# Safe way to use leverage



## tech/a (21 May 2006)

Posted a piece on this here for those interseted in leverage.

https://www.aussiestockforums.com/forums/showthread.php?p=46469#post46469.

Most trade the Pennies because trading blue chips is like trading in slow motion the account increases at a similar rate.

The volatility of the Pennies and the opportunity to pocket a 50% or more winner is alluring---so thats where most go.

Bluechips will possibly more predictable just wont bring a decient return!

with LEVERAGE--THINK AGAIN.

Success may not be the leverage buy HOW ITS USED.


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## krisbarry (21 May 2006)

Try using a geared share fund for superannuation.  That way it gives you that extra leverage that is needed to gain returns, far greater than the current 10 to 20% on normal super funds.  Returns have been running at 20 to 80%.


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## wayneL (21 May 2006)

> Next is maximum string of Losses and risk.
> Again mine is 1% risk and 12 the longest string.
> Taking CFD's at 10x my risk becomes 10% and 12 straight then Im ruined.
> Without this knowledge I could be trading a highly profitable method (Which it is) and going broke!! simply because I am not in the position to manage my business because I dont have CRITICAL INFORMATION.




This is perhaps the most important point in leveraged trading and should be discussewd far more often. WD Tech.

Essentially, this is capacity risk.... one most never consider.

But those who have tried martingale staking plans will have run into this one  

Cheers


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## stink (29 August 2006)

wayneL said:
			
		

> This is perhaps the most important point in leveraged trading and should be discussewd far more often. WD Tech.
> 
> Essentially, this is capacity risk.... one most never consider.
> 
> ...




Hi Tech/Wayne,

I think this is what i am searching for, this capacity risk that you mention Wayne?

Just about to read your post Tech so i will comment there.

Cheers Stink

Its like a hunt for something but you dont know what it looks like yet


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## Ageo (29 August 2006)

Stink tech/a is basically talking about what i mentioned before to you.

Not risking more than your account can handle.

i.e 1% risk per trade can allow you to take 10 trades and if all go bad you can still come out with 90% of your bank intact.

Risk 10% per trade (10 times the original amount) and have 10 trades on, and all those trades go bad then basically your bankrupt

Remember start small (even 0.5% risk per trade) to learn the ropes. After that its a numbers game


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## tech/a (29 August 2006)

Ah yes but there is more.
It takes effort on the traders part.
IE quantifying what that risk is before and after leverage.
Most dont know what their drawdown on a methodology is.


*Its pointless knowing a set amount like the often bandied around 2% when you have no idea how many trades typically using your methodology could string together as a string of losses.

*You absolutley MUST know what your drawdown is over a long period of using your method.Particularly initial drawdown.*Remember a 50% drawdown in any trading equity will require a 100% profit JUST to break even again.*
Often a 50% drawdown will render a trading method un profitable due to under capitalisation!!!!

It takes effort time and patience to learn how to run your trading business---its not easy and will require an investment both in time and money---as any decient business would.

Most want the profit of a sound business while running a business which is far from professional or profitable.

*This is where you start---learning how to run a business.*
What are the key attributes?
What do you actually need to have as a busines owner to maximise your chances of being profitable?

Get this right and you'll have the best opportunity at being profitable in any venture you become involved in.
*By pass it and you'll likely become a statistic!! 90% of Businesses fail in the first 3 yrs.*


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## stink (29 August 2006)

Thanks Guys,

Tech you will see i posted a reply to your other thread enquiring how you work out this maximum drawdown?

I do understand what you are saying about knowing how to run a business profitably etc. But if the maximum drawdown is known then isnt the amount of money that you have meaning less? I mean sure you could have more open positions etc but isnt the risk the same whether i have 10k or 100k?

I am sure when you explain to me how to calculate drawdown i will understand.

Ageo, i agree 100% with what you are saying and am just trying to work out what that amount is.

Cheers Stink


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## ducati916 (29 August 2006)

*stink* 



> I am sure when you explain to me how to calculate drawdown i will understand.




Drawdown;
Starting capital $10,000
Buy $10,000 equity on Monday
Position current market price on Tuesday = $5000 = 50% drawdown

If you are leveraged by *2
You are in essence worth $0.00
As $10,000 * 2 [leverage] = $20,000 capital - 50% drawdown = $5000 * 2 = [-$10,000] = $0.00

Therefore, unless you are going to be profitable.
Not think, hope, flip a coin, you would be best to avoid leverage, as you will go broke * leverage faster.

jog on
d998


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## It's Snake Pliskin (29 August 2006)

tech/a said:
			
		

> Ah yes but there is more.
> It takes effort on the traders part.
> IE quantifying what that risk is before and after leverage.
> Most dont know what their drawdown on a methodology is.
> ...





And then there are discontinuous events that your system doesn`t know.  Some people call them calamitous, catastrophic etc.


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## stink (29 August 2006)

ducati916 said:
			
		

> *stink*
> 
> 
> 
> ...





Thanks Duc,

I understand what you have said there but surely what you have posted is not a practical example of how someone in my position would use leverage?

Stink


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## ducati916 (29 August 2006)

*Stink* 



> I understand what you have said there but surely what you have posted is not a practical example of how someone in my position would use leverage?




No, most likely, you would use a form of position sizing money management.
In essence, you would reduce your position size to reflect the multiple of the leverage.

By way of example; same $10K, using *10 CFD's contrasted with no leverage.

*without leverage $10K of shares @ $1.00 [= 10K shares] stoploss @ $0.90 = $1K risk
*CFD's same purchase price $1.00; $1K risk = 1000 contracts @ $0.90 stop

There is in essence no difference.
So why leverage?

