# Trading System by Andrew Gibbs - Member of Larry Williams Hall of Fame



## zipzap (17 October 2013)

Hi Guys

This post and trading system is EXCLUSIVE to Aussie Stock Forums. I am going to show you a complete share trading system, back tested performance and something that any trader can take away and use.

The following post outlines a share trading system that is designed for trading stocks that meet a specific scanning criteria that reduces the stocks you are trading down to a basket of say 20 shares. It is to active to trade across an entire index, say the ASX200. As a part of this article I am going to also include some exceptional (and backtested) screening approaches, along with some shortcuts on how to choose stocks to trade.

Have you ever run your favorite scan based upon either fundamental or technical criteria, come up with a group of stocks and then struggled for entry and exit criteria to get you into and out of a stock. This system addresses that very problem. It is designed to give you an efficient way to get you into and out of trades that is profitable across the majority of stocks.

A warning first. This system, like the stockmarket and most systems suffers from large drawdowns. In other words leverage at your own risk. It does however offer a highly profitable method for entering and exiting the market.

A second warning. The scanning criteria is the way to tilt the market well and truly in your favour. If your stockmarket scans give you a group (or basket) of stocks that are most likely to outperform the market you can really tilt the playing field in your favour before even applying a technical trading system to the stocks. Let me ask you this.. would you rather trade stocks that belong to an index and average say 8-10% per annum or a basket of stocks, if you re-weight the basket every so often returns 20-40% per annum. The right answer is trade the basket that average 20% plus..not just the stocks that make up an index.

Following on:

This trading system is designed to work across just about any stock and is designed to be in the market a lot. 

In building a trading system that works across almost anything we need to analyse the charactertics of the stockmarket itself.

The stockmarket has two characteristics, it regresses to the mean after a downturn, in other words turns up and doesn't trend very often to the downside and it shows momentum after breaking to new highs or in other words shows trending characteristics on the upside. The result is that two types of signals should work, an oversold signal and /or a breakout signal. This system uses both.

Before I disclose the entry rules, I emntioned earlier that it is the scanning criteria for your portfolio that really stocks the odds in your favour. If you get your scanning criteria right and the criteria has a history of market outperformance the best way to enter the market is during a dip.

There are lots of ways to do this for example buy when price goes BELOW a moving average. You could use an oscillator like an RSI and buy when it shows an oversold reading etc.

Our technique simply uses the parabolic indicator. If the price of the stock is BELOW (Note I said BELOW!, not above) and the 4 period RSI is below 25 we will buy at market.

Rule 1: If Close< Parabolic Indicator (AF 0.01, maxAF, 0.2) and RSI(close,4)<25 then buy the next bar at market.

The second rule kicks in if the first one does fill. If close is below the Parabolic buy at the 15 period high price on stop.

Note that traditional technical analysis say to buy above the Parabolic indicator, I disagree, it's not as effective as anticipating a trend change, although does leave you bruised at times (like anything).

This chart demonstrates the entry rule 1 in action.




This chart demonstrates entry rule 2 in action




Note that the shaded green boxes illustrate when price is trading below the Parabolic SAR....

If you think I'm cherry picking the good trades, you'd be RIGHT! I'll show some of the uglier trades later.

Let's look at the exit rules:

The first one is as follows:

Once we are in uptrend, which in this case is established when the Parabolic indicator flips so it is below the closing price.. as shown above when the close is ABOVE the red dots we will use the Parabolic indicator to trail the stop.

This exit works great in strong up trending markets as you can see in the previous trades shown, but what about when the market is trending lower... the second exit shunts us out of the market more quickly. Basically if the index (we are using the S&P500 Cash Index (SPX) in this example is below where it was 100 bars ago we will exit as soon as the parabolic flips to uptrend and the close is ABOVE the Parabolic indicator.




YES.. still cherry picking


Here's a BAD trade:




And here's an UGLY one... followed by two mediocre trades




In the next post we'll look at the backtesting history and the use of stops.

For the FUNDAMENTAL guys out there, you've probably already guessed but our screening techniques we use to pick stocks are based almost exclusively on fundamental analysis and yes, unlike almost everybody else we backtest our screening techniques as well.. until tomorrow, enjoy your evening. I've written a book on how to trade BHP as well, click the link in my signature to go the the landing page.

Enjoy

ZZ...


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## Gringotts Bank (17 October 2013)

WHat does this mean pls

"The second rule kicks in if the first one does fill. If close is below the Parabolic buy at the 15 period high price on stop".


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## zipzap (17 October 2013)

Gringotts Bank said:


> WHat does this mean pls
> 
> "The second rule kicks in if the first one does fill. If close is below the Parabolic buy at the 15 period high price on stop".




Sorry, it's a typo (does should be doesn't)... 

Here's an attempt at a clearer explanation

The price needs to be trading below the Parablic SAR for both entry rules (shown by green shaded areas in the example):

You buy if the 4 period RSI Indicator is below 25 (the next bar at market on open)

or

You buy on stop at the highest high in the last 15 bars using a stop entry order.

Whichever one occurs first.


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## KurwaJegoMac (17 October 2013)

*** Warning to members ***

Please be VERY wary of posts that provide you with a trading system. Ensure you backtest/forwardtest them YOURSELF and can demonstrate profitability.

Quite often, people post these systems up on sites for free, because they want to take the other side of your trade. I.e. they give you a system that sends you a buy, but in reality it is a 'sell' on their side and they milk you.

Now, zipzap may or may not be dodgy, I don't know. If their intentions are pure, then I apologise - no insult intended.

This is just a caution to beginners who are still learning and haven't come across something like this before.

Please please please validate the system personally (as you should no matter who posts).


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## zipzap (17 October 2013)

Thanks for that... sadly, you're right, there are many unscrupulous operators out there and therefore it's important for you to do your own investigations.. these are just trading ideas some I trade, some I don't but this one has value.

The image below shows the back tested results on the S&P100 stocks going to back to 1980.

Assumptions: $10,000 invested per trade, no slippage or commission included.




The Equity Curve..




ZZ...


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## zipzap (17 October 2013)

Performance Reports Per Stocks




And the next part of the table




Hard to read as I had to re-size, the challenge is to see if you can find a stock in the S&P100 index the system loses on....

ZZ...

p.s. this systems wins on every single stock that makes up the current S&P100 index. There are issues such as survivorship bias etc that we'll touch upon later. As I mentioned earlier, this is a very active system, it is designed to be traded on baskets of stock that are much smaller than the S&P 100 stocks and we'll get to how these are selected another day as well.


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## KurwaJegoMac (17 October 2013)

Highest number of consecutive losses 52 - ouch!! That takes some strong mindset there to keep going.

Some good results, but requires you to be very active in your trading. 18000+ trades across 32 years = ~12 trades per week. Good expectancy although payout ratio is a bit low for my tastes (just personal trading style) but fine given the high win rate. Problem is that you need to remain "right" most of the time for this to be effective.

Some interesting ideas for better entries/exits.

Thanks for sharing.


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## zipzap (17 October 2013)

KurwaJegoMac said:


> Highest number of consecutive losses 52 - ouch!! That takes some strong mindset there to keep going.




In reality it is not practical to trade a basket of 100 shares, this system is designed as a way to enter and exit stock baskets of say 20 stocks that are selected based upon some fundamental screening techniques which really tip the playing field in your favor way further than any technical system can.

The purpose of testing across such a wide number of stocks (and it shows similar results on the S&P500, Russell3000 etc) is to show how robust the trading method is before refining the basket of stock we're looking at.

More on this tomorrow.

ZZ...


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## tech/a (17 October 2013)

Had dinner with Andy
Very very talented guy.
Has a great sense of humor too boot.

Indeed fortunate to have Andrew post let alone
Posting a fully disclosed system plus his feed back.

He's he real deal.
Didn't know about the Hall of Fame
How'd you get that?


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## sinner (17 October 2013)

It doesn't appear your backtesting accounts for changes in the S&P100 index. You are backtesting the current constituents of the S&P100 going back 1980. Your backtest is invalid.

What is the purpose of statements like this



> the challenge is to see if you can find a stock in the S&P100 index the system loses on.




except to sensationalise the idea.


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## sinner (17 October 2013)

I can't get over just how intellectually dishonest this backtest is. 

How many of the stocks in your backtest haven't even been in existence since 1980? CISCO listed 1990, Google 2004, Intel in 1989, Amazon in 1997, so on and so forth.

So exactly how is the equity curve calculated? How are the backtest stats adjusted to account for this? In which year did the backtest actually start to cover 100 stocks? 2004?

You say you use a fundamental screen, Fama and French data is freely available and you could have easily constructed a fundamental universe each year going back much further than 1980 for the backtest but instead you chose to present an impossible scenario as profitable, and say we will touch on the issue which completely invalidates it, later. 

If this isn't a marketing strategy to drive customers to SCM/Halifax I don't know what is. As someone who has previously mentioned SCM in a good light on this forum I am pretty disturbed.

I think OP should come clean about who he is (is he actually Andrew Gibbs? I doubt it), what is his affiliation with SCM/Halifax, and wherever possible not post BS backtests.


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## Gringotts Bank (17 October 2013)

sinner said:


> I can't get over just how intellectually dishonest this backtest is.
> 
> How many of the stocks in your backtest haven't even been in existence since 1980? CISCO listed 1990, Google 2004, Intel in 1989, Amazon in 1997, so on and so forth.
> 
> ...




He did mention survivorship bias was an issue.  Give him a chance to explain on that front.

Halifax in Australia is a very dodgy set up.  Not sure about NZ.


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## sinner (17 October 2013)

Gringotts Bank said:


> He did mention survivorship bias was an issue.  Give him a chance to explain on that front.




Sorry, no I cant accept that.

OP told us 



> The purpose of testing across such a wide number of stocks (and it shows similar results on the S&P500, Russell3000 etc) is to show how robust the trading method is




If OP was for real, and not just paying lip service by mentioning survivorship bias (then dismissing it for later, after you're reeled in), he would absolutely not post the equity curve and stats he has to "show how robust the trading method is".


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## zipzap (17 October 2013)

Hmmm, 18,000 trades, 4 simple rules across 100 stocks, same rules tested across all of them, no optimisation at all.. tested back 30 years and the system makes money on every single one of them... yeah..crap system, throw it in the bin.


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## skyQuake (18 October 2013)

zipzap said:


> Hmmm, 18,000 trades, 4 simple rules across 100 stocks, same rules tested across all of them, no optimisation at all.. tested back 30 years and the system makes money on every single one of them... yeah..crap system, throw it in the bin.




Same old question. Why share it with the general public hmm?


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## sails (18 October 2013)

skyQuake said:


> Same old question. Why share it with the general public hmm?




Brokerage for Halifax?


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## wayneL (18 October 2013)

zipzap said:


> More on this tomorrow.
> 
> ZZ...




I remember ZZ from years ago. He's no scamster and I'm interested in hearing more on this.

Hope to hear from you today my man.


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## tech/a (18 October 2013)

skyQuake said:


> Same old question. Why share it with the general public hmm?




Creates discussion
Has a desire to implant ideas in others
He can
Thank god it's not ANOTHER general un related to trading thread.
I created TechTrader it's been published---my motive was/is?

Andrews created 100s of systems.


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## zipzap (18 October 2013)

skyQuake said:


> Same old question. Why share it with the general public hmm?




You guys are so clever, you've seen through my cunning plan...

I actually think what I am posting has value and yes, better than some id..iot posting a stock tip and yes... I have a business interest, I own a broking firm and manage millions of dollars in client funds. The difference being I really care about making my clients money whether they are self directed or via a managed account, it's good for everyone..win:win, I get long term clients and make money from fees, client makes profits from trading or investing and taking on risk.  But.. if you want to listen to Charlie next door and follow his system then be my guest.

The other thing is if you're in business you have to market, it's that simple... I'll be straight up, I've just expanded the business and am now in a position to expand my client base. We have the best research products in the market but if you're alrady making money from stock or CFD trading you don;t need to read this, if you're not I'm showing you how you can.

All you guys need to do is sit back, read and enjoy, be thankful that I have a commercial interest or you wouldn't be getting anything. I also trade my own account using my trading systems. Take it or leave it.

So... moving on..

As I've mentioned several times throughout this thread already this system simply outlines a set of rules for entering and exiting the market, it's nothing special, there's no secret sauce and it can have large losses so risk needs to be managed through diversification, but this system has the elements it was designed for. It captures virtually every move and generally is hsown to be profitable across a wide range of stocks and time periods.

But the entry and exit rules are only half of the story, the system only makes money because of the upward bias in stocks... Apply the same thing to commodity futures or forex (which do not always have an upward long term bias due to cost of carry) and it won't win.. but that's fine because this is about trading stocks. The point is without good stocks the system won't make money.

