More on breakouts

I made the trade shown above in my super fund. IPL was up over 35% in a 6 month period when I took the trade. It had one week in the previous 6 months where it jumped 18%. I bought in at $26 and sold at $72.





Another signal fired not long after the exit. It would have been nice if the exit wasn't given - but that's the way it goes. Sell up and move on. I didn't take the second leg. When the second buy signal was triggered the stock was up 220% over the last year!

From when the 2nd buy signal was triggered to mid May 08 the stock put on another $100.

How many traders would have looked at IPL and thought it's had a good run surely there's not more to come? I did, although I picked up MCC as a consolation prize.

So much for discretion.

stevo

Random Entries and Black Swans

Systems;
1. Simple breakout.
2. HHV breakout.
3. RSI breakout - RSI must be above 70.
4. MA "breakout" - classic C crossing the MA, not really a breakout.
5. Random entry - uses Random()>0.955 in Amibroker.

The above chart shows the RAR of the 5 different entries teamed with a 12 week timed exit. So the exit is always taken 12 weeks after the entry.

Position sizing was 10% of equity.
The tests were run on the current ASX200 stocks.
The 0 to 80 axis is a dummy variable to generate 10 possible outcomes of each system. Positionscore was set to random.
Trades delayed and timeframe was weekly and the test was run from 1997 to December 2005. This allows, if so desired, for out of sample runs on all the systems up to April 2008.

You could investigate this sort of stuff for years wondering if the results are real, whether you are curve fitting, whether you got some test methodology wrong, or whether the whole concept of testing is flawed in some way etc.

stevo

Equity Curves

I always thought that multiple equity curves from a Monte Carlo would be fun to plot.

The program is free from TickQuest.

I have to admit I don't really know what I am doing!

stevo

Even a monkey could write a great novel

I have been reading Fooled by Randomness by Nassim Nicholas Taleb. It’s a challenging read, but worth the effort by anyone that is into system design. I haven’t finished it yet.

To quote p.163;
“Beset with insomnia, the computerized day traders become night testers plowing the data for some of its properties. By dint of throwing monkeys on typewriters, without specifying what book they want their monkey to write, they hit upon hypothetical gold somewhere. Many of them blindly believe in it.”

The reference to “monkeys on typewriters” relates to the theory that if enough monkeys are put in front of typewriters eventually one of them will write War and Peace. I strongly suspect that the number of monkeys required would be impossible to find, let alone feed!

Any results need a good dose of scepticism – even a monkey can write a great novel!?

Trading is not just about making the maximum profit. “The greater the profit the greater the chance of going broke. “ (stevo 2008). Well maybe – I am not really into hard and fast rules. If I try for 100% plus returns using leverage then I might make it 3 out of 4 years, but the 4th year will wipe me out. If I plug for 20% I am less likely to self destruct.

Then there is the ride taken. I did some work on a fairly simple system. The equity curves are shown below. The system was developed using data from 1999 to 2003 so the walk forward equity curve looks pretty good.

Figure 1 Basic System

The first curve is the basic system from 1999 to March 2008. It looks pretty good considering I am not pyramiding profits into the system, just trading with a flat amount. The second equity curve has an index filter added to turn the buy signals off if the market looks weak. The equity curve is still pretty good, but total profits are down compared to the system without the index filter.

Figure 2 With index filter

But when I look at the period from Jan 2007 to current a different picture is painted. Without the index filter the equity curve is south of the zero line for most of the period, whilst the index filter version looks much more tradeable. . I always remember starting up a system back in 2002 and immediately losing money. Startup is always hard! Starting this system up at the beginning of 2007 would have been tough.

Figure 3 Basic system from 2007


Figure 4 With index filter from 2007. Note that a lot of the money was made in just a couple of trades, but at least it wasn’t given back as in the basic system.

Over the last 5 years from 2003 to 2008 turning off a system when the occasional market dip occurred didn’t really help make money. It was better to be in the market all the time.

