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