The most important consideration is which stocks to trade and how do we select them. Given the system is in the market a lot and very active, say one or two steps down from buy and hold as I just said the key to the entire thing is to find stocks that are most likely to outperform the market, we only need about 20 and that is the real edge and is what I'll cover next.

ZZ..


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## IFocus (18 October 2013)

wayneL said:


> I remember ZZ from years ago. He's no scamster and I'm interested in hearing more on this.
> 
> Hope to hear from you today my man.





Yep ZZ has been around for ever and unless he has joined the Mongrel Mob should be straight up would encourage everyone to ask questions with respect and allow ZZ to explain until proven other wise.

The points that ZZ makes are fundamental in trading the main one is moving the bias in your direction I would'nt burn him until at least he explains his method........unless you are a genus making millions.


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## zipzap (18 October 2013)

Rightio, so let's have a look at stock selection. To do this I use Portfolio123 so we're going to focus on US shares.   www.portfolio123.com.au . Btw I am getting ASX and NZX shares added to Portfolio123 so stay tuned.

There are two different ways to come up with a stock basket to trade.

1. The easy way - let other people do it for you
2. The hard way - DIY, we'll look at examples further on.

In these examples I am going to show you the easy way.

Firstly let's look at what a stock index is. Really it is just a portfolio of XX number of stocks with stocks getting added to and removed from the index every so often..it sounds rather like a portfolio doesn't it. In fact most funds are invested into this type of portfolio (i.e. a stock index such as S&P500 in US or ASX200 in Australia etc) and that's where your superannuation goes.

So here's a question for you, which index would you rather trade... the blue one, which is the S&P500 index or the red line which is a basket of 20 stocks that makes up part of the S&P500 index at any one time?




The red line averages 25% with a 24.5% drawdown whilst the S&P500 ETF Trust (which mirrors the S&P500 index) has averaged 2.5% with a 55% drawdown.

You can find out more info by going to www.portfolio123.com.au and clicking on the Ready 2 Go portfolio tab. This portfolio is put together by a guy called Hemmerling, not by me.

The red line includes survivor-ship bias, brokerage and slippage.

It obviously makes far more sense to focus your attention on those stocks that are more likely to outperform the market and therefore just trading the 20 stocks that make up the red lines performance is going to result in a better outcome than trading all of those stocks in the S&P500 index itself.

Next I'll explain what the red line represents, how the stocks are selected and what you'd need to do each week to make those stocks part of your basket which you can then apply the technical system outlined above to.

ZZ...


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## Gringotts Bank (18 October 2013)

That website looks like collective2 but with better Eq curves.


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## zipzap (18 October 2013)

Portfolio123 runs off the Compustat Point in time database and allows you to backtest based upon fundamental data, ratios, analyst forecasts, estimates, earnings surprises etc etc. This is very powerful software, the best I've seen.


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## Caveroute (18 October 2013)

I dropped the logic into amibroker and ran against the asx200 - results attached. 

Pretty similar in profile to what was described earlier by Andrew for the S&P.

The drawdowns would require some strong medicine though.


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## CanOz (18 October 2013)

Caveroute said:


> View attachment 54808
> 
> 
> I dropped the logic into amibroker and ran against the asx200 - results attached.
> ...




Is the idea to trade the entire ASX200?


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## zipzap (18 October 2013)

CanOz said:


> Is the idea to trade the entire ASX200?




Nope.. the idea is to have a technical entry and exit rule for trading a basket of about 20 stocks selected based upon their fundamentals.


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## CanOz (18 October 2013)

zipzap said:


> Nope.. the idea is to have a technical entry and exit rule for trading a basket of about 20 stocks selected based upon their fundamentals.




So the drawdown considering the entire ASX200 universe is a worst case scenario?


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## Caveroute (18 October 2013)

zipzap said:


> Nope.. the idea is to have a technical entry and exit rule for trading a basket of about 20 stocks selected based upon their fundamentals.




Yes, sorry should have mentioned that - identifying the preferred sub set is the next step, havn't been through the posts describing how you do that that bit yet, but clearly  it should be done in isolation of the backtest results


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## sinner (21 October 2013)

zipzap said:


> Hmmm, 18,000 trades, 4 simple rules across 100 stocks, same rules tested across all of them, no optimisation at all.. tested back 30 years and the system makes money on every single one of them... yeah..crap system, throw it in the bin.




LOL except you once again gloss over the key fact that the 100 stocks chosen are the current *100 largest stocks by market cap in the US, comprising almost 50% of the total US market cap*. So these are stocks that have gone up by definition, and any stocks which went down (say, Enron, which used to be a S&P 100 constituent and probably demolished on this system) are not included in the backtest.

You say you tested 30 years across 100 stocks that is a patent lie, as I have already shown. The majority of the stocks you test were not S&P 100 components for a majority of the 30 year "backtest" and many of the consituent stocks have not even been listed companies for 30 years. So considering Google didn't list until 2004 and didn't even exist until sometime in the 90s, how is it possible for you to have tested these particular 100 stocks for 30 years? 

If you don't think picking the *current S&P 100* as your universe for a 30 year backtest on a mean reversion system is optimisation then you are fooling yourself and I personally don't think you should get the opportunity to fool others on here. 

You promised to address this issue and show how your stock selection screen works, but all you've done is instead spruik for *another* website. So we are up to SCM, Halifax and now add "Portfolio123" to the list.


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## sinner (21 October 2013)

P.S:

Just for the record, I never said the system was crap I said, specifically, that the backtest was crap and your attempt to use the backtest as validity for "robustness of the system" was even more crap.


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## sinner (21 October 2013)

Caveroute said:


> View attachment 54808
> 
> 
> I dropped the logic into amibroker and ran against the asx200 - results attached.
> ...




Considering that a large majority of the companies currently in the ASX200, weren't before, what meaningful conclusion do you expect to take from this backtest? 

Garbage In, Garbage Out


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## zipzap (21 October 2013)

Thanks for that Sinner.

Before this gets into an argument, let's digress, you are right with what you are saying and it's an important point you are making, however it is not the main point or even an issue with the entire method. 

If this was purely a technical trading system then sure, the backtest was crap. However for the purposes of what I was trying to acheive the backtest is fine. My goal with the system was to come up with a method for entering and exiting a stock that captures virtually every move. Any technical system that captures every signel move will only every have a marginal edge.

In this case 90% of the method/results or edge comes from stock selection using Portfolio123 with the technical system simply being a way to enter and exit the trade and therefore as long as it does this to a satisfactory degree , that is adequate.

The whole point for this series of postings is that the stock selection (for this method) is way more important than the technical system. The point of the technical system is simply to find something reasonable that gets the trader into and out of the stock, which is why I put together an active method that is in the market a lot. As I mentioned it captures almost every move. It does that..job done.

The other thing is I am not worried about the survivorship bias for the backtest, in fact I want to test on a bunch of stocks that has an upward history because the actual basket of stocks we are selecting from Portfolio123 (P123) should have an even bigger upward bias. 

P123 includes survivorship bias in its backtesting so in this case it is the engine driving any profitable results, not the trading system.

This system is only suitable for trading with the fundamental overlay, I mentioned that from the start.

Stock selection first + technical system for entries and exits=entire method ex money management

ZZ...


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## craft (21 October 2013)

zipzap said:


> The most important consideration is which stocks to trade and how do we select them. Given the system is in the market a lot and very active, say one or two steps down from buy and hold as I just said the key to the entire thing is to find stocks that are most likely to outperform the market, we only need about 20 and that is the real edge and is what I'll cover next.
> 
> ZZ..




My experience is that if you can actually identify 20 odd superior stocks then the best thing to do from that point is nothing.

Eagerly awaiting a robust back test on the ACTUAL VARIABLE universe to challenge my beliefs.  Does the trading add return after transaction/slippage/taxation? Or are you shooting for risk adjusted return – (assuming that you call volatility risk)

I have used Radges Growth portfolio as a universe in the past on the assumption that the right universe would improve an edge – conclusion. Edges don’t add to each other – they subtract.

I have the same conclusion about adding trading to a FA derived portfolio’s. Conceptually the idea sounds very appealing but reality has always come up different.  The best trends to ride in a trading time frame occur on highly leveraged (operational/financial) companies experiencing changing macro conditions or on stocks that are bloody hard to value and the market is performing price discovery in a pretty wide range. The best long term FA stocks are pretty much the reverse.       

The portfolio’s you have mentioned with the turnover you have indicated don’t strike me as long term.  Since launch, none of them appear to have been running live for more than 1 year in a very strong US market and the since inception numbers are subject to the backtest problems Sinner has mentioned. No real basis for knowing just how robust those portfolios, which are effective trading systms in themselves, will be long term.


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## zipzap (21 October 2013)

craft said:


> My experience is that if you can actually identify 20 odd superior stocks then the best thing to do from that point is nothing.
> 
> The portfolio’s you have mentioned with the turnover you have indicated don’t strike me as long term.  Since launch, none of them appear to have been running live for more than 1 year in a very strong US market and the since inception numbers are subject to the backtest problems Sinner has mentioned. No real basis for knowing just how robust those portfolios, which are effective trading systms in themselves, will be long term.




Hi Craft, lots of great advice there.

Just in relation to your last comment the portfolio/s I mentioned from portfolio 123 are backtested correctly. The database includes delisted stocks, survivorship bias, slippage and commission.

The last sentence is good and without knowing just exactly what rules the systems are looking at are, there is no real way of knowing. However, as traders that is the problem we always face with a new system.. i.e. not knowing what the future will bring and hoping our assumptions of the past will hold up.

The advantage of running custom built Portfolio123 portfolios is that we known the assumptions behind the system, with the Ready2Go models the actual rules is are only outlined in the description but not disclosed. I should also mention that with the Custom built Portfolio123 models we can then also backtest the universe correctly using the technical model and then everyone will be happy ;-).

I'll post some trade examples in the next few days.


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## Caveroute (21 October 2013)

sinner said:


> Considering that a large majority of the companies currently in the ASX200, weren't before, what meaningful conclusion do you expect to take from this backtest?
> 
> Garbage In, Garbage Out




Conclusions ............

Once I can find some recent stock selections packs, then you can have some conclusions.


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## sinner (21 October 2013)

zipzap said:


> Thanks for that Sinner.
> 
> Before this gets into an argument, let's digress, you are right with what you are saying and it's an important point you are making, however it is not the main point or even an issue with the entire method.




lol. I am not really "arguing" anything here, let's make it clear, I am making some factual statements about your nonfactual ones. 



> If this was purely a technical trading system then sure, the backtest was crap. However for the purposes of what I was trying to acheive the backtest is fine. My goal with the system was to come up with a method for entering and exiting a stock that captures virtually every move. Any technical system that captures every signel move will only every have a marginal edge.




This is nonsense. Why do you need a technical system to capture "virtually every single move"? Is it maybe because this way generates a much higher frequency of buy/sell churn of the portfolio which would otherwise have holding periods more like quarter/year/5Y?



> In this case 90% of the method/results or edge comes from stock selection using Portfolio123 with the technical system simply being a way to enter and exit the trade and therefore as long as it does this to a satisfactory degree , that is adequate.




Right so this is a system which derives its alpha from well known, well researched and documented factors such as value premium or liquidity, or some combination thereof. Except this is precisely the thing you've not shown, just some technical trading rules optimised for a hindsight adjusted universe which seems to juice returns but really only because it's buying dips (i.e. long term mean reversion) on known survivor stocks and switching to short term mean reversion in high volatility regime (where 6 month momentum is negative). 

Oh wait, I forgot you also spruiked Portfolio 123. 



> The whole point for this series of postings is that the stock selection (for this method) is way more important than the technical system. The point of the technical system is simply to find something reasonable that gets the trader into and out of the stock, which is why I put together an active method that is in the market a lot. As I mentioned it captures almost every move. It does that..job done.




Don't you mean to say here, that the whole point for this series of postings is to add broker friendly overlay to overtrade an otherwise simple and existing quantitative funamental analysis? You have provided exactly ZERO evidence that the technical overlay adds any alpha to well known quantitative fundamental analysis. To make matters worse, the technical system provided is completely arbitrary (i.e. apparently a stock with RSI at 26 is horrible and shouldn't be bought but a stock with RSI at 25 is a great buy).



> The other thing is I am not worried about the survivorship bias for the backtest, in fact I want to test on a bunch of stocks that has an upward history because the actual basket of stocks we are selecting from Portfolio123 (P123) should have an even bigger upward bias.




This is complete nonsense. Please explain how Intel at IPO is a valid stock for any form of reasonable testing, simply because it's a current constituent of the S&P 100? Out of the 30 year backtest, for exactly how many weekly periods was CISCO a "value stock" which would have shown up in any of the screens? 