But it’s not only about CAR (compound annual return) it’s about the ride taken. Measuring the ride can be difficult, but the equity “curve” paints a picture that most people can understand

stevo

March Quarter

Not the best quarter. I've posted a yearly chart as well as the quarterly. The equity line is looking a little shaky for the start of this year. There are some early signs of life in the market - let's see what the rest of 2008 brings.

stevo

March quarter, systems and competition

I thought I would look at how my portfolio was performing in preparation for the end of another quarter. I plotted my closed trade equity curve and discovered that the equity curve hadn't done much at all since I last posted one below.

I couldn't see any difference because there has only been 2 closed trades since the last posting at the end of January and the gains and losses have been so small that they had little impact on equity.



I have mainly been trading one system for the last 5 years, although I have tried to introduce new ones at times. I keep coming back to a system that I am comfortable with, although in testing it may not be as profitable as some others. A few others trade my favourite system and to reduce competition against them I developed yet another system, currently called 50%, although I will change the name soon. I basically took my favourite system and stripped it of the bells and whistles.

Competition in the market against others probably isn't that big a problem. For starters there is some discretion in stock selection and this has resulted in quite a bit of variation in portfolio makeup. This has resulted in my brother being up around 15% (including open trades) for the current financial year, whilst I am struggling to get 5%. He has IPL and CEY in his portfolio from October last year, whereas I don't.

I will keep my favourite system for my super fund and make the new 50% system the system of preference for the portfolio reported here. I tested both systems combined and weighted trades towards the new system. So the 50% system has priority and, if any money is left, it goes to "old faithful". I am finding that I will make more if I trade a little more, although the ride will be bumpier.

Since I nearly went to cash it's like starting up the portfolio again. System startup is always a difficult time.

Happy trading,

stevo

Trading, GPS navigation and mates

I have a mate, a really good friend.

I rely on GPS navigation systems when I drive around the city. I figure that, even though there may be a quicker way, on average, I am better off with a good navigator. My mate (call him Peter) detests sat nav systems – he knows the city exceptionally well and the nav system is pretty well nearly always "wrong".

Peter decides that he wants to trade, wants to make some easy money. The managed funds he holds are doing ok but he is sure that he can do better. So he comes to me. I know that it is not as easy to show someone how to trade so I give him a list of things that he has to do – set up a brokerage account, get a data feed, buy software, work out how much money he wants to use. I want him to think about how much effort is involved. This takes him around 18 months to set up since he is very nervous about jumping into the market and also has very limited computer skills (his wife is much more comfortable with computers).

I give Peter a system, as well as a list of simulated trades that the system would have made over the last 5 - 10 years. I suggest that he studies these past trades to see how the system performed, what it’s weaknesses and strengths are, to get a feel for the system. I am very conscious that this is unlikely to happen. Paper trading is very hard. The pull of the markets, the excitement making that first trade is far too strong to waste time understanding what could happen and how the system behaves.

As usual, after waiting for some years before he can gather the courage to face the markets , the market struggles and Peter loses a little bit of money. But soon he falls into a rhythm and seems to be following the system quite well. He even wings a couple of trades because he believes that he is getting a feel for the markets.

Then the market has a bit of a downturn and Peter, who has been trading quite well for around 18 months thinks that he can improve the system by ignoring the sell signals, much like he ignores a satnav system. For a few trades he waits a few weeks and then gets out a little better then acting immediately on the signal.

But then he ignores the sell on CHC. This is not the only sell signal ignored, there are a couple of others, but this one illustrates the point nicely – none of them have recovered yet. Instead of getting out at around $2.50 back in December 2007 he holds it.



It’s early February and Peter isn’t looking too happy. I ask him how the trading is going.
“I don’t want to look” he tells me.
Over a couple of days I find out about CHC and another trade that have gone seriously wrong.
“What should I do? What would you do?”
“I would have sold CHC back when the signal was given.” I tell him. “If I did somehow ‘forget’ to act on a signal then I would get out as soon as I realised my mistake. I would sell immediately and move on.”