The reason is that should you exceed the cost of the leverage & have a high expectancy, you can supercharge the returns. The *type of leverage is a far more important consideration* 

jog on
d998


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## tech/a (29 August 2006)

Substitute ducs figures for lesser amounts and you'll get the picture.

One must use a bit of your own grey matter,we cant do all your thinking!!



> is not a practical example of how someone in my position would use leverage?




No but it gives you the basics.

Simply WHEN YOU DO KNOW wgat your initial drawdown will likely be then you would be sure to hold leveraged positions so that in the event of all failing you didnt destroy your equity.

As an example T/T has a maximum INITIAL drawdown from testing of 6-9% based upon Montecarlo analysis over 20000 portfolio's.
Therefore with a maximim leverage of 2.5:1 or 22% of initial equity then I was/am comfortable to run it.

I trade 3 Systems all similar and I have never reached maximum initial drawdown.
I know of 18 users of T/T who keep in touch with results and none have reported reaching initial D/D levels or ever recieving a Margin call.

*Snake* catastrophic loss is always a possibility no matter how you trade.
Diversification in Investment type is I feel the best defence,but then again Catastrophic means just that and could mean anything from a huge hike in interest rates to Oil Shortage to a collapse in the western monetary system.

Cant bury our heads in the sand because of what "Could" happen we can only control that which we have influence over.

More later.


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## ice (29 August 2006)

Just as an aside if you risk 10% of your capital per trade and keep losing then 10 straight losses whilst painful isn't going to wipe you out. 
Think about it   


ice


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## tech/a (29 August 2006)

If talking position sizing then possibly.
If talking risk then no.


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## swingstar (29 August 2006)

stink said:
			
		

> Thanks Duc,
> 
> I understand what you have said there but surely what you have posted is not a practical example of how someone in my position would use leverage?
> 
> Stink




All the answers to your questions are summed up nice and concisely in this book.


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## stink (29 August 2006)

tech/a said:
			
		

> Substitute ducs figures for lesser amounts and you'll get the picture.
> 
> One must use a bit of your own grey matter,we cant do all your thinking!!
> 
> ...


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## Ageo (29 August 2006)

ice said:
			
		

> Just as an aside if you risk 10% of your capital per trade and keep losing then 10 straight losses whilst painful isn't going to wipe you out.
> Think about it
> 
> 
> ice



hhmm ok lets go through this.

Starting capital $10,000.

Trade 1 Max risk 10% ($1000) - lose

So 1st trade is a $1000 loss.

If you lose the next 9 trades then obviously your $10000 down which means bankrupt.

please explain?


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## swingstar (29 August 2006)

Ageo said:
			
		

> hhmm ok lets go through this.
> 
> Starting capital $10,000.
> 
> ...




If using a percentage of your current balance, not your initial starting capital... 

$10k - 10% = $9k
$9k - 10% - = $8.1k
$8.1k - 10% = $7290
etc.


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## stink (29 August 2006)

swingstar said:
			
		

> All the answers to your questions are summed up nice and concisely in this book.




Thanks Swingstar,

I might have to get me a copy this afternoon.

Cheers Stink


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## swingstar (29 August 2006)

stink said:
			
		

> Thanks Swingstar,
> 
> I might have to get me a copy this afternoon.
> 
> Cheers Stink




It's short and to the point. Should be able to get through the most important stuff (first two parts) within an afternoon/evening. I don't suggest that's all you should read, but it'll answer your questions on leverage and drawdown etc., and also explains CFDs and how you should use them.


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## stink (29 August 2006)

Understood mate i have a great deal of material to get through at home from the course i attended awhile back, just nothing on leveraged instruments in there.

Have you read Catherine Daveys book? I might grab that to if its available.

Thanks Stink


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## swingstar (29 August 2006)

stink said:
			
		

> Understood mate i have a great deal of material to get through at home from the course i attended awhile back, just nothing on leveraged instruments in there.
> 
> Have you read Catherine Daveys book? I might grab that to if its available.
> 
> Thanks Stink




Yep, I've read both her books. They're both basically plugs for CMC Markets. I don't recommend them. You can find all the info you need online. If you have questions, your CFD provider should be able to answer them - they're not complex. 

It's also obvious she doesn't have a tested system after reading her trading diary. No wonder she is always so stressed, lol (she goes to a psych after a streak of losing trades).


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## stink (29 August 2006)

Yeah i read the first chapter online last night and she plugged CMC straight up lol had a link to their demo and all  

Anyway yeah i will hit up my provider for some details on cfd's

Thanks Again
Stink


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## tech/a (29 August 2006)

Always remember you neednt trade CFD's to their maximum leverage---IE 10 X.

Radges use of leverage in his book is not as expected and excellent.

Stink relax---if you were a little more specific then perhaps you would not have been misunderstood.
My apologies for kicking up a stink!


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## Ageo (29 August 2006)

swingstar said:
			
		

> If using a percentage of your current balance, not your initial starting capital...
> 
> $10k - 10% = $9k
> $9k - 10% - = $8.1k
> ...




Thanks for the explaination. 

Although risking more than 2% on your "current balance" is way more than enough.


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## Ageo (29 August 2006)

Tech, 1 question are you subscribed to "The Chartist"?


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## stink (29 August 2006)

tech/a said:
			
		

> Always remember you neednt trade CFD's to their maximum leverage---IE 10 X.
> 
> Radges use of leverage in his book is not as expected and excellent.
> 
> ...





Sorry mate,

Yeah i suppose i get a bit frustrated because its hard to know how to ask the right questions to get the answer i want  

Think i have got what i am after for now, i shall take the advice and move forward stopping via the bookshop on the way home of course.