You are fooling yourself. Please stop stating nonfactual statements as factual, in case someone who doesn't know any better falls for it.



> P123 includes survivorship bias in its backtesting so in this case it is the engine driving any profitable results, not the trading system.
> 
> This system is only suitable for trading with the fundamental overlay, I mentioned that from the start.




and yet instead of providing a backtest based on a universe suitable for the system, you generated a charlatan backtest and claimed it tested 100 stocks for 30 years and this proves how robust it is.


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## sinner (21 October 2013)

If anyone would like an example of *free*, academically sourced and rigorously back-tested strategies for combining technical and fundamental overlays
http://empiritrage.com/wp-content/uploads/2012/03/Value-and-Momentum.pdf


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## zipzap (21 October 2013)

Thanks again for your contribution Sinner, certainly makes my afternoon a little less dull.



sinner said:


> lol. I am not really "arguing" anything here, let's make it clear, I am making some factual statements about your nonfactual ones.




Fact. I tested the system on the current stocks that make up the current S&P100 index. I tested back as far as 1980 on each of these stocks if the data was available.

The purpose of the test was to see quickly and easily if the system worked reasonably well. It does in fact work well on those stocks as it made money on almost every one of them probably because as you say it buys dips on stocks that over the long term have gone up. 

I don't have a problem with that for the purposes of this trading idea.

Issue: The universe was not tested on stocks removed from the index nor the constituent data historically which means the results look better than they would have been if bankruptcies and delistings were included... Agree, but it makes money on stocks that have a long term upward bias... did I mention that was the point of the system all along?

Similar results in terms of profit factor and win:loss ratios were achieved on the S&P500 and Russell3000 stocks. Same issue survivorship bias.. you've covered that adequately.

So what conclusion can you draw from this. Sinner thinks you can't draw any conclusions because it wasn't tested correctly. I think the conclusion that can be drawn is that the rules do what they were designed to do in the first place... Show an active method to buy and sell a small number (10-25) of stocks that are likely to go up based upon the fundamental research or stock screen.



sinner said:


> This is nonsense. Why do you need a technical system to capture "virtually every single move"? Is it maybe because this way generates a much higher frequency of buy/sell churn of the portfolio which would otherwise have holding periods more like quarter/year/5Y?




The purpose of the system is to give us an entry rule that will get us into the market early on in a new trend and an exit rule that is trend following. The average hold is 26 trading days (5 weeks) so it's not really that high frequency. I think it's safe to say (and correct me if I'm wrong) that it's probably a fairly common time frame for a good many traders. Instead of trading a Ready2Go model traders for stokc selection traders could use Portfolio123 as a stock screener. The point is the fundamentals screening technique can and should also be back-tested as that is how you pick the stocks that "should" have more chance of going up.



sinner said:


> Right so this is a system which derives its alpha from well known, well researched and documented factors such as value premium or liquidity, or some combination thereof. Except this is precisely the thing you've not shown, just some technical trading rules optimised for a hindsight adjusted universe which seems to juice returns but really only because it's buying dips (i.e. long term mean reversion) on known survivor stocks and switching to short term mean reversion in high volatility regime (where 6 month momentum is negative).




Yep, the basket of stocks is derived from well researched and well documented factor that should generate alpha, you can use the Ready2Go portfolios as a short cut or DIY. Then we apply a system which is shown to work on stocks like this to get us into and then out of the market, a system that makes money from buying dips or breakouts from consolidations..no rocket science here. Let's cover Alpha below.




sinner said:


> Oh wait, I forgot you also spruiked Portfolio 123.




Yep! Portfolio123 is an excellent product, it can give you a real edge in the market and it backtests fundamentals, other similar products do not do backtests on the screening technique or fundamental (quant) criteria so how can you possibly beleive that the screens are likely to give you an edge or generate alpha.. you can't which makes Portfolio123 so good. Don't see a problem with "spruiking it". Thanks for giving me another opportunity.




sinner said:


> Don't you mean to say here, that the whole point for this series of postings is to add broker friendly overlay to overtrade an otherwise simple and existing quantitative fundamental analysis? You have provided exactly ZERO evidence that the technical overlay adds any alpha to well known quantitative fundamental analysis. To make matters worse, the technical system provided is completely arbitrary (i.e. apparently a stock with RSI at 26 is horrible and shouldn't be bought but a stock with RSI at 25 is a great buy).




No, my intention is twofold, one we've already covered (the commercial motive), the other to draw people attention to stock selection and it's importance.

I concede there is no evidence to show the technical system adds extra alpha. All it provides is an alternative for getting into and out of the market to simply buying or selling at US open at the beginning of the week.

What I have provided is evidence that the technical system does indeed make profits on stocks with a long term upward bias and hopefully these are the stocks being selected using the P123 screens, R2G models, DIY models etc.

Your other point about RSI. It's an entry rule, something to make you take action, the RSI rule gets you in on a dip. If a breakout occurs before the dip you buy on a stop, which-ever occurs first. More trades were entered into from the RSI rule than the breakout rule.

Fail to grasp your point on your RSI comment when clearly the fundamental overlay/stock selection is what makes the stock a great buy.



sinner said:


> This is complete nonsense. Please explain how Intel at IPO is a valid stock for any form of reasonable testing, simply because it's a current constituent of the S&P 100? Out of the 30 year backtest, for exactly how many weekly periods was CISCO a "value stock" which would have shown up in any of the screens?
> You are fooling yourself. Please stop stating nonfactual statements as factual, in case someone who doesn't know any better falls for it.




Talk about miss the point Sinner, for up-tenth time....blah blah blah, I am not even going to repeat myself. It is completely valid because the stock being traded with the P123 basket might have recently been an IPO. The system clearly makes money on stocks that go up because it buys dips. It will lose during bear markets and on stock that go down. This can be handled from the Portfolio123 side. The basket of stocks goes to cash during down periods for whatever reason.





sinner said:


> and yet instead of providing a backtest based on a universe suitable for the system, you generated a charlatan backtest and claimed it tested 100 stocks for 30 years and this proves how robust it is.




Definately a bad choice of words. To be fair I rushed the back-test because of prior comments however I did mention survivorship bias was an issue and you've made your thoughts pretty clear on that and I've made my point about it, you think it is of utmost significance.


Here's the exact same system rules back-tested on the current stocks listed in the Russell3000 tested back to 1995 where data is available.


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## nulla nulla (21 October 2013)

I'm curious. Can you run the same back test on the shares making up a single sector within the all ords and produce a summary of results similar to the above. For instance the S&P/ASX 200 Property Trusts (XPJ) for the period January 2009 to September 2013, using only those shares listed as at today (don't get bogged down on mergers/acquisitions/restructures etc) trading parcels of $10,000.00??


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## skyQuake (21 October 2013)

To deal with survivorship bias, why don't u run a backtest on say S&P100 constituents from late 2000 - see attached.

View attachment SP100 Index 2000.xls


Have S&P 500 constituents too back to 1990.


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## Gringotts Bank (21 October 2013)

skyQuake said:


> To deal with survivorship bias, why don't u run a backtest on say S&P100 constituents from late 2000 - see attached.
> 
> View attachment 54839
> 
> ...




^^ This is the obvious solution.  Doing this will put an end to the arguments and show us how significant survivorship bias is.  Overlay the first equity curve with the survivorship-free equity curve, so we can get a quick visual.


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## zipzap (22 October 2013)

Thanks Skyquake and Gringgotts, I'll set this up and post the results. Nullanulla I can probably do the ASX property trusts as well. If Trade Navigator has the data the tests can be run.

ZZ..


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## zipzap (22 October 2013)

Results as follows on a stock by stock basis where Trade Navigator supplies the data. Other software like Multicharts or Amibroker that accepts third party data would need to be used for testing those stocks that do not exist anymore. Results 2000 onwards.




Next Page


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## nulla nulla (22 October 2013)

If it helps, perhaps you could reduce the back test to the following extract from the property sector:


*	Share	*  *Code*    *	Abacus Property	*  ABP  *	Australand Property	*  ALZ  *	BWP Trust	*  BWP  *	Challenger Div	*  CDI  *	CFS Retail Trust	*  CFX  *	Charter Hall	*  CHC  *	Charter Hall Retail	*  CQR  *	Commonwealth_Office	*  CPA  *	Cromwell	*  CMW  *	Dexus	*  DXS  *	Federation Centres	*  FDC  *	FKP Stapled	*  FKP  *	Goodman Group	*  GMG  *	GPT Group	*  GPT  *	Investa Office	*  IOF  *	Mirvac Group	*  MGR  *	SCA Property Group	*  SCP  *	Stockland Property	*  SGP  *	Westfield	*  WDC  *	Westfield Retail	* 	WRT	

From January 2009 to September 2013 and $10,000.00 trades.


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## zipzap (23 October 2013)

Technical System on ASX Property Trusts. From 2005 to now.


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## Caveroute (23 October 2013)

nulla nulla said:


> If it helps, perhaps you could reduce the back test to the following extract from the property sector:
> 
> 
> *	Share	*  *Code*    *	Abacus Property	*  ABP  *	Australand Property	*  ALZ  *	BWP Trust	*  BWP  *	Challenger Div	*  CDI  *	CFS Retail Trust	*  CFX  *	Charter Hall	*  CHC  *	Charter Hall Retail	*  CQR  *	Commonwealth_Office	*  CPA  *	Cromwell	*  CMW  *	Dexus	*  DXS  *	Federation Centres	*  FDC  *	FKP Stapled	*  FKP  *	Goodman Group	*  GMG  *	GPT Group	*  GPT  *	Investa Office	*  IOF  *	Mirvac Group	*  MGR  *	SCA Property Group	*  SCP  *	Stockland Property	*  SGP  *	Westfield	*  WDC  *	Westfield Retail	* 	WRT
> ...




Results attached, Jan 09 to early 2013. 

Code used:

SetOption( "InitialEquity", 200000 );
SetOption( "commissionmode", 2 );
SetOption( "CommissionAmount", 30 ) ; // make 5
SetOption( "allowsamebarexit", False) ;

SetTradeDelays( 1, 1, 1, 1 ) ;


Buy_Cond1 = C < SAR(0.01,0.2) AND RSI(4) < 25 ;

Buy_Cond2 = Ref(C < SAR(0.01,0.2), -1) AND Ref(H,-1) > Ref(HHV(H,15),-2) ;

Buy =   buy_cond1 OR buy_cond2 ;

BuyPrice = O ; // IIf(Cond1, O, HHV(H,15)) ;   //AND Ref(intrade_L,-1) == 0 ;

Sell_Cond1 = Ref(SAR(0.01,0.2) < C, -1 ) AND C < SAR(0.01,0.2 ) ;

Sell_Cond2 = Foreign ("XJO","Close") < Ref( Foreign ("XJO","Close"),-100) AND C < SAR(0.01,0.2 ) ;

Sell = Sell_cond1 OR Sell_cond2 ;

SellPrice = O ;


SetPositionSize( 10000,  spsValue );

Not sure if the proposed  ticker set qualifies as a "123" group, whose population will change over a period of time.


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## Gringotts Bank (23 October 2013)

Yikes caveroute that's one ugly equity curve.

Can you also run it on the S&P500 stocks please? (with the earlier constituent list that Skyquake provided).


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## sinner (23 October 2013)

Still waiting for a backtest from which even remotely useful conclusions can be drawn...

Not much point of the OP backtest against the S&P100 constituents from 2000 with only the survivors included. I can't be bothered counting out the rows of the chart, how many stocks are even tested?

Since AFL code has been posted, I'll also add that Frank Hassler from Engineering Returns is offering his AFL survivorship code (data not included, PremiumData recommended) originally for a $500 UNICEF donation but I think these days you just have to email him (second link)

http://engineering-returns.com/2010/09/02/the-impact-of-survivorship-free-backtesting/
http://engineering-returns.com/2011/02/07/test-your-trading-strategies-survivorship-free/


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## tech/a (23 October 2013)

How can you have a survivorship code if your data doesn't hold the stock
IE it's delisted or had it's name changed.--- 
Are you saying Premium data have all of these going back 30 yrs


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## nulla nulla (23 October 2013)

zipzap said:


> Technical System on ASX Property Trusts. From 2005 to now.
> 
> View attachment 54873




Hi ZZ

Thank you for the effort. Unfortunately if you include the period from November 2007 to January 2009, the outcome will be a disaster because this is when the world woke up to the level of leverage A-REIT's were using and the massive sell down that resulted throughout 2008. If it isn't too much trouble, it would be much appreciated if you could narrow the backtest down for the same shares as per your list for the period of January 2009 to September 2013. This was when most of the A-REIT's restructured, refinance and reduced their debt to arround 30% +/-.