I am in a risky position. It is just as likely that as soon as the stock is sold it rebounds back above a $2 and Peter is cursing acting on my system based advice and believing that his judgement is better than any system. So I make sure that he understands it’s his decision, he is outside the system and I really have no special knowledge of what might happen to this stock over the next few months. He is navigating blind in a city where roads are built, moved and destroyed every day. In this sort of city a well thought out strategy is required if you want to get to your destination.

This is a true story and I take the following from it;
1. If you are going to trade a system then trade the system, don’t try to beat or “improve” the system on the fly.
2. Believing that you have some special, innate ability, some “gut feel” for the markets is a seriously delusional state of mind. Sure you can be lucky some of the time, but luck tends to run out the more it is relied on.
3. Taking a loss is hard for many people. We are not brought up to take losses. Trading is not a natural activity for humans to undertake.
4. Some people seem to be able to follow a system as easily as they breathe. They don’t question, they don’t try to beat it, and they just follow the signals and move on. For others it is not that easy!
5. Don’t look back – always move forward. What could have been is irrelevant. Peter would always say things like “if I had held it longer it would have recovered.”
6. We tend to see what we want to see. It is easy to find examples that validate our beliefs about the market and ignore the trades that don’t.
7. Some people are not suited to trading a system, or trading in general. They should go for managed funds or use a blue chip buy and hold approach.
8. It is much better to learn from another’s experience than to be the guinea pig yourself. Experience is the cruellest teacher when it comes to trading.

Do we really believe that we are, without any training, strategy or insider knowledge, natural born traders? Or do we just try to sway the probabilities in our favour and hang on for the ride?

stevo

Tough Month - closed trades equity curve

I was just looking at how January went and it wasn't all that pretty - like many long term traders. Not surprising considering the All Ords is down over 10% since the end of June 2007. Any gains that may have been around at the end of December were severely damaged in January 2008. Still I have a slight profit for the year, probably similar to putting my money in the bank - which is where most of it is at the moment.

Most of the open trades have turned into closed trades over January. I have left open trades off this chart, although there are not too many of them. For the first time since I started trading systems the open portfolio is in a slight loss situation.

Currently drawdown from the peak on the chart (on the 24/12/07) above to current is around 11% and could go a little lower depending on what the open trades do.

I seem to be very busy of late with work, travel and other projects (obsessions!) but I am still able to follow my system, which is very fortunate given the state of the markets at the moment.

I am afraid that I have no words of wisdom. If you are trading a long term system that you "know" works then hang in there!

regards
stevo

TWO & OST

The TWO trade triggered in Christmas week whilst travelling. Volumes were very light so I exited over 2 weeks for a 53% gain.

OST was easier to exit and I got out in the Christmas week for an 8.6% loss.

The only other exit in December was KCN for a 16% loss.

Stevo

2007

Just a couple of charts showing closed trade performance (as per TradeSim style reports for those that use the software).

Performance that includes monthly drawdown, dividends and adjustments for cash etc will take me a lot longer.

The closed trade equity curve is looking ok - it's heading in the right direction.

I know that people like percentages but that is a little more difficult for me to produce, especially since money tends to flow in and out of this account.

Suffice to say this isn't paper trading results - this is real money. It wasn't a brilliant year (greater than 50% gain would be a brilliant year :) ), but I really have nothing to complain about. If I can average greater than 20% compounding over the next 20 years financially I will be ok. Some might think that this target is too low?

I have taken the Y axis labels off the charts but just assume that they are in dollars. The portfolios traded with a relatively static capital base up until the end of 2006, but the capital more than doubled in 2007. If you look back on the this blog you can probably make some extrapolations if you desire.

I have probably mentioned previously that adding capital can be quite challenging. If enough is added it can nearly be like starting the portfolio up again. Startup is the hardest time in a portfolio.

I have a lot of cash (around 40%) on the sidelines since the systems have mainly been off through November & December.

Wishing everyone the best in 2008!

stevo