Thanks Stink


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## tech/a (29 August 2006)

Ageo said:
			
		

> Tech, 1 question are you subscribed to "The Chartist"?




No,but I have thought about it for no other reason but to study how Radge thinks. I like the way he thinks.


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## swingstar (29 August 2006)

stink said:
			
		

> Yeah i read the first chapter online last night and she plugged CMC straight up lol had a link to their demo and all
> 
> Anyway yeah i will hit up my provider for some details on cfd's
> 
> ...




Her diary is quite interesting actually. If you do want a book purely on CFDs, then I'd recommend that and not her other one. She does give a brief explanation on them in the beginning.  

In the first few weeks or so she loses 40%, then goes on to make 400% (of her lowest point) in like two months. She does have a lot of years experience, but it didn't appear that she was following any rules or routine, and given that she was so emotionally affected by her initial drawdown, it appears she had no idea of expectancy (of her 'system' or past results at least, as she does explain expectancy). 

She's also a bit sloppy on risk... risking a fixed $350 on trades, then just piling in on winners. 

Should get something from it, if not what NOT to do (if you want stress-free trading).


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## Ageo (29 August 2006)

tech/a said:
			
		

> No,but I have thought about it for no other reason but to study how Radge thinks. I like the way he thinks.




thanks mate, looks like ill need to purchase his book on adaptive analysis.


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## tech/a (29 August 2006)

Ageo said:
			
		

> thanks mate, looks like ill need to purchase his book on adaptive analysis.




Better still BOTH.

You could do worse!!


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## tech/a (29 August 2006)

Now that I have a little more time I must stress and make the point clear that to trade any trading method successfully you should have the following information about the methodology you trade.
If you trade without it you really are trading blindly,your taking a risk both in possibly being more cautious than you need be,
IE Bailing out of a method that may well be profitable in the long run OR
Being to liberal and running the risk of believing that your method is profitable when in fact it simply isnt.

You need Initial Drawdown.You'll need more than one test to be able to determine this.Best way is Montecarlo which you can test you methodology in a few minutes over 1000s of Portfolios traded at various starting points.
This will give you a deviation with which to benchmark results.

Youll need maximum string of losses.Without this tested over 1000s of portfolios you wont be able to determine wether a run of losses is acceptable (Read expected) or is over anything ever recorded in your rigorous testing.

Both of these are most important when setting your risk when trading wether it be leveraged or not.

Once you start to run a profit its far easier to manage and the stress or fear and as profits increase these deminish to a point where it doesnt play a part.Infact trading becomes boring.

There are many other components which need to be satisfied in a successful trading methodology (Positive expectancy being the main one) but as for gearing and setting risk parameters for Margin or any other leveraged trading you absolutley must have this information.
Without it your punting.Sure some punters do very well.
Ive always been a very average punter.


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## stink (30 August 2006)

tech/a said:
			
		

> Now that I have a little more time I must stress and make the point clear that to trade any trading method successfully you should have the following information about the methodology you trade.
> If you trade without it you really are trading blindly,your taking a risk both in possibly being more cautious than you need be,
> IE Bailing out of a method that may well be profitable in the long run OR
> Being to liberal and running the risk of believing that your method is profitable when in fact it simply isnt.
> ...




HI Tech,

Thanks again for an  informative post!

Now i assume the only way to get this type of testing done is through some software package? Or is there any free tools available that can perform this Montecarlo test, right or wrong i forked out alot of money for my trading platform which is very good but it doesnt have this test available.

Any suggestions ?

Cheers Stink

P.S bloody local bookstore didnt have any copies of Nicks book


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## tech/a (30 August 2006)

Email Nick direct Im sure you can buy a copy from him.
Could also try Moneybags they are on the net.They are in Adelaide but will deliver everywhere good to deal with.

Yes this type of analysis is difficult to find "built in"
Tradesim has it so to does Bullcharts as it uses tradesim
I believe that Amibroker has an addon.

However if you have a Systems tester that can test Portfolio's then the only suggestion that could be of some benifit is that of Kaves in a post above.
Problem is that even spending many hrs testing on various dates will only give you a rough guide to deviation.

If however you find one solitary losing portfolio my advice would be back to the drawing board.


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## It's Snake Pliskin (30 August 2006)

tech/a said:
			
		

> Now that I have a little more time I must stress and make the point clear that to trade any trading method successfully you should have the following information about the methodology you trade.
> If you trade without it you really are trading blindly,your taking a risk both in possibly being more cautious than you need be,
> IE Bailing out of a method that may well be profitable in the long run OR
> Being to liberal and running the risk of believing that your method is profitable when in fact it simply isnt.
> ...





Tech,

Good advice there!

Is there any for the discretionary gang?


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## stink (30 August 2006)

LOL bloody hell,

Snake you just made me ask myself a question.

What type of trader am i trying to be? Tech give advice based on the notion that you use a purely mechanical system, which is great but does it apply to me? hmmm  

I think i am a discretionary trader so far, i mean i study the charts and use my own judgement but also wait for indicators etc 

I dont think i could even test my method if i had a peice of software that could do it.

Anyway cheers
Stink


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## tech/a (30 August 2006)

stink said:
			
		

> LOL bloody hell,
> 
> Snake you just made me ask myself a question.
> 
> ...




And there in lies the problem for discretionary traders.
Trading in a discretionary manner is simply hit and miss.
You just dont have the information to be able to trade with confidence.
I and many like me were purely discretionary traders. However when I decided to trade serious money ( $100K plus on Margin),there just wasnt the *CONSISTANCY* I wanted.So I and many like me have gone the Mechanical track. The results and the piece of mind have been well worth the long journey.