If you could produce a summary table, per your earlier posts re the S&P200, as well it would be much appreciated.


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## sinner (24 October 2013)

tech/a said:


> How can you have a survivorship code if your data doesn't hold the stock
> IE it's delisted or had it's name changed.---
> Are you saying Premium data have all of these going back 30 yrs




Is this a serious question? Yes, you need the data. The code handles the data.


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## tech/a (24 October 2013)

sinner said:


> Is this a serious question? Yes, you need the data. The code handles the data.




Yeh its serious.
I was un aware that Premium data had the product which I believe has only been out about 18 mths.


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## zipzap (24 October 2013)

The survivorship bias issue is handled from the stock selection side as I've already mentioned. The system is just a way to enter and exit the market. My mistake with this thread was putting the cart before the horse, should have started with stock selection then moved on to entry and exit rules using technical analysis.

The success or failure of the entire method depends almost entirely on stock selection.

The main point of the backtests was to find a generic method that we could apply to the stocks we choose from our screening method that would make money, assuming the screening method isolates stocks that are likely to outperform the index.

To be exact with the testing and historical hypothetical performance we'd need to run a back test on the screening technique first so we have a list of stock and the dates upon which they entered and exited the basket historically and then backtest the technical system on the evolving basket over the historical period.

For most of us and for the average person it is to time consuming and beyond most peoples skill level so I've made a number of assumptions and taken some short cuts.

1. By testing on a wide range of stocks we can safely conclude that the technical system is profitable on stocks with an upward bias. It is an appropriate method where the same rules can be applied to each and every stock that enters our stock trading basket There were 251,000 trades in the Russell3000 test and 18,000 trades on the S&P100. Yes the stocks have an upward survivorship bias but I'm ok with that as I am handling this problem from a different angle.

2. I showed the quick and easy way to pick stocks that are likely to outperform the market, it takes out the time consuming part of building your own custom stock selection method in Portfolio123, learning the software and back-testing the screening criteria and taking advantage of other peoples expertise.

3. By combining the stock selection from the stock baskets used in the Ready2Go models in P123 with a technical system that makes money from stock showing an upward bias we should have a method that makes money in the future.

I think it is pretty safe to conclude that this entire method has a good chance of making money.

Personally, with my trading hat on, that is what I care about....

We haven't even touched upon risk management yet and I've only briefly discussed the stock selection methods so there is still plenty to talk about.


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## zipzap (24 October 2013)

ASX Real Estate 09 to now...  again please refer to my previous post...




and equity curve





Perhaps with future posts I can create a custom stock screen or portfolio in portfolio123 then what I can do is test on those constituents over the historical period, maybe with an annual re-weighting to save time for a more accurate historical performance on that particular stock basket... that will take a lot of time however but it will show whether additional alpha is generated from the entry and exit rules.


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## Caveroute (24 October 2013)

zipzap said:


> The survivorship bias issue is handled from the stock selection side as I've already mentioned. The system is just a way to enter and exit the market. My mistake with this thread was putting the cart before the horse, should have started with stock selection then moved on to entry and exit rules using technical analysis.
> 
> The success or failure of the entire method depends almost entirely on stock selection.
> 
> ...




To be exact with the testing and historical hypothetical performance we'd need to run a back test on the screening technique first so we have a list of stock and the dates upon which they entered and exited the basket we going to be trading and then backtest the technical system on the evolving basket over time.

Precisely. 

If you can give me an excel/csv file in this format:
Ticker, Date, O,H,L C, Rank
Where rank is used to represent the most favourable precedence in the basket.
So, if we have 10 tickers, with 250 days per year, for 3 years, that represents 10*250*3 rows per ticker. Rows within a ranking window will have the same rank value, once we have performed a ranking assessment they are modified thru to the next window. So, if we have 12 months of data and rank weekly, there will be 52 different ranking groups. 
To do this export whatever data source you have into excel and somehow add the rank value. 
Then I can:
Load the data into a new AB database
Use rank to drive the AB position score algorithim - which means I add one line in my code and AB will buy based upon available capital, position size and highest rank. 
Generate results based on ranking changes within the basket
Let any inflight trades die a natural death according to the rules we already have. 

I think this will work, but you never know until you try.


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## craft (24 October 2013)

zipzap said:


> To be exact with the testing and historical hypothetical performance we'd need to run a back test on the screening technique first so we have a list of stock and the dates upon which they entered and exited the basket historically and then backtest the technical system on the evolving basket over the historical period.




YEP and then you need to compare against just holding the stocks and see if the trading overlay (after slippage, transaction costs, dividends  and tax implications) adds any extra return.

Until you prove the overlay adds value with a robust comparison, the prudent assumption (and my expectation) is that it doesn’t add any value.

A simpler way to test the overlay may to be take the strongest 10 stocks that have remained in the S&P 100 over the last 10 years and compare the overlay against just holding outright.  The selection would be based on hindsight of strength but that doesn’t matter because you are just trying to isolate if the overlay adds value to a buy and hold based on another system that targets strong stocks.

Not sure why though we are so bogged down on a trading overlay when you are indicating that the majority of the result is due to stock selection.  You obviously want to plug portfolio123 here for that job, so I reckon sling a few advertising bucks to the appropriate person and spruik your hart out. I’m interested in hearing the nitty gritty of what it has to offer but am not motivated to take the trial yet. (specifically interested in how much of the underlying data for conducting the fundamental system tests is visible and could be scrapped to excel etc)


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## nulla nulla (24 October 2013)

zipzap said:


> ASX Real Estate 09 to now...  again please refer to my previous post...
> 
> View attachment 54896
> 
> ...




Thank you for the above.  

1. In regard "concurrent trades" does the back test identify all the possible trades across the nominated shares or is there a first come first entered criteria determined by the remaining funds in your trading pool? 

2. Does the program record the time the trade runs for (number of days) and can the program determine the average holding time across all trades?

3. Can the back test program extract a list of trades per individual share (entry/exit dates, entry/exit price etc).

4. Does the back test program factor in the entitlement to distributions/dividends in the result? Where a trade is active through the period where a stock goes ex-div, although the stock going exdiv would probably trigger a stoploss sell on the exdiv date the investor would still be entitled to the div?

thanks & regards

nulla


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## zipzap (24 October 2013)

nulla nulla said:


> 1. In regard "concurrent trades" does the back test identify all the possible trades across the nominated shares or is there a first come first entered criteria determined by the remaining funds in your trading pool?




The backtest takes all possible trades with $10k allocated to each trade, you could potentially be in every stock on the list at the same time.



nulla nulla said:


> 2. Does the program record the time the trade runs for (number of days) and can the program determine the average holding time across all trades?




Yes, see below:




Pm me and I can send a txt file of every trade.



nulla nulla said:


> 3. Can the back test program extract a list of trades per individual share (entry/exit dates, entry/exit price etc).




Yes, see above.



nulla nulla said:


> 4. Does the back test program factor in the entitlement to distributions/dividends in the result? Where a trade is active through the period where a stock goes ex-div, although the stock going exdiv would probably trigger a stoploss sell on the exdiv date the investor would still be entitled to the div?




No dividends are included with the tests in Trade Navigator.

p.s. ignore the label of the entry in the table above, it is not accurate and has nothing to do with bollinger bands...


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## sinner (24 October 2013)

zipzap said:


> No dividends are included with the tests in Trade Navigator.




Yeah I guess if you're going to produce an invalid backtest, you might as well go the whole hog and use the least useful data you can get to really muddy those waters.



> Not sure why though we are so bogged down on a trading overlay when you are indicating that the majority of the result is due to stock selection.




The fact is that OP has explained away the part of the system he claims provides alpha through the Portfolio123 "black box". Anyone who wants to contend that fundamental factors add alpha can go and read all the papers on SSRN or even download the free Fama+French datasets to perform their own analysis.

So have we gotten bogged down in the overlay or is it the only thing being discussed because it's actually the only thing OP has provided insight into? So far the thread has gone something like this:

OP: Hey! Awesome! Stats! 
Me: Those stats are rubbish and cannot certainly be used to verify Awesome.
OP: No they aren't! Because, black box.
*repeat*



> You obviously want to plug portfolio123 here for that job, so I reckon sling a few advertising bucks to the appropriate person and spruik your hart out. I’m interested in hearing the nitty gritty of what it has to offer but am not motivated to take the trial yet. (specifically interested in how much of the underlying data for conducting the fundamental system tests is visible and could be scrapped to excel etc)




There is a great book out there "Quantitative Value", I paid about $50 on Amazon for it, full nitty gritty on the strategy the guys who wrote it run their fund with. There is a free website (http://alpha.turnkeyanalyst.com) for their screener (along with a couple of extra quantitative screens and forecast tools thrown in) with backtest data (including Fama French factor backtests) going to 1970, built on CompuStat data. If you've read that book, use their website and read say, Mebane Fabers seminal paper on the 200 day SMA trading rule (free on SSRN or on his website) or similar papers on "Absolute Momentum" then you are at least on par if not far far ahead of what P123 could possibly offer.

EDIT: If you don't want to buy the book, almost every section of it was originally posted as blogposts on greenbackd.com


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## craft (24 October 2013)

sinner said:


> There is a great book out there "Quantitative Value", I paid about $50 on Amazon for it, full nitty gritty on the strategy the guys who wrote it run their fund with. There is a free website (http://alpha.turnkeyanalyst.com) for their screener (along with a couple of extra quantitative screens and forecast tools thrown in) with backtest data (including Fama French factor backtests) going to 1970, built on CompuStat data. If you've read that book, use their website and read say, Mebane Fabers seminal paper on the 200 day SMA trading rule (free on SSRN or on his website) or similar papers on "Absolute Momentum" then you are at least on par if not far far ahead of what P123 could possibly offer.
> 
> EDIT: If you don't want to buy the book, almost every section of it was originally posted as blogposts on greenbackd.com





Sinner

Thanks for the lnfo/limks however the turnkey link just goes to a login screen.

I’m thinking, If P123 is white label access to CompuStat data then it could be useful. All depends on whether the data required for the back testing is visible/accessible or not. Waiting on ZZ to clarify.  To date I’ve only found decent historical  fundamental data in expensive institutional platforms.


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## zipzap (25 October 2013)

RRRrrrrRRRRrrrrRRRRrrr, the self appointed forum police is back on the case. Sinner, I would suggest you have an in-depth look at Portfolio123 so you can provide in informed opinion, it' a very powerful program.

And, in case you didn't read earlier posts, when I get a spare few hours I'll be posting more detail on P123 and what it can do.


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## zipzap (25 October 2013)

In the next group of posts I am going to demonstrate how fundamental data can be used for isolating a group of stocks to trade based upon a combination of fundamental and technical considerations.

The first step is to build a ranking system

For this post we'll have a look at some valuation factors and see if they can improve performance on the stocks we are trading.

These tests include survivorship bias, dividends etc and all of the other things required for an accurate test by the forum police..

These tests divide the stock universe, in this case all stocks listed in the United States that have fundamental data into 10 buckets. Each stocks receives an equal weighting in the tests.

In the first test we'll look at Price to Sale ratios and see if lower price to sales ratios generate alpha.

Pr2SalesTTM
Price to Sales Ratio, TTM
Category
RATIOS & STATISTICS / VALUATION
Ranking Default
 When this factor is used in a ranking system stocks with lower values will get higher ranks
Full Description

This is the current Price divided by the Sales Per Share for the trailing twelve months. If there is a preliminary earnings announcement for a quarter that has recently ended, the revenue (sales) values from this announcement will be used in calculating the trailing twelve month revenue per share.

NOTE: Most Banks and Finance companies do not report revenues when they announce their preliminary quarterly financial results in the press. When this happens, the trailing twelve month values will not be available (NA) until the complete quarter is released. 




Performance Graphs for each bucket.




The conclusion with this single factor ranking system show stocks with lower price to sales ratios tend to perform better than stocks with higher price to sales ratios. Note the testing reweights the bucket every 4 weeks.

Later on we'll be using these ranking system for stock selection in the stock screens we'll look at and or/portfolios we create..

In the next post we'll look at Price to Projected Earnings.


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## zipzap (25 October 2013)

This is another single factor ranking system which looks at Projected PE ratio.

The first graph below ranks the stocks in the universe into 5 groups, from highest PE ratio to lowest PE ratio and then breaks the list into 5 baskets showing the average return for each.




Again the basket showing the highest return comes from those stocks with the lowest projected PE ratio with an average annual return around 15% compared with the S&P500 at circa 3%. Below is the performance graph for each basket.




Next we'll look at some multi-factor ranking systems to see if returns increase from looking at more than one factor.

An example might be a valuation factor like PE ratio combined with an earnings surprise or even perhaps a growth forecast.


