure that all the traders out there (and I use the term in it's broadest sense) are having a pretty good year. Adding up the monthly percentage gains I am up 31% on the portfolio, including cash in the bank (rather than shares) in the base. Obviously it's best not to leave money sitting in the bank in the current market.

In the Financial Review today (Wednesday 2 May 2007, Page 20) Barton Biggs, a hedge fund manager with a reputation, is tipping that the Dow Jones Industrial Average might rise by 19% this year and that "markets in general are going higher". To quote the Fin. "shares of the largest US companies were "very cheap" relative to other asset classes."

It would be nice if he is right. A blog devoted only to market predictions that people make would keep someone really busy! I have often said that the weather tommorrow is likely to be the same as the weather today, and often enough I am right - the weather does trend.

Stevo

% Gain in a portfolio after adjusting for cash movements

I have tried to get a % gain calculation up based on;
1. The amount in cash and shares at the start of the month,
2. Adjust for withdrawals and additions of cash during the month,
3. Determine the % movement in the portfolio after adjusting for the cash movement.

I get the following graphs as % gains / losses from the spreadsheet, although it is probably not correct to just sum the % moves.



The % gains of my portfolio on a monthly basis are shown below;


It's relatively easy for me to work this out now that I am balancing my cashbook and timing issues over time will be pretty irrelevant.

I better go and check to see if I have to take any action next week.

regards
Stevo

% Profit by trade

Continuing on from understanding my trading results I plotted % profit for all trades since Jan 2003 up to the 1st quarter 2007. The worst % loser in dollar terms was quite small since I use % risk based position sizing. The same goes for the biggest % winner!

What I did find interesting was that I worked out I was turning over my capital 2 to 3 times. So $400,000 worth of capital typically made over $1 million worth of trades in a year. I suspect that this level of turnover is quite low for a trader. For example in 2005 I closed out $1.274 million in trades for a profit of $141,000 (excluding dividends). I averaged around $400,000 of capital in the market so return was around 35% for the year, plus some dividends and bank interest. There were a couple of months in 2005 where I had most of the capital in the bank - as can be seen from this post:
http://drawdown.blogspot.com/2007/01/money-in-market.html

Stevo

Net Profit per Security, Equity Curves & other stats

The charts below are generated from my trading portfolio.


Since I add and subtract cash from my trading portfolio it's a little hard to give % return type figures. So I look at other statistics and graphs - like the equity curve shown above.

137 trades in a little over 4 years means that I am averaging 32 round trip trades a year. This means that I have at least 20 weeks a year where I just watch the portfolio.




Profit per security is an interesting chart above. I know that I stuffed up the KIM trade - my biggest loser in the last 4 years. I bought far to many by using postion sizing for my Super fund rather than my trading portfolio.

I will be happy to keep the win / loss ratio above 3. So far so good. I also am happy with the % winners I am achieving. I know that the systems I am trading could have produced better results. For starters I didn't (or couldn't) take the SMY trade....

regards
Stevo

Sun(land) sets!

I exited Sunland (SDG) yesterday for a 48% profit.

I held it for just over a year - as shown by the little yellow dot on the chart a couple of weeks back. The one year target isn't a big deal since I trade in a company, but at least it was a decent length trade.

Limiting the number of trades per week

Using some code Shutty found on Yahoo I was able to see the impact of limiting the maximum number of trades per week. I added the code in did an optimise and exported the results to Excel to get the graph above.

For a longer term system, like the one used for this test, it is possible to limit the number of buys to one per week and still get reasonable results.

With a shorter term system limiting the number of trades per week would have a bigger impact since the system needs to trade more - see the results for a 4 week system below.