Sure I still trade in a discretionary manner and sure I have good results but they are without consistancy---and I trade only smaller sums.
Being business orientated I know the value of Consistant *COMPOUNDING* gains

So really if like me and others like me who are* not happy with your consistancy* and wish to trade in telephone numbers(but consistancy and reliability are placing doubts in your mind) then this in my veiw is the ONLY way to go. 

*In the end you have a business not an INTEREST.*


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## Ageo (30 August 2006)

Tech, with a mechanical system once programmed do you do any physical work (like buying/selling? or anything else) or does it do it all for you?


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## stink (30 August 2006)

If you trade by a certain set of criteria all the time no matter what, is that a mechanical system? even though you do the physical searching etc you always act on a certain set of criteria?


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## It's Snake Pliskin (30 August 2006)

> By tech/a: And there in lies the problem for discretionary traders.
> Trading in a discretionary manner is simply hit and miss.



That is true. But, what about the controlled miss and hit? I`m not talking about controlling the market, but oneself. A lot can`t do it, or don`t know how to do it.



> You just dont have the information to be able to trade with confidence.




There are no numbers to work with; maybe paper trading info but they are not numbers, just results - not to be trusted fully.



> I and many like me were purely discretionary traders. However when I decided to trade serious money ( $100K plus on Margin),there just wasnt the *CONSISTANCY* I wanted. So I and many like me have gone the Mechanical track. The results and the piece of mind have been well worth the long journey.




It helps if one has weak psychological biases to deal with.



> Sure I still trade in a discretionary manner and sure I have good results but they are without consistancy---and I trade only smaller sums.
> Being business orientated I know the value of Consistant *COMPOUNDING* gains




Compounding is very important to wealth creation. 



> So really if like me and others like me who are* not happy with your consistancy* and wish to trade in telephone numbers(but consistancy and reliability are placing doubts in your mind) then this in my veiw is the ONLY way to go.




I agree. 

Discretionary traders have convictions and price discipline - they know their system, what drives the market and their psychology. They are happy to hit and miss.


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## stink (30 August 2006)

Yeah it seems its a personal thing and what any individual is comfortable dealing with.

I think i will always be discretionary just by my nature, does that mean i cannot profit from the market consistently? Well time will tell but i think i can, really the way i see it, its about making decisions based on evidence. You either have that evidence or you dont.

Isnt a "system" acting on the same evidence but just doing it automatically?

 

Stink


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## tech/a (30 August 2006)

With a purely mechanical method in the strictest of terms it would be purely mechanical and some brokers can/or do run your systems but then you'll need to find them.

I personally run and monitor my mechanical systems so I buy and sell on triggers--Entry/Exit/stops.I use a Full service broker as trade numbers /year are only up to 30 each system.

So I guess you could say that they are mechanical in design and manual in execution.This in itself has the advantage of being able to impart a small discretionary element (which sounds like a contradiction but actually isnt--I'll explain).

Montecarlo analysis tells me that over 20000 portfolios the best performed at a 40% flat return (Un leveraged) and the worst 23%. Of course you cant pre select the 40% return portfolio.
So I have confidence that the worst performing portfolio will return a minimum of 23%.Each portfolio is different as many stocks are triggered but ofcourse funds dont allow ALL triggers to be taken.
In my wisdom I have added 2 eyeball filters (Looking at the charts),these do not alter the criteria at all,what they do do is give me a confidence that the stock according to the chart
(1) Isnt Ranging.
(2)Is in a Trend/or emerging trend/or has clearly broken a downtrend.

As it turns out maybe by goodluck rather than good management,all 3 are performing at the higher end of the Portfolio test returns.


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## Ageo (30 August 2006)

tech/a said:
			
		

> As it turns out maybe by goodluck rather than good management,all 3 are performing at the higher end of the Portfolio test returns.




so more than 40%?


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## tech/a (30 August 2006)

> Isnt a "system" acting on the same evidence but just doing it automatically?




The difference is subtle yet dramatic.

What your doing with a Mechanical method is applying a set of criteria down to position size over a long time period and over a great number of trades.

The END RESULT is a positive expectancy of X if you do exactly as you have programmed in your system.

The difference being is that you KNOW THIS.
You have a *Blueprint * of information returned from rigorous testing that gives you information that you can and should use as a *Benchmark*Relative to your trading.You can pick a run of losses as being acceptable OR out of testing and such not the way to trade--IE your method of trading isnt as you expected.
In a discretionary environment you just wont know this and other important aspects of a trading methodology until possibly years later.

Once you get sick of inconsistancy you may well tread the path I have.


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## tech/a (30 August 2006)

Ageo said:
			
		

> so more than 40%?




No but at the high end in he 30% + Range.


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## Ageo (30 August 2006)

tech/a said:
			
		

> No but at the high end in he 30% + Range.





nice, how long has that performance kept up?


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## MichaelD (30 August 2006)

tech/a said:
			
		

> Montecarlo analysis tells me that over 20000 portfolios the best performed at a 40% flat return (Un leveraged) and the worst 23%. Of course you cant pre select the 40% return portfolio.
> So I have confidence that the worst performing portfolio will return a minimum of 23%.



Playing the Devil's Advocate here - why? (do you have confidence that the worst performing portfolio will return 23%).

For those that are unaware, Tech and I trade very similar systems, so this is "friendly fire". My bent, however, is much more towards the market being a random walk rather than being predictable in any way. I am also very interested in the gotchas of backtesting.


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## tech/a (30 August 2006)

Ageo.