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## sinner (25 October 2013)

craft said:


> Sinner
> 
> Thanks for the lnfo/limks however the turnkey link just goes to a login screen.




Free signup link is directly below the login button.



> RRRrrrrRRRRrrrrRRRRrrr, the self appointed forum police is back on the case. Sinner, I would suggest you have an in-depth look at Portfolio123 so you can provide in informed opinion, it' a very powerful program.




If you feel like anything I'm stating is incorrect or nonfactual in any way, feel free to report it to the actual forum police so they can take a look. For the record, my opinion is very informed, you won't catch me posting on this forum unless it's to learn something or to discuss something on which I have an informed opinion.



> In the next group of posts I am going to demonstrate how fundamental data can be used for isolating a group of stocks to trade based upon a combination of fundamental and technical considerations.
> 
> The first step is to build a ranking system
> 
> ...




So how much of this portfolio alpha is due to the "Monday effect" and "equal weight" phenomenons and actually have nothing to do with P/S ratio (which is *easily* the most industry specific - and therefore least robust across a broad basket - of the value factor ratios)?

Have you even bothered to check? Seems like a lot of Monday effect to me. Seems like you are fooling yourself on multiple levels here.


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## sinner (25 October 2013)

From what I can see in the chart, the return from end of '99 until end of 2011 is approx ~450%.

Here is the return from the equal weight CRSP portfolio over the same duration. As you can see the R^2 is very high and return is only ~100% less (depending on the day you pick). 

So how much of your portfolio returns are actually do to picking the cheapest P/S quintile? Only approximately a quarter of the total returns, at best, if you're completely discounting the Monday effect.




EDIT: This portfolio is actually rebalanced annually, so my guess is if you rebalanced it monthly it would probably return closer to the equity curve as shown by the OP.  So is the OPs alpha really derived from fundamental quantitative factors, or (much more likely) simply because he hasn't realised that equal weighting positions tends to provide a "free diversification lunch".


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## zipzap (25 October 2013)

Speeding up the process... In the table below I have run a test which includes a 2 factor ranking system combining a Valuation factor with a Growth Factor (called Sustainable Growth%) and run an optimisation which looks at each valuation factor individually with the Growth factor to see what valuation factor combines well with growth.

The value factors are shown below

PEExclXorTTM (Price to Earning Excluding Extraordinary items current)
Pr2FrCashFlTTM (Price to Free Cash Flow , Current)
EarnYield (Earning Yield)
PEG (PE Growth Ratio)
Prc2SalesIncDebt (Price to Sales Including debt current)
Pr2TanBkQ (Price to Tangible Book Value Current)
Pr2BookQ (Price to Book Current)
Pr2SalesTTM (Price to Sales)

The Growth Factor

Sustainable Growth %




Looking at the tables the Earnings Yield combined with Sustainable Growth % worked well with the best percentile showing a 17% return. the price to sales combined with growth seemed to work the least well, but the numbers still look reasonable.


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## zipzap (25 October 2013)

Interesting stuff Sinner, was going to mention that generally an equally weighted benchmark outperforms a capital weighted bench mark and that shows through in a lot of the screens, especially in those tests where all percentiles outperform the benchmark for that very reason..

Anyway will carry on with these self deluding tests, please excuse my ignorance.


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## craft (25 October 2013)

ZIPZAP

Is the historical raw data that the tests are running off visible/accessible to subscribers?


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## sinner (25 October 2013)

zipzap said:


> Interesting stuff Sinner, was going to mention that generally an equally weighted benchmark outperforms a capital weighted bench mark and that shows through in a lot of the screens, especially in those tests where all percentiles outperform the benchmark for that very reason..
> 
> Anyway will carry on with these self deluding tests, please excuse my ignorance.




Wait, so you actually understand what I'm describing, but you specifically didn't mention it?

Why not?

Seems awful misleading to me.


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## McLovin (25 October 2013)

craft said:


> ZIPZAP
> 
> Is the historical raw data that the tests are running off visible/accessible to subscribers?




There's a video on the website of the system and it appears no.


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## zipzap (25 October 2013)

sinner said:


> Wait, so you actually understand what I'm describing, but you specifically didn't mention it?
> 
> Why not?
> 
> Seems awful misleading to me.




Sinner, you're clutching at straws...

How do you explain the increased returns as we work up the percentiles?

Also if you were to choose a valuation factor, which one/s would you choose and how would you compute the number and how would you adjust it?

Craft, you cannot export the data, however you can use the data with a program called Quantshare and maybe you can export it through that, not sure.


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## sinner (25 October 2013)

zipzap said:


> Sinner, you're clutching at straws...
> 
> How do you explain the increased returns as we work up the percentiles?




LOL very simply as a poor use of arithmetic averages to hide the facts?

If you take even a cursory glance at the P/S equity curve you can plainly see that the outperformance is not systematic across quantiles and as a matter of fact the "cheapest" quantile underperformed the second cheapest quantile until 2008 when the FASB Mark to Market rules were suspended and replaced with Mark to Unicorn. So it is very very easy to verify my statement that P/S is not robust valuation when you are working across multiple industry sectors *because you can see it right there in the chart*.

So, by the same token, OP can you please explain for those who don't know, why the return for the second cheapest P/S quantile was higher than the cheapest quantile until 2008? Having read the Shiller paper where he uses momentum to discard "value trap" sectors and the work of Eric Falkenstein on his defProb default model, I understand pretty thoroughly exactly why this is the case. Do you?

The P/E quantiles (even though you didn't include equity curves for all) are generally explained by a behavioural bias rather than actual fundamental pricing matter, and that behavorial bias is actually one you are falling for by suggesting a "Growth Factor" screen should be added in.



> Also if you were to choose a valuation factor, which one/s would you choose and how would you compute the number and how would you adjust it?




It absolutely depends on the market, industry and index in question. At the macro level I am using CAPE balanced equally with MV/GDP, and "future 10Y returns" to build a least squares linear regression for forecast purposes (similar to as seen on alpha.turnkeyanalyst.com except I made my own version with multiple inputs not just CAPE), at the single name level I am using EBIT/TEV as defined in "Quantitative Value".


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## sinner (25 October 2013)

I have also found this paper to be inspiring but done no specific work to implement or test (yet):

papers.ssrn.com/sol3/papers.cfm?abstract_id=2051101


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## zipzap (26 October 2013)

This is all very academic however at least you are prepared to provide some valuable contributions which is good and probably adds value to this thread. I am going to try to work through your comments.

1. Survivorship bias - the data being used (S&P Compustat Point in Time database) includes survivorship bias so I hope that is sufficient. More detail can be found in the message board for the product on this issue.

2. Equal weighted portfolios show a higher return than capital weighted indices in general so this needs to be considered in results. However I might add it odesn't really matter, we are scanning for stocks that will hopefully generate a reaosnable equity curve so as long as we get there, that is more important than being to academic about it. Still it is important to isolate where the added returns are coming from. However difficult to quantify with the ranking system, one way it could possiblt be done is to run another ranking system which only includes those two items although you'd still need something to rank the stocks in some sort of order rather than looking at everything in aggregate... For me, if each quartile gets stronger with the particular ranking system being used it could possibly indicate some sort of bias.

3. When benchmarking need to compare apples with apples, one problem onwith the ranking system is that it will only benchmark against the S&P500 index and I am testing on all US stocks with adequate fundamental data available for testing. Once I get to using the ranking system in a stockscreen or Portfolio simulation any benchmark can be used but from a strictly acedamic standpoint (and I'm no academic... so I'm not going to win debates on that front) this probably isn't ideal.

4. Monday effect... not sure how this plays a part when the ranking system assumes 100% invested at all times and when re-weighting stocks are sold and purchased at the same time (Mondays open). The index itself should also reflect a Monday bias if that is the case... I might add that I am aware of some of these effects, many of my futures systems take advantage of end of month rallies, first trading day of the month effect and other seasonal biases. I never really found the Monday effect to be particularly strong, but must admit my Dax system favours Monday and Tuesday over other days for getting long.. anyway off topic...

5. Small cap stocks have outperformed larger cap stocks over time so that probably account for some additional outperformce in the ranking system. Leter when we benchmark against the right index through the Portfolio simulator or stock screen back test we can address this.

6. When comparing the tests I am running here and say the academic ones mentioned, bear in mind that the data sets being tested on might be different so I daresay that will account for some of the differences in results, other than my ignorance.


I want to make the comment that in order to be a trader or investor it's about generating profitable ideas and you don;t need to be an academic to do that. Yes, supporting the idea with a premise is very important. 

I might also mention that P123 is used in some United States Universities and has a strong academic following, the problem here, from Sinners persepctive is more likely me and my use of it rather than the program itself... Sinner I would suggest you actually look into the program first, are you attempting to discredit me or more specifically my use of the program or the program itself? Let's get clear on that.

Sinner, I'll move on to your comments in your previous post in my next post.. got to go back and see what they are.. I actually don;t think we are that far apart, in fact you're more knowledgeable than me with this type of analysis so keep posting, it's making me step up and go back and check things as well.


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## zipzap (26 October 2013)

sinner said:


> LOL very simply as a poor use of arithmetic averages to hide the facts?




I'm not sure I agree with this, it's a very convenient comment so please ellaborate.

From my perspective, the testing is simple enough, rank all stocks from 1-about 1500 (there are about 1500 stocks in the universe being tested) based upon the valuation criteria and then break it into five baskets are re-weight the basket once per month. The baskets showing the lowest value criteria showed steadily increase outperformance as we moved along the percentiles. How can you explain this in terms of Monday effect and equal weighting effect when that should show an equal weight for each basket. I might actually run this test and we can use that return as the benchmark rather than the index.



sinner said:


> If you take even a cursory glance at the P/S equity curve you can plainly see that the outperformance is not systematic across quantiles and as a matter of fact the "cheapest" quantile underperformed the second cheapest quantile until 2008 when the FASB Mark to Market rules were suspended and replaced with Mark to Unicorn. So it is very very easy to verify my statement that P/S is not robust valuation when you are working across multiple industry sectors *because you can see it right there in the chart*.




That's fine and thanks for the info, I was illustrating the program, the test also suggested other valuation criteria showed higher returns. 



sinner said:


> So, by the same token, OP can you please explain for those who don't know, why the return for the second cheapest P/S quantile was higher than the cheapest quantile until 2008?




Maybe the testing was run on different data, I certianly did not adjust for moment, although this can be done. The results were run from 99-Now so perhaps if the test was just run through to 2008 it would show similar results to those you've mentioned in your next comment. Seriously..do you want me to run the same test but only to 2008..I can do this.



sinner said:


> Having read the Shiller paper where he uses momentum to discard "value trap" sectors and the work of Eric Falkenstein on his defProb default model, I understand pretty thoroughly exactly why this is the case. Do you?




I have not read the Shiller paper nor Eric Falkenstein so your understanding is obviously far better than mine. In terms of avoiding the value trap this could be accomplished by creating a multifactor model such as shown below. You would actually be a pretty expert user of the softaware straight away with your undertstnading of fundamental stock screening and quant analysis as you are already aware of some of the pitfalls etc and know what to look for already.




And the parameters tested.






sinner said:


> The P/E quantiles (even though you didn't include equity curves for all) are generally explained by a behavioural bias rather than actual fundamental pricing matter, and that behavorial bias is actually one you are falling for by suggesting a "Growth Factor" screen should be added in.




Maybe, however my spproach is to test any number of combinations to see if they add value, if it doesn't discard it and move on. Your backghround research certainly would help in building a good ranking system and.  This also helps me form a view on the different aspects that combines well together..the downside it is is very time consuiming. At this early testing stage this was more about showing some of the things we can look at as opposed to falling for a value trap.



sinner said:


> It absolutely depends on the market, industry and index in question. At the macro level I am using CAPE balanced equally with MV/GDP, and "future 10Y returns" to build a least squares linear regression for forecast purposes (similar to as seen on alpha.turnkeyanalyst.com except I made my own version with multiple inputs not just CAPE), at the single name level I am using EBIT/TEV as defined in "Quantitative Value".




Thanks for this, it appears a lot of what you mention is covered from the site you've provided links for.. We can test EV/EBIT or EBIT/TEV etc but it's difficult (but possible, just takes time to get it right) to build a ranking system on these but it requires a multifactor approach and the elimination of some of the companies (with an EV/EBIT <say 3 or above say 10 (EV/EBIT)) which distorts the ranking system. Attached is a default one that include EV/EBIT.




Graph


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## craft (26 October 2013)

zipzap said:


> I might also mention that P123 is used in some United States Universities and has a strong academic following, the problem here, from Sinners persepctive is more likely me and my use of it rather than the program itself... Sinner I would suggest you actually look into the program first, are you attempting to discredit me or more specifically my use of the program or the program itself? Let's get clear on that.