One is traded live here for the last 4 yrs.(Techtrader)

http://lightning.he.net/cgi-bin/suid/~reefcap/ultimatebb.cgi?ubb=forum;f=74

Michael 20000 portfolio tests!
Plus over the last 4 yrs none of the Systems have traded outside of their blueprint and we have had some nasty corrections!!!



> I am also very interested in the gotchas of backtesting




Me to and Duc has had a good go over the years at Gotchaing!!


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## It's Snake Pliskin (30 August 2006)

MichaelD said:
			
		

> My bent, however, is much more towards the market being a random walk  rather than being predictable in any way.




So your assumptions of the market are clear, hence the mechanical approach.

Excepting fallacy and delusion of the discretionary trader believing in prediction, I recognise the basis of your approach to the market. If it works keep doing it.


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## It's Snake Pliskin (30 August 2006)

tech/a said:
			
		

> Ageo.
> 
> One is traded live here for the last 4 yrs.(Techtrader)
> 
> ...




Tech have you matched it with some guru methods in books etc?


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## tech/a (30 August 2006)

Snake Pliskin said:
			
		

> Tech have you matched it with some guru methods in books etc?




How do you mean??



> is much more towards the market being a random walk rather than being predictable in any way.




I agree thats why I develope methodologies which are predictable.


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## It's Snake Pliskin (30 August 2006)

tech/a,



> How do you mean??




Comparison.


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## It's Snake Pliskin (30 August 2006)

Snake Pliskin said:
			
		

> So your assumptions of the market are clear, hence the mechanical approach.
> 
> Excepting fallacy and delusion of the discretionary trader believing in prediction, I recognise the basis of your approach to the market. If it works keep doing it.




....should have mentioned I don`t believe in throwing darts though.


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## stink (30 August 2006)

tech/a said:
			
		

> The difference is subtle yet dramatic.
> 
> What your doing with a Mechanical method is applying a set of criteria down to position size over a long time period and over a great number of trades.
> 
> ...




I see what your saying Tech, i can make 20 paper trades and all of them are profitable and i think "How good am i" my "system" or trading plan works. But in reality i have no idea, it may work but until i have used that system in exactly the same way for a number of years i cant have any positive expectancy.

And long before i get to this stage three things can happen.
1. My system is actually positive, i just dont know it yet.
2. I meander along win some winsand some losses but never really make anything from my trading business, just keep my head above water.
3. I go broke.

However should i apply my methods to a test over various portfolios, i can then detrmine whether the expectancy of any given system is positive or negative.

Its funny though, should i test my current trading strategy and it proves positive, if i want to actually benefit from the system i need to remove myself from it. The moment i have changed something i have ruined the blueprint no?

I assume then tech your system basically cruises along and gives you alerts that say "buy this now" "sell this now" etc

Regards Stink


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## tech/a (30 August 2006)

stink said:
			
		

> I see what your saying Tech, i can make 20 paper trades and all of them are profitable and i think "How good am i" my "system" or trading plan works. But in reality i have no idea, it may work but until i have used that system in exactly the same way for a number of years i cant have any positive expectancy.
> 
> And long before i get to this stage three things can happen.
> 1. My system is actually positive, i just dont know it yet.
> ...





*Exactly Stink now youve got it.*

You actually wont have a blueprint unless you record every trade and know what it is that you need to analyse from the data--both wins and losses.
The benifit of systems testing is that I can get years infact centuries of trading results analysed in a few minutes (Bar the time developing a trading methodology).I then have it BEFORE I invest and am not reacting to results---rather implementing results.

In essence you are correct they alert entries and exits/or stops and I dont even look at them unless I have funds to enter a new trade.
This can mean that I dont do anything for months.


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## Ageo (30 August 2006)

tech/a said:
			
		

> *Exactly Stink now youve got it.*
> 
> You actually wont have a blueprint unless you record every trade and know what it is that you need to analyse from the data--both wins and losses.
> The benifit of systems testing is that I can get years infact centuries of trading results analysed in a few minutes (Bar the time developing a trading methodology).I then have it BEFORE I invest and am not reacting to results---rather implementing results.
> ...





tech, do you only use your own funds for trading? or do you use other OPM?


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## tech/a (30 August 2006)

Both.
Thats what margin Trading/leverage (to a degree,you can leverage without using OPM) is all about.

To define OPM.
Not investing peoples funds,Im not licensed

OPM are funds on loan.


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## stink (30 August 2006)

Tech,

I have had a quick look and my software does have a backtest functionality, with a whole crap load of standard industry indicators half of which i dont even now what they mean   as well as some proprietry indicators.

Is there a combination of indicators that can be used in the backtest that would achieve the same or similar results as the Montecarlo you talk off?

Cheers Stink


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## tech/a (30 August 2006)

Whats the software?

Montecarlo is a specialist function few have as a built in functuality.
Its the ability to test many portfolios.Its not an indicator or formula.


Infact most software cannot systems test a single portfolio let alone multiple.
Most can only test a single entity.
which is fine if your trading a singularity.IE Futures or a few stocks as a specialist. This in itself is fine and maybe something to consider.IE trading one or a few stocks.

Even so it is unlikely you ill get the information you need from the software.
Amibroker is the cheapest.

Mine in total Metastock and tradesim enterprise edition set me back around $2500 but the return has been way beyond investment.
Mind you took me a few years to become proficient and still learning 12 yrs later!


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## stink (30 August 2006)

Yeah i see,

The software is called Virtual Trader Pro, through the sharemarket college.

To my knowledge its not available to the general public, but from the couple of other i have looked at it does the same as most as well as some proprietry functions.

I am able to setup a system test and then run the test over a watchlist of stocks over a specific time period.

If you dont mind i will run a couple of tests tonight and then post up the output. I would love to get your opinion and i am sure you would be able to get a better feel for what the system is doing.

Cheers Stink


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## stink (30 August 2006)

Hey Tech,

I found it mate, this is the software i use not called the same thing but this is it.

Could you please have a look, its got information on the webpage about the system test functionality etc

http://www.mdsnews.com/australia/tour/default.aspx 

Cheers Stink


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## tech/a (30 August 2006)

stink said:
			
		

> Hey Tech,
> 
> I found it mate, this is the software i use not called the same thing but this is it.
> 
> ...




Stink.
It seems to have rudimentary functionality.
Without having the numbers reported rather than the equity chart I cant see what it actually calculates.
If its restricted to standard Oscillator codes this would be a disadvantage.
I use price action more so than oscillators.

Anyway happy to have a look at what you post up.

It wont have Montecarlo analysis however there are somethings you can do.
Will be an interesting and worthwhile exercise and I can (time permitting) test your idea when you get one you think is viable on my software (If you let me know your inputs).Please lets not test every idea!!.

Anyway will be very good for you you will learn heaps!


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## MichaelD (30 August 2006)

tech/a said:
			
		

> Michael 20000 portfolio tests!
> Plus over the last 4 yrs none of the Systems have traded outside of their blueprint and we have had some nasty corrections!!!



I would argue that 20,000, 200,000 or 2,000,000 tests on a selected universe proves very little about overall system performance in the long term (and I don't see any nasty corrections, just a few minor blips in a raging bull market from 2500 to 5000). Anyone long term trend trading who did *not* make lots of money in the greatest bull market in history is doing something very seriously wrong.

However, I am personally becoming very aware of how easy it is to confuse the following in a bull market;
1. Brains
2. Luck
3. Positive expectancy system

Snake, I have an open mind on how the stock market works and am still pondering. Right at the moment, my beliefs are;

1. The market is a random walk with an overall positive bias.
2. There are moments of short term non-random behaviour driven by greed and fear.

To capitalize on 1 requires a robust long term exit, a la Tech Trader/ATR exit. To capitalize on 2 requires a different exit strategy, one of which I'm currently paper trading to see if I can get a positive expectancy out of it.


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## stink (30 August 2006)

OK tech heres a strategy i ran through the back test tonight to give you a look at how it presents the data.

the first picture is the feilds i chose to base the backtest on, and used 10k as the total capitol.

heres the output file
Summary Report By Code for - linc  





Trading System Settings 



Run Date: 8/30/2006 7:38:19 PM 
Check Entry Signals (Custom): OXR.AX,LHG.AX,EQN.AX,PDN.AX 
Initial Equity: $10,000.00  
Brokerage Fee Type: Fixed 
Fee Amount: $60.00  
Allow Multiple entry per code: False 



Total Trading System Summary 



Bars in Test: 418 
Total Net Profit: $6,571.345 
Open Position Gain/Loss: ($16.94)  
Total Commission (Fees): $6,840.00  
Return on account: 65.71% 

Max System Drawdown: ($1,445.22)  
Max System Drawdown Percent: -22.42% 


Total Trades: 65 Total Trades (Inc. Open Positions): 68 
Percent Profitable: 53.85% Percent Profitable (Inc. Open Positions): 52.94% 
Profit of Winners: $16,030.86  Profit of Winners (Inc. Open Positions): $16,185.90  
Loss of Losers: ($9,442.575) Loss of Losers (Inc. Open Positions): ($9,614.555) 
Total Winning Bars: 283 Total Winning Bars (Inc. Open Positions): 306 
Total Losing Bars: 200 Total Losing Bars (Inc. Open Positions): 205 


Largest Winning Trade: $1,325.22  
Avg. Winning Trade: $458.025 
Largest Losing Trade: ($659.94)  
Avg. Losing Trade: ($314.753) 
Number of Bars in Largest Winning trade: 43 
Avg. Bars for Winning Trades: 8.09 
Number of Bars in Largest Losing trade: 3 
Avg. Bars for Losing Trades: 6.67 




Trading Summary for - OXR.AX 



Open Position Gain/Loss: ($112.98)  
Total Commission (Fees): $1,920.00  

Max Trade Drawdown: ($1,445.22)  
Max Trade Drawdown Percent: -22.42% 


Total Trades: 17 Total Trades (Inc. Open Positions): 18 
Percent Profitable: 15.38% Percent Profitable (Inc. Open Positions): 14.71% 
Profit of Winners: $5,331.86  Profit of Winners (Inc. Open Positions): $5,331.86  
Loss of Losers: ($2,057.525) Loss of Losers (Inc. Open Positions): ($2,170.505) 
Total Winning Bars: 116 Total Winning Bars (Inc. Open Positions): 116 
Total Losing Bars: 47 Total Losing Bars (Inc. Open Positions): 52 


Largest Winning Trade: $1,325.22  
Avg. Winning Trade: $533.186 
Largest Losing Trade: ($369.24)  
Avg. Losing Trade: ($293.932) 
Number of Bars in Largest Winning trade: 43 
Avg. Bars for Winning Trades: 11.60 
Number of Bars in Largest Losing trade: 10 
Avg. Bars for Losing Trades: 6.71 



Trading Summary for - LHG.AX 



Open Position Gain/Loss: $155.04  
Total Commission (Fees): $1,560.00  

Max Trade Drawdown: ($1,439.25)  
Max Trade Drawdown Percent: -22.35% 


Total Trades: 15 Total Trades (Inc. Open Positions): 16 
Percent Profitable: 10.77% Percent Profitable (Inc. Open Positions): 11.76% 
Profit of Winners: $4,288.55  Profit of Winners (Inc. Open Positions): $4,443.59  
Loss of Losers: ($2,444.84)  Loss of Losers (Inc. Open Positions): ($2,444.84)  
Total Winning Bars: 106 Total Winning Bars (Inc. Open Positions): 129 
Total Losing Bars: 72 Total Losing Bars (Inc. Open Positions): 72 