I’ve had a bit more of a look trying to work out the data visibility question and although the data is not visible the software looks like a pretty impressive bit of kit.

Whether a fundamental system developed on historical data is robust going forward has all the same issues as price driven systems and I’m staying out of that debate.

However as a fundamental data back tester and a scanner for candidates to investigate further goes, it looks pretty good.  (Damn site better and more transparent then another piece of junk being flogged in AUS)

ZZ is every stock on the ASX included in the database?


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## zipzap (26 October 2013)

Hi Craft, at this stage it is only for US equities. Adding ASX would be a 4-6 month project and costs $$ but well worth it in my opinion.. however to answer your question it only does US stocks at the moment.


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## nulla nulla (26 October 2013)

zipzap said:


> Rightio, so let's have a look at stock selection. To do this I use Portfolio123 so we're going to focus on US shares.   www.portfolio123.com.au . Btw I am getting ASX and NZX shares added to Portfolio123 so stay tuned.






zipzap said:


> Technical System on ASX Property Trusts. From 2005 to now.
> 
> View attachment 54873






zipzap said:


> Hi Craft, at this stage it is only for US equities. Adding ASX would be a 4-6 month project and costs $$ but well worth it in my opinion.. however to answer your question it only does US stocks at the moment.




okay i'm getting confused here... In your early posts, you are in the process of adding the ASX and NZX shares, then you run a test on the REITs' for me (thanks) then it is "only US equities". 

As suggested I emailed you about getting the output of the actual trades making up the earlier summary report, in excel format rather than txt, so I could assess the individual shares involved. I felt this would be beneficial in the share selection process. 

Are you able to provide an excel output of the REIT trades referred to in your summary? 

thanks & regards

nulla


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## zipzap (28 October 2013)

nulla nulla said:


> okay i'm getting confused here... In your early posts, you are in the process of adding the ASX and NZX shares, then you run a test on the REITs' for me (thanks) then it is "only US equities".
> 
> As suggested I emailed you about getting the output of the actual trades making up the earlier summary report, in excel format rather than txt, so I could assess the individual shares involved. I felt this would be beneficial in the share selection process.
> 
> ...




1. Nulla, the screening software/portfoliobuilder P123 only does US equities, the technical overlay I programmed in Trade Navigator so can be applied to any stocks if you have the data.

Draw the dinstinction between the program we are using to select the stocks to trade (P123) (only does US equities)

The software I programmed the technical system into (Trade Navigator) (Has ASX data) which would be used for entering and exiting the stocks chosen above using the technical rules I spelt out.

2. You can open a .txt file in Excel ...so not sure what the problem is.

Cheers
ZZ...


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## nulla nulla (28 October 2013)

zipzap said:


> 1. Nulla... You can open a .txt file in Excel ...so not sure what the problem is.
> 
> Cheers
> ZZ...




Okay, email me the .txt file then when you get a minute.

cheers


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## sinner (30 October 2013)

My final 2c on this, because I'm tired of saying the same crap over and over:

* OP wants you to think his trading method is robust, but has provided no actual proof. Anything presented as proof I have highlighted why it's misleading from multiple angles and OP has made 0 effort to address any of these concerns realistically.

* OP wants you to think simply applying a fundamental screen is some form of recipe for success, even though the fundamental screens have all underperformed the market cap benchmark since 2009 lows and OP hasn't bothered to demonstrate that his technical overlay adds even 0.01% of alpha to these screens which are generally designed for *low turnover* institutional portfolio.

* OP wants you to use a paid-for black box, with no guarantees on business or data longevity, as your source for the fundamental screens. He hasn't exactly made it clear if he has any commercial arrangement with the providers of the magic black box. If you have ever bothered to read the work of Seth Klarman one of the greatest value investors of all time (especially his opinion on what differentiates an investor from a speculator) then this sort of hand-waving will raise red flags for you. The difference between "trading sardines" and "eating sardines".

* OP has a trading business, and has a vested interest in convincing you that he is smart, capable and you will make money together by combining his "high churn" technical overlay with simple low turnover portfolios, without providing any actual evidence thereof. My feeling is that his intelligence and capability are entirely focused on his own pockets, not yours.

* So far every single issue I have raised on this thread, OP has claimed to know about, but conveniently forgot to mention it until someone else called it out.

I'll leave you guys to exercise your faculty of critical thinking and decide what the go is here.


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## Gringotts Bank (30 October 2013)

Sinner, while you're there, do you know any good info on rotational trading in blue chip stocks/ETFs?


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## Kaizen (30 October 2013)

Gringotts Bank said:


> Sinner, while you're there, do you know any good info on rotational trading in blue chip stocks/ETFs?




Simple:
1. Rank each stock in your universe (AS300 or whole market) I find whole market better as trends are normally outside the ASX300
2. Filter for liquidity
3. By the top 5 by your momentum measure.
4. Rotate each two weeks or month to the new top 5. Hold any that are still in the top 5 sell and replace any that are not.

The only tricky part is #3.
I use long term momentum (i.e 252 days) I also punish for volatility because we want nice smooth trend not stocks that have gone up over night.

Have a cut off so you rotate to cash  when there are not stocks greater than you minimum momentum measure. This way you rotate to cash in bear markets.


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## Gringotts Bank (30 October 2013)

Kaizen said:


> Simple:
> 1. Rank each stock in your universe (AS300 or whole market) I find whole market better as trends are normally outside the ASX300
> 2. Filter for liquidity
> 3. By the top 5 by your momentum measure.
> ...




Thanks Kaizen.

I should start a new thread.  Can someone transfer to thread "rotational trading systems" so it doesn't sidetrack this thread.  Thanks.


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## zipzap (30 October 2013)

Sometimes you can lead a horse to water...


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## smallcapinvestor (1 November 2013)

zipzap said:


> Sometimes you can lead a horse to water...




Andrew,

I think that discerning and capital-flush investor with a critical eye will indeed look into you, your services and out-of-sample performance in addition to any backtest. I would not waste another moment trying to convice a two-bit heckler who likely lost money by following a free 'hot pick' newsletter service that merely wants to get revenge on every quant and strategist alive. The other alternative is that they have their own agenda and are simply putting others down so they seem good by comparison... a dangerous game to play.

Keep up the good work and thanks for creating low correlation trading products when compared to the average equity fund. I look forward to learning more about what you do. There is a lot of angry alpha males in the investment community who lost a lot of money and are trying to strut around showing off their peacock feathers to convince themselves and others that the market is rigged, they didn't lose their money making bad decisions and they are still a smart and discliplined investor.


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## nulla nulla (1 November 2013)

smallcapinvestor said:


> Andrew,
> 
> I think that discerning and capital-flush investor with a critical eye will indeed look into you, your services and out-of-sample performance in addition to any backtest. I would not waste another moment trying to convice a two-bit heckler who likely lost money by following a free 'hot pick' newsletter service that merely wants to get revenge on every quant and strategist alive. The other alternative is that they have their own agenda and are simply putting others down so they seem good by comparison... a dangerous game to play.
> 
> Keep up the good work and thanks for creating low correlation trading products when compared to the average equity fund. I look forward to learning more about what you do. There is a lot of angry alpha males in the investment community who lost a lot of money and are trying to strut around showing off their peacock feathers to convince themselves and others that the market is rigged, they didn't lose their money making bad decisions and they are still a smart and discliplined investor.




This post would have more credibility if it came from a long term member with an established reputation rather than being the first post of someone that joined the forum in the last 5 hours.


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## smallcapinvestor (1 November 2013)

nulla nulla said:


> This post would have more credibility if it came from a long term member with an established reputation rather than being the first post of someone that joined the forum in the last 5 hours.




If you want to take this to American forums where I have been a long-term member and you are not, I can do that too. But then again, nothing you say, regardless of backing, will be taken seriously until you wait for a few years to build your a forum track record. Or we could skip this high-school bullying and discuss strategy and content and keep it analytical and based on evidence.


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## Porper (1 November 2013)

nulla nulla said:


> This post would have more credibility if it came from a long term member with an established reputation rather than being the first post of someone that joined the forum in the last 5 hours.




Seconded. Is it just me or are we starting to get a lot of these "new guru's" joining the forum?

Hopefully members will have more sense than to believe a single word from these people without actual proof that a system works. You'll never see it though. Getting mates to join the forum or creating multiple accounts just doesn't hack it I'm afraid. Very transparent.


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## tech/a (1 November 2013)

Well Andrew I don't know why you bother.
Like you I don't mind informed and constructive 
Exchanges,but when it becomes a personal vendetta
To discredit----then your just wasting your time.

Best of luck going forward.


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## Joe Blow (1 November 2013)

Folks, I think this thread could have been a lot more constructive, and it's a shame. These sort of discussions are the type that this community is good at, and are what ASF is all about.

I'm all for robust, passionate debate. It keeps things interesting and injects new ideas and perspectives into the discussion, but please lets keep things both civil and constructive. Discuss and criticise ideas and methodologies, not each other. 

There is some good discussion and a lot of useful content in this thread, and I'm sure I'm not the only one who would like to see it continue.


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## nulla nulla (1 November 2013)

smallcapinvestor said:


> If you want to take this to American forums where I have been a long-term member and you are not, I can do that too. But then again, nothing you say, regardless of backing, will be taken seriously until you wait for a few years to build your a forum track record. Or we could skip this high-school bullying and discuss strategy and content and keep it analytical and based on evidence.




Belittling me for stating the obvious only serves to diminish the credibility of your earlier post further. 
At no stage have I demeaned the posts of zipzap, quite the opposite in fact. zipzap has very kindly provided me with a sample of data for specific shares for a predetermined period for my assessment. This information is presently being assessed and I will likely post the outcome of my analysis in this thread when I have finished. 
Further, I look forward to when zipzap posts his "Stock selection" criteria. The system outlined to date is very "scatterguned" and I'm sure the positive expectancy would be increased through a process of eliminating crappy stocks. This is not an endorsement of his stategy, I can already see some shortcommings but I am not convinced either way at this point. As always do your own research and good luck .


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## sinner (1 November 2013)

tech/a said:


> Well Andrew I don't know why you bother.
> Like you I don't mind informed and constructive
> Exchanges,but when it becomes a personal vendetta
> To discredit----then your just wasting your time.
> ...




What a joke tech/a, you constantly lambast people on here for using technical indicators in the way OP has proposed claiming they are useless, and in any gfiven thread you can be absolutely counted on to derail any FA discussion whatsoever. Yet when the famous OP comes along proposing to combine these methods in a proprietary and unproven fashion, he is suddenly a benevolent genius reaching down to us idiot folk trying to explain something we would never understand.

Apparently I'm a two-bit, newsletter following, heckling, alpha male market loser out for revenge. At this point, I really hope the likes of you lot sign up with OP and all the services he's spruiking. Last time I waste my time on this stupid ****ing forum. 

ENJOY!


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## zipzap (1 November 2013)

I guess when you are new to a forum you have to go through the "initiation" ceremony where everyone is very skeptical and thinks the only reason for posting is for the benefit of the poster.... in this case I have been transparent all the way through, both of my own interests and with disclosing system logic.

What a shame one of these guys is a fellow kiwi, in terms of the comment about, how you'll never see any evidence or proof these things work, if you guys weren't heckling every step of the way you'd already have it.. as it stands I am still getting there. You are getting good quality content and trading ideas just by reading this thread, but you can't see past the "commercial Interest" of the poster so automatically think there is something fishy going on.... When I see a lot of other stuff out there I can hardly blame you.. but let me just make this clear:


My business depends on me making my clients money
My reputation depends on providing good quality content, here or anywhere else
I will be providing solid evidence of every strategy I post in this thread or anywhere else and I am quite comfortable with what I have posted so far.
I challenge anyone else who has a problem to post something that is more innovative and profitable than what I am showing you here (in another thread and obviously I am setting the bar quite low so it should be easy) and also show backtested results ..then I can do some heckling of my own.

In terms of smallcapinvestors contribution, I drew his attention to the thread as I want to use some content he has published elsewhere and he posted of his own accord and I for one appreciate it and you will likely appreciate it to once you see the content. Thanks also to Tech/a and to the other people who have offered  support, posting here does take time away from other activities. Guys like Tech/a keep me posting. There is more to come, as I will be posting some content that is not my own I am getting the necessary permissions so I should have that in place tomorrow morning and if I get a chance I'll start posting more over the weekend.

Please refrain from any additional comments until further posts where I get a chance to finally explain how to backtest and build a portfolio using fundamental data...

and then once we have the stock basket history for the portfolio we can test the technical system through history and see if it adds an value (alpha)

So guys.. be nice, be patient, give me a chance to actually post the information everyone has been patiently waiting for ....