Largest Winning Trade: $1,117.25  
Avg. Winning Trade: $612.65  
Largest Losing Trade: ($506.85)  
Avg. Losing Trade: ($305.605) 
Number of Bars in Largest Winning trade: 56 
Avg. Bars for Winning Trades: 15.14 
Number of Bars in Largest Losing trade: 10 
Avg. Bars for Losing Trades: 9.00 



Trading Summary for - EQN.AX 



Open Position Gain/Loss: ($59.00)  
Total Commission (Fees): $2,040.00  

Max Trade Drawdown: ($965.44)  
Max Trade Drawdown Percent: -16.72% 


Total Trades: 21 Total Trades (Inc. Open Positions): 22 
Percent Profitable: 13.85% Percent Profitable (Inc. Open Positions): 13.24% 
Profit of Winners: $3,020.49  Profit of Winners (Inc. Open Positions): $3,020.49  
Loss of Losers: ($3,754.59)  Loss of Losers (Inc. Open Positions): ($3,813.59)  
Total Winning Bars: 29 Total Winning Bars (Inc. Open Positions): 29 
Total Losing Bars: 74 Total Losing Bars (Inc. Open Positions): 74 


Largest Winning Trade: $637.50  
Avg. Winning Trade: $335.61  
Largest Losing Trade: ($659.94)  
Avg. Losing Trade: ($312.883) 
Number of Bars in Largest Winning trade: 1 
Avg. Bars for Winning Trades: 3.22 
Number of Bars in Largest Losing trade: 3 
Avg. Bars for Losing Trades: 6.17 



Trading Summary for - PDN.AX 



Open Position Gain/Loss: $0.00  
Total Commission (Fees): $1,320.00  

Max Trade Drawdown: ($999.97)  
Max Trade Drawdown Percent: -16.96% 


Total Trades: 12 Total Trades (Inc. Open Positions): 12 
Percent Profitable: 13.85% Percent Profitable (Inc. Open Positions): 13.24% 
Profit of Winners: $3,389.96  Profit of Winners (Inc. Open Positions): $3,389.96  
Loss of Losers: ($1,185.62)  Loss of Losers (Inc. Open Positions): ($1,185.62)  
Total Winning Bars: 32 Total Winning Bars (Inc. Open Positions): 32 
Total Losing Bars: 7 Total Losing Bars (Inc. Open Positions): 7 


Largest Winning Trade: $774.71  
Avg. Winning Trade: $376.662 
Largest Losing Trade: ($577.92)  
Avg. Losing Trade: ($395.207) 
Number of Bars in Largest Winning trade: 4 
Avg. Bars for Winning Trades: 3.56 
Number of Bars in Largest Losing trade: 3 
Avg. Bars for Losing Trades: 2.33


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## stink (30 August 2006)

Sorry the screen capture should have been first, but i am sure you get the picture.

Cheers Stink


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## stink (30 August 2006)

Oh before you ask the time period i ran the test over was from 1/1/05 to 30/8/06


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## tech/a (30 August 2006)

OK.

First thing I notice and the thing that is often overlooked by the un wary is the Syyatems test doesnt deduct the Brokerage cost from the Nett profit.

Take the final summary $6571 profit and $6840 Brokerage.
I checked the nett results down lower and its not taken into account.
Unfortunately a 65% winning system is infact a loser.The actual loss is A few hundred dollars.The Broker would be happy though.

Winners take losers = $6571 profit.
Brokerage of $6840 at $60 I presume $60 each way equates to 57 trades not the 65 bought and closed.So cant follow that either.

Brokerage must be considered and many many short term systems fail when brokerage is included in the nett figures.


Im not sure how the System takes trades It appears to be each bar?
That cant be right? Possibly the terminology Im not understanding.

All in all though the results are mis leading and you need to be aware of what your getting back.

Anyway let me know what Im missing or not understanding.

*For interest sake here is a Tradesim report on one of the Techtrader versions*

Detailed Report
(TT Master 011)

Simulation Summary
Simulation Date:                                             7/06/2006
Simulation Time:                                            5:49:40 PM
Simulation Duration:                                      0.51 seconds

Trade Summary
Earliest Entry Date in the Trade Database:                   7/09/1998
Latest Entry Date in the Trade Database:                    16/05/2006
Earliest Exit Date in the Trade Database:                   28/09/1998
Latest Exit Date in the Trade Database:                     19/05/2006

Start Trade Entry Date:                                      7/09/1998
Stop Trade Entry Date:                                      16/05/2006
First Entry Date:                                            7/09/1998
Last Entry Date:                                            24/03/2006
First Exit Date:                                            28/09/1998
Last Exit Date:                                             19/05/2006

Total Trading duration:                                      2811 days

Profit Summary
Profit Status:                                              PROFITABLE
Starting Capital:                                          $100,000.00
Finishing Capital:                                         $848,414.00
Maximum Equity/(Date):                        $748,414.00 (19/05/2006)
Minimum Equity/(Date):                          -$6,752.24 (6/01/2000)
Gross Trade Profit:                              $883,438.60 (883.44%)
Gross Trade Loss:                              -$135,024.60 (-135.02%)
Total Net Profit:                                $748,414.00 (748.41%)
Average Profit per Trade:                                    $4,428.49
Profit Factor:                                                  6.5428
Profit Index:                                                   84.72%
Total Transaction Cost:                                     $10,140.00
Total Slippage:                                                  $0.00
Daily Compound Interest Rate:                                  0.0761%
Annualized Compound Interest Rate:                            32.0009%

Trade Statistics
Trades Processed:                                                 1924
Trades Taken:                                                      169
Partial Trades Taken:                                                0
Trades Rejected:                                                   903
Winning Trades:                                            60 (35.50%)
Losing Trades:                                            109 (64.50%)
Breakeven Trades:                                            0 (0.00%)

Normal Exit Trades:                                       127 (75.15%)
Delayed Normal Exit Trades:                                  0 (0.00%)
Open Trades:                                                10 (5.92%)
Protective Stop Exit Trades:                               32 (18.93%)
Time Stop Exit Trades:                                       0 (0.00%)
Profit Stop Exit Trades:                                     0 (0.00%)

Largest Winning Trade/(Date):                 $125,685.00 (19/05/2006)
Largest Losing Trade/(Date):                    -$4,660.00 (7/12/2005)
Average Winning Trade:                                      $14,723.98
Average Losing Trade:                                       -$1,238.76
Average Win/Average Loss:                                      11.8861

Trade Duration Statistics
(All Trades)
Maximum Trade Duration:                                    1226 (days)
Minimum Trade Duration:                                       2 (days)
Average Trade Duration:                                     166 (days)
(Winning Trades)
Maximum Trade Duration:                                    1226 (days)
Minimum Trade Duration:                                      12 (days)
Average Trade Duration:                                     377 (days)
(Losing Trades)
Maximum Trade Duration:                                     222 (days)
Minimum Trade Duration:                                       2 (days)
Average Trade Duration:                                      49 (days)

Consecutive Trade Statistics
Maximum consecutive winning trades:                                  9
Maximum consecutive losing trades:                                  10
Average consecutive winning trades:                               1.76
Average consecutive losing trades:                                3.21

Trade Expectation Statistics
Normalized Expectation per dollar risked:                      $2.2000
Maximum Reward/Risk ratio:                                       47.50
Minimum Reward/Risk ratio:                                       -1.26
Average Positive Reward/Risk ratio:                               7.26
Average Negative Reward/Risk ratio:                              -0.58

Relative Drawdown
Maximum Dollar Drawdown/(Date):                $14,090.41 (16/09/2002)
Maximum Percentage Drawdown/(Date):                5.8960% (6/01/2000)

Absolute (Peak-to-Valley) Dollar Drawdown
Maximum Dollar Drawdown:                          $18,680.36 (6.4660%)
Capital Peak/(Date):                           $288,896.75 (3/07/2002)
Capital Valley/(Date):                         $270,216.39 (1/10/2002)

Absolute (Peak-to-Valley) Percent Drawdown
Maximum Percentage Drawdown:                      7.2140% ($11,960.18)
Capital Peak/(Date):                          $165,780.04 (18/04/2000)
Capital Valley/(Date):                        $153,819.86 (26/06/2001)


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## stink (30 August 2006)

lol yeah i am not sure either mate,

Its the first time i have used it so i would have to speak to the developers and get them to explain how it makes that calculation on the brokerage.

Anyway thanks for having a look, i am not planning on using this so it no big deal.

Regards Stink


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## tech/a (30 August 2006)

Im off for now but if you come up with an Idea that you think may be "The one" let me know and I'll code it up and run it if you like.(Thats if I can code it!)


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## Bobby (30 August 2006)

MichaelD said:
			
		

> 2. There are moments of short term non-random behaviour driven by greed and fear.
> 
> . To capitalize on 2 requires a different exit strategy, one of which I'm currently paper trading to see if I can get a positive expectancy out of it.




Yes Michael thats part of it, & when this happens there are others that exasperate such.   

Bob.


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## ducati916 (31 August 2006)

> I would argue that 20,000, 200,000 or 2,000,000 tests on a selected universe proves very little about overall system performance in the long term (and I don't see any nasty corrections, just a few minor blips in a raging bull market from 2500 to 5000). Anyone long term trend trading who did *not* make lots of money in the greatest bull market in history is doing something very seriously wrong.
> 
> However, I am personally becoming very aware of how easy it is to confuse the following in a bull market;
> 1. Brains
> ...




For the reason that, *Monte Carlo is NOT STATISTICAL...........it is DETERMINISTIC* 

Determinism, has a very different expectation to a Statistical expectation.
The Laws of Probability & large numbers are just not as strong.
Therefore, Determinism provides an inference, suggesting further study.
Statistics provide a *Probability* to a %confidence level & standard deviations.

jog on
d998


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## tech/a (31 August 2006)

I would argue that any set of statistics applied---- in the end will be deterministic.
If they werent what purpose do they serve.

Semantics Ducster.


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## stink (6 September 2006)

tech/a said:
			
		

> OK.
> 
> First thing I notice and the thing that is often overlooked by the un wary is the Syyatems test doesnt deduct the Brokerage cost from the Nett profit.
> 
> ...




HI Tech,

Sorry it took so long to get back to you.

I asked the question about the brokerage calculation

Hi,

  The profit figure includes the fees, so the system did indeed make that profit.

  If you're calculating your figures based on the total profitable and total not profitable, then keep in mind that those figures are quoted as net too, not gross.  i.e. the Fee component is already included.

  For a proper comparison, run the test again without the fees component.  Though note too that additional transactions may be included, as extra cash might be available to take a position, where it wasn't possible before.

  I realise that my response above may be a little cryptic.  Please let me know if you would like a more details explanation, or feel that I've totally missed your point.

I have asked for more information, but what do you make of it?

Regards Stink


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