ZZ...

p.s. Sinner, I just saw your last post.. you and me both feel like bashing their head against the wall, for opposite reasons.


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## waza1960 (1 November 2013)

> Last time I waste my time on this stupid ****ing forum.




 Hopefully not Sinner I for one really appreciate your posts.
 Nothing like a scientific and evidence based approach I say


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## Porper (1 November 2013)

zipzap said:


> Sometimes you can lead a horse to water...




I thought I recognised your name. You were an adviser for Tricom (options) a few years ago.

I used your service for a few weeks.


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## tech/a (1 November 2013)

sinner said:


> What a joke tech/a, you constantly lambast people on here for using technical indicators in the way OP has proposed claiming they are useless, and in any gfiven thread you can be absolutely counted on to derail any FA discussion whatsoever. Yet when the famous OP comes along proposing to combine these methods in a proprietary and unproven fashion, he is suddenly a benevolent genius reaching down to us idiot folk trying to explain something we would never understand.
> 
> Apparently I'm a two-bit, newsletter following, heckling, alpha male market loser out for revenge. At this point, I really hope the likes of you lot sign up with OP and all the services he's spruiking. Last time I waste my time on this stupid ****ing forum.
> ENJOY!




Your a smart guy.
Your also more capable of having an intelligent discussion which is of value to everyone--than you currently display here---.

To correct you on my stand with Indicators and Oscillators.
Used for discretionary trading I feel they are next to pointless.
Used in a properly tested System they have value but I don't use them to any large degree.

My stance on F/A is simple.
Its simply a calculated opinion which will be proven correct or incorrect just as T/A.
My main beef with most exponents of F/A is their lack of risk management.
Fine in a Bull market crap in a flat or bearish market.

As for the stuff in Blue---that's left field and in your mind only from what I see.


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## zipzap (4 November 2013)

So… I’ve made a few mistakes with this thread which I’ve been called on, so I am going to try to rectify some of them here. In what follows we are going to take an idea and create and backtest the idea to create a fully mechanical trading system based on fundamental analysis. Then as part 2, I am going to run the technical model we have discussed throughout to see if it improves performance. 

What follows is a process for creating a fundamental trading system. Much of the work has been put together by Kurtis Hemmerling and he has kindly allowed me to utilise the content. Remember for my own trading as I’ve mentioned earlier I simply follow portfolios put together by people like Kurtis and then apply my trading systems.. This is simple and easy and takes advantage of the skills from people with more expert knowledge than me. However for people who wish to understand how to build a fundamental trading system I hope that what follows is fairly helpful, it also enables us to have a historical record of portfolio constituents we can apply the technical system to.

Before I go further it is important to note that there is no need to apply a technical model to what follows..that is what I like to do, but it is not necessary and it may even turn out not even more profitable, that is a question that can be answered afterwards with additional testing.

So here goes… 

(Reference: How to Build a Strategic Model Portfolio – by Kurtis Hemmerling):

To build a sound investment system that generates reliable returns, you first need a thesis or a concept of why and how you will be able to do achieve bigger returns than the broad market. These investment ideas do not need to be new creations from your head - there is already decade’s worth of academic research that you can draw inspiration from. Sinner also kindly been pointed out some resources you could use earlier as well. But, there is plenty of stuff out there so you do need to dig through these papers and abstracts to discover what has already been researched and tested. As you carefully read through the research, try to think about why these rules may translate into market out-performance or a reduction in risk.

Often, the academic will come right out and tell you the rationale in the article summary, but you need to meditate on the line of reasoning to determine whether you comprehend and agree.

*Finding the Idea*

One comprehensive resource is called Social Science Research Network (SSRN.com). Here you will find hundreds of thousands of papers – many of which relate to market-timing, momentum, capital structure, technical analysis, dividend yields, payout ratios, valuation techniques and much more. It can be a bit overwhelming at first. Start by picking a topic that fits with your investing style and that you already have a little knowledge and experience with. If you are a long-term investor, you may want to start with value premiums and dividends. Or you might simply type in ‘long-term investing’ in the search bar and sort through the results. This process will take some time.

Below are a few papers you may find interesting:


Adaptive Market Timing with ETFs, 2010, Glenn
Best Ideas, 2010, Cohen, Polk and Silli
Enhancing the Investment Performance of Yield-Based Strategies, 2012, Gray and Vogel
Filter Rules: Follow the Trend, or Take the Contrarian Approach?, 2010, Kozyra and Lento
How Active is Your Fund Manager? A New Measure That Predicts Performance, 2009, Cremers and Petajisto
How to Identify and Predict Bull and Bear Markets?, 2010, Kole and Van Dijk
Insider Trading and Share Repurchase: Do Insiders and Firms Trade in the Same Direction?, 2011, Bonaime and Ryngaet
Investing in Stock Market Anomalies, 2011, Bali, Brown and Demirtas Is Portfolio Theory Harming Your Portfolio?, 2011, Scott Vincent
Long-Term Volatility Forecasting, 2012, Reitter
Market Timing & Trading Strategies Using Asset Rotation, 2010, Schizas and Thomakos
Market Timing with Moving Averages, 2012, University of Adelaide Business School
Optimal Portfolio Strategy to Control Maximum Drawdown – The Case of Risk Based Dynamic Asset Allocation, 2012, Yang and Zhong
Portfolio Diversification Dynamics as a Measure of Market Sentiment, 2012, Roger
Rebalancing and the Value Effect, 2012, Chaves and Arnott
Relative Strength Strategies for Investing, 2010, Faber
Revisiting the Fisher and Statman Study on Market Timing, 2011, Pfau
Size, Value, and Momentum in International Stock Returns, 2011, Fama and French
The High Dividend Yield Return Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with Attractive Returns Over Long Measurement Periods, 2007, Tweedy, Browne Company LLC
Timing and Volatility Quantitative Model, 2009, Baryshevsky
Where the Black Swans Hide & the 10 Best Days Myth, 2011, Faber


There are thousands more of such gems to be found at SSRN.com and these are just a select few to get you started. The important point here is that you need to have a solid concept of what you want to achieve and a rough idea of how to do so before you start hammering out trading rules. Some questions you may want to ask yourself are these: 

•	Are you looking to lower downside risk in bad markets? Have you considered market-timing? If bear markets produce high price correlation, how can you use this to your advantage? 
•	Are you looking to lower day to day portfolio price volatility? 
•	Do you want to ‘beat-the-market’ in that you want stock picks that have larger returns on average? 
•	Are you looking to compound dividend returns? What role does payout ratio, yield and capital structure play? 
•	Do you prefer to follow trends or buck them? With the crowd or contrarian? 
•	How active of an investor are you willing to be? 
•	What is your preference for market capitalization? 
•	Are you aware of such effects (more pronounced on smallcaps) such as Post-Earnings-Announcement-Drift, upward EPS revisions, analyst upgrades, momentum, value and short interest? 

Once you have your investment idea that harmonizes well with your objectives, goals and level of risk - you can proceed to the next step where we expand a concept into a strategy. 

From Concept to Crude Strategy 

Over the course of this post, we will be building an investment strategy based on the Tweedy Browne paper of high yield and low payout ratio…which is in turn based on a Credit Suisse report. As well, we will include some complimentary ideas from the Gray and Vogel paper, Enhancing the Investment Performance of Yield-Based Strategies. The underlying concept in these papers is that stocks with higher yields and lower payout ratios, by their very nature, have deep value which investors may not be pricing efficiently. Consider… 
A stock offers a 6% dividend yield. But does this stock have good value or not? One cannot tell simply by the dividend yield. On one hand, the company might not evening be generating profit and the dividend comes from cash reserves. This would not be of good value to the shareholder. On the other hand, a company might have so much profit that they pay only 10% of their earnings back to shareholders as a dividend. If the 10% profit represents a 6% dividend yield – this stock has screaming hot value. Of course, this is an extreme example not likely to be found in the market. 
Our initial concept will be to trade stocks with higher yields with limits on the payout ratios as it suggests value – which in turn can lead to a rapid share price increase should sentiment improve. After reading the various academic papers, it is good to make a list of concepts that you feel comfortable with. Your system is liable to evolve and change during this process but you need a starting point. 
Here is list of some crude investing concepts: 
1. High yield 
2. Lower payout ratio 
3. Low debt and/or paying down on debt 
4. Relative strength holdings 

*Initial Testing* 

Initially we will utilise a stock screener for testing before moving onto creating a ranking system and portfolio simulation.The stock screener excels at broad strategy testing, its strong point is to test ideas against thousands of stocks. For example, the stock screener can test all value stocks against all growth stocks in seconds with two massive portfolios containing thousands of stocks each. As we progress a portfolio simulation can then be used as the second step where we take the tested strategy and create a portfolio that holds dozens of stocks with real world constraints that mimic the actual brokerage account. 

The stock screener layout looks like the picture below. The rules tab is where you enter buying criteria that must be met in order for a stock to be purchased.

The SCREENER layout looks like the picture below. The RULES tab is where you enter buying criteria that must be met in order for a stock to be purchased.




*Using the FRank Function*

This is where reading the FACTORS and FUNCTIONS really pays off. In our investment strategy we want high-yield stocks. How will we determine what is high yield and what is not since every market is different? Picking an arbitrary number (e.g. four percent) is weak since what is low during one period of time might be high in another. Thankfully, we have a flexible set of instructions that allows us to screen for the highest relative dividend yield.
•	Under FUNCTIONS – RANKING & SORTING we find a valuable tool called FRANK (as in Function: Rank). FRANK allows us to sort stocks based on whatever factor we choose and return stocks in a certain percentile range.

We want the top 30% yielding stocks in the S&P 500. While the YIELD rule will return stocks that are above a specified yield, the FRANK function will return the highest yielding stocks regardless of the actual dividend number. The rule we are using looks like this:
•	Frank (“Yield”)>70

*Creating a Benchmark*

Before we test our first rule, we need an appropriate benchmark. Our system is based on the S&P 500 index, therefore, we should use that as our benchmark. Yet, the S&P 500 is a market-cap weighted index and we are using an equal-weighting methodology (where every stock is held at the same weight regardless of how big or small it is). Hence, we will use an equal-weighting of the S&P 500 as our benchmark. Our slippage will be 0% as we are merely testing the validity of our strategy at this point – later we will factor in trading costs and real-world constraints. We will rebalance every four weeks and start the test in January 1999.




The redline is our equal-weight strategy of the S&P 500 with an annualized return of 8.39% (you can also select the “S&P 500 equal-weight index” as the benchmark but it does not include dividends). The blue line underneath is the market-cap weighted S&P 500 index that is the most widely publicized.

The next step is to run our high-yield ranking rule across the index and keep the best 30% of the yielding stocks. Remember that our screener includes all dividend payments – which is vital for a test such as  this.




While our total return improves slightly, our drawdown increases somewhat. We might question our initial test results since not all S&P 500 stocks offer dividends. Although we know this is not true, what if the S&P 500 only had 150 dividend stocks? Our rule that keeps the highest-yielding 30% of the index would, in that case, return the entire set of dividend yielding stocks. Our strategy is to find the highest- yielding stocks of ones that pay dividends. This is a different screen altogether and it requires that we modify our universe of stocks.
But before we create an entire universe of S&P 500 dividend stocks when we can simply add a rule that states the yield on our screened stocks must be greater than 0? Wouldn’t that fix the situation? No because one is an ‘after-market’ rule modifying our universe and the other is a changed universe at the source. Consider how it is different…
•	In one scenario you have a universe of S&P 500 stocks that pay dividends only. You have modified the universe at the source so only dividend-paying companies are present. Next, you add a ranking rule in the screener to choose the lowest 10% dividend payers. You will get stocks with small yields such as 0.1%, 0.2% and 0.3%.

•	In the next scenario you have all S&P 500 stocks in your universe. Your first rule is to have a yield greater than 0. Your second rule is to rank the entire universe of stocks and keep the bottom 10% yields. What will happen? The first rule eliminates the 100 stocks that don’t pay dividends but the second rule ranks the entire S&P 500 universe and finds that the lowest yielding stocks do not pay dividends at all. Thus, the two rules conflict and absolutely nothing turns up on your screen.
It is best to change your universe of stocks at the source since that is what ranking rules evaluate. There is a work-around but it is better to change it at the source so you do not need to worry about it later.

*Creating a Custom Universe*

What we have done is create a custom universe then added a single rule that states the following:
•	Yield>0

We then run a test just to see how many stocks are currently paying a dividend the answer is 405. We select “S&P 500 Yielding Stocks” as the descriptive name for the new universe. What we have accomplished is the creation of a new equity index where the constituents must be a member of the S&P 500 index plus paying a dividend.




Now we return to the SCREENER and re-run the test with this new stock universe that only holds dividend yielding stock in the S&P 500 index. We backtest the ‘top 30% dividend yield’ rule to see what effect this has on my risk and return.




The return improves slightly along with a few other risk/performance statistics although the maximum drawdown during 2008/2009 increases yet again.

Adding In the Other Rules

The next step is to build the rest of my investing rules which includes payout ratio, relative strength and debt ratios.

After some deliberation, it was decided to use an absolute rule for payout ratio. The reasoning? We do not want a company that pays out more than 100% of its profit in the form of a dividend as this is not sustainable. But we neither want to overly restrict my universe of stocks (feel free to modify at will). So the basic payout ratio rule will stipulate that dividends must be less than profit earned.

•	PayRatioTTM<100

The next rule either requires there to be low debt or a reduction of net debt. How can you create a rule that allows either one condition or the other?

*Creating a Forked Rule*

You need to program the system to accept either condition A or condition B – yet you do not have a preference for which one. First, we need to define each rule clearly.

Our first condition is for a low debt-to-equity ratio. We create a simple rule just like our other FRank rules that will limit the debt-to-equity ratio to the bottom 50% of our universe (based on the most recent quarter):

•	FRank("DbtLT2EqQ")<50

Our second condition is trickier since we have to dig into the BALANCE SHEETS as we will be comparing quarterly data to determine a change in ratios. 

To create this formula, we will use the long-term debt to equity ratio from one year ago (quarterly) and divide this by the long-term debt to equity ratio of the most recent quarter. In this instance, the bigger the number translates into more debt reduction. So the  rule will look like this:

•	FRank("(DbtLT(4,QTR)/EqTot(4,QTR))/(DbtLT(0,QTR)/EqTot(0,QTR))")>50

I know it looks scary but if you break it down it is simple. This is a ranking rule so we begin with FRank. Next, we take the LT Debt from the same quarter last year (It is number 4 if you count backwards from the most recent quarter being 0) and divide this by the total equity in the same quarter. You divide this by the same formula – only this time you use the most recent quarter (0). Put brackets around the whole string and make it return the highest 50% (which actually means the largest debt reduction).

All you need now is to place an OR operator between the two screening rules and the system will either take the best 50% as regards low debt-to-equity or the best 50% as to reduction of debt-to-equity.

*Relative Strength Testing*

Our relative strength rule is simple. This rule requires the 52 week performance of our stock to exceed the S&P 500. Better performing stocks have a tendency to do over the following year. This is called momentum much literature has already been written on the subject.

*The 4 Rule Investment System*

The 4 rules to my investment strategy looks like this:




To Be continued...


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## zipzap (4 November 2013)

Previous Post Continued - Part 2 (Reference - How to Build a Strategic Portfolio Model - By Kurtis Hemmerling)

Next, we need to historically backtest the strategy. As I do so, I notice that this system is overly restrictive during 1999 and 2000. This could be from my look-back rules or from some other cause. For the sake of this tutorial (and not to make it overly complicated), I will start my backtest in 2001. To do so, I need to re-test the benchmark (equal-weighted S&P 500). I run this manually because I want both an equal-weighted index but also dividends for a comparable total return.

The updated benchmark test since 2001 is below.




Heading back to our simple 4 rule system, we achieve the following results:




Our annual return is 2% higher than an equal-weighting S&P 500 strategy and our drawdown is less. You can also turn the rules on and off – one at a time – to see the individual performance of each rule and then the combined performance of synergy.

As we do so, it shows the relative strength is actually harming returns and being overly restrictive on our stock selection. Why might this be the case? Relative strength looks at price performance of our stock and compares it to the market. However, our high-yield dividend stocks contain a large amount of the returns in dividend payments which is not reflected by a strong price performance. Thus, relative strength might be more meaningful in non-dividend stocks than income stocks. Just think of a quick example…

Stock ABC pays dividends while stock XYZ does not. Stock ABC has a 10% dividend yield. Share prices have stayed flat all last year and the previous 3 years. Stock XYZ has risen 5% every year for the past 3 years. Stock XYZ appears to be the better stock. But wait – stock ABC has returned 10% annually while stock XYZ has only been able to accomplish half that much. In fact, the higher the dividend yield the less meaningful relative strength becomes.

The rule is removed and the strategy is re-run.




This seems to make more sense. What further improvements can we make on this S&P 500 dividend system?
After looking over the strategy it can be discerned that this strategy could woefully pick up stocks where the equity was negative, thus throwing off my formulas. Hence, the addition of this one extra rule to prevent any miscalculations is required. You can add it to your screen or directly to your universe.

•	EqTot(4,QTR)>0 and EqTot(0,QTR)>0

It simply states that the equity in the same quarter last year and the most recent quarter must both be positive. Its performance effects are negligible at this point but its safety net is priceless.

Moving onto where we were earlier, Ranking system. Ranking systems that let you grade stocks based on a theme. A ranking system is a group of rules built around a theme. A value ranking system might include price-to-book, price-to-assets, price-to-earnings, and price-to-dividends. All the stocks in our universe are graded by these factors and you can select the top scoring stocks to hold in your value portfolio. Ranking systems can be applied to any other strategy you have or it can be used by itself. I prefer to use it to enhance an existing strategy.

Our 3 buy rules recommend anywhere between 25 and 50 stocks. We will build our own ranking system later, but for now, let’s utilize a basic ranking systems to pick the ‘best 10’ stocks. After testing out various ranking systems, including one that uses market-timing, we settled on one called BASIC: QUALITY. Holding the ‘best 10’ stocks according to this ranking system (in addition to our 4 investing rules), we get the following results:




From our preliminary testing we conclude that we have a good core strategy to build upon. The question is…where to from here? At this point we should do one of three things:
•	Use the Advanced Backtest
•	Build a custom ranking system
•	Create a real-world simulation

*Advanced Backtest*

I do not wish to spend a lot of time on the advanced backtest other than to say that it is a useful statistical tool to check for strategy robustness. Why is this useful? Perhaps you have an investment strategy that works well starting in March 2009. But is your gain due to superior strategy or lucky timing? In our strategy, we re-balance every 4 weeks. What if we started investing on week 2 instead of week 1? Or week 3? How different might the results be?

The advanced backtest gives us a few stats to mull over.

•	Every 4 weeks this strategy earns 1.24% vs the market return of 0.26%.
•	In up-markets it averages 3.87% which is similar to the market gain of 3.33%.
•	But in down-markets, this strategy only loses 2.62% every 4 weeks on average while the market on average dumps over 4.26%.

Our strategy gains from a reduced downside in bad markets but it does not out-perform in bull markets.

*Ranking System*

Creating a ranking system can be an in-depth process. There are layers of complexity and depth in a relative ranking system. For the sake of this post we have built a simple ranking system based on our three rules:

•	Yield – higher is better – compare vs. Universe
•	PayRatioTTM – lower is better – compare vs. Universe
•	Long-term debt to Equity – lower is better – compare vs. Universe

Back-testing our ranking system in our S&P 500 dividend universe yields the following results.




After testing my ranking system I am shown the following results:


To be continued next post


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## zipzap (4 November 2013)

Part 3 - How to Build a Strategic Model Portfolio - By Kurtis Hemmerling




What have we accomplished here? We now have a set of relative ranking rules that can be used on any system or strategy – past, present or future.  As an example, if you run a test using no other strategy other than ‘the best 10 stocks’ as determined by this ranking system. The chart below shows the back-tested performance using only my 4-rule ranking system on the entire S&P 500 index while rebalancing every 4 weeks.




Now this ranking system may not be suitable for any and all strategies as it is tailored toward dividend stocks. As well, this simple ranking system will no doubt need added layers of complexity and optimization. Remember to include either in the screener rules or in the universe rules a requirement for equity being above 0 in both the most recent quarter and the same quarter last year

 (EqTot(4,QTR)>0 and EqTot(0,QTR)>0).

But you can likely see the power of first proving our investment ideas through the SCREENER and then building it into a ranking system to have a powerful and flexible tool to be re-used in many different applications.

Now that we have proven our concept, developed sound investing rules and even have a new ranking system at our disposal - how do we create a portfolio that e-mails us recommendations of when to buy and sell the various holdings? For this step we need to learn how to create a SIMULATION and a PORTFOLIO. Don’t be alarmed – you have already performed 75% of the leg work by creating the strategy in the SCREENER.

Simulation Testing and Optimization

Creating a simulation allows us to simulate what trading this system would look like in a real portfolio with cash. This is as close to the real thing as it gets. And once we have the simulation settings just right
–	we simply click one button and it becomes an automatic and hands-free system that e-mails us rebalance notices.

How do we create a simulation?

I will walk you through each screen – one at a time. Your GENERAL screen will look like this:




You need to name the system and choose how much starting capital you want to invest with and an appropriate benchmark. Next, you can enter in the commission for each trade and how much price slippage you expect. The bigger the stock the less price slippage you will experience and these are some of the most widely followed companies – so I expect little slippage. Because I am using Foliofn as my brokerage, I do not pay a commission for each trade ($29 per month flat-fee if using ‘window trading’ which is available twice daily).
Our initial setting is for a re-balance every four weeks, but as I will show you later, you can increase your rebalance to weekly and still manage your annual turnover. Thus, you will have a more responsive system while keeping not over-trading.

The next tab, POSITION SIZING, looks like this:




Here is where we decide how big our optimal portfolio size will be. We can also decide how far to let stocks go before we rebalance. If our constraints are 30% from ideal size, we will not rebalance a stock that trades at $10 per share unless it moves above $13 per share. Personally, I am not a fan of micro- managing our positions so I will leave this number at 30%.

Our next tab is UNIVERSE & RANKING. We already have a custom made universe, so go ahead and select that one. I will use the BASIC: QUALITY ranking system.




We will ignore the STOP LOSS rules. Empirical evidence suggests that using a STOP LOSS does not improve performance or lower risk after fees. If you find that it works for you – go ahead. I don’t and won’t. We want to focus on our BUY and SELL rules. First we open the BUY tab. Here we have 2 buy rules pre- loaded.

•	The first rule ensures that our portfolio will not become more than 30% weighted in any one industry.
•	The second rule dictates that we can only buy up to 5% of the daily volume. This is good risk management.

Next, simply cut and paste the 3 rules from the SCREENER.

To Be Continued


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## zipzap (4 November 2013)

Part 4 - How to Build a Strategic Portfolio Model - by Kurtis Hemmerling

Please refer to Part 1, 2 and 3 prior to reading the following post.




This covers our buying criteria but we need to consider when we want to sell. How will you do this? This is where many people run into problems. I have a couple of tips that you might be able to use.
•	Create a buy/sell rule using the ranking system
•	Use the inverse of a buy rule to become a sell rule

We will start by using the inverse buy rules in order to sell. Simply copy the buy rules and paste them in the sell fields. Just make sure you switch the operators around.




From here, click Re-Run Simulation. Here is how our initial set-up tested with all our brokerage fees and real-world constraints:




What we are noticing is the effects of real-world portfolio constraints. Our return is not as good as previous, but this is more realistic of what we will experience going forward. 

*Hedging a Portfolio*

I prefer to have a market-timed hedge that adds downside protection when conditions warrant it.

You have a few customizations at your disposal:
•	Hedge: pick an appropriate hedge for your trading strategy. A short S&P 500 ETF seems reasonable for our strategy.
•	% of Total Equity: Since our strategy already manages downside risk through other techniques, I will employ a hedge worth 50% of my holdings. But I will not include cash in that calculation…I am only going to hedge my real equity position.
•	Transaction Type: Long. The ETF is already short or inverse the market. I will use margin so as not to tie up any cash or to force stocks to be sold if enough cash is not available for my hedge.
•	Slippage: 0.1%
•	Entry and Exit Rules: I use the Add Wizard Rule to enter in my hedging rules. Under SP500 Fundamentals, I select SP 500 Estimates Trend. The concept behind this rule is that the S&P 500 earnings trend often precedes a market topple (you can read more about this under the main tab TOOLS). I select Add Entry/Exit Pair and I am done.

From here we re-run the SIMULATION.




Because our hedging technique uses market timing signals, our upside performance is enhanced while further reducing our downside loss. The blue bands represent when our hedge was engaged. Our maximum loss was 19%. If I run this test over the trailing 10 years, the maximum drawdown is only 14.88% with the return staying the same.

That concludes this post on how to create a fully mechanical fundamental trading system… 

Recall the steps we needed to take…first we need an idea. This starts with reading papers and previous research. Pick concepts that you agree with and that fit your investing style. Next, build out those ideas into actual rules – whether they be absolute (market cap greater than $3 billion) or relative (market cap in top 50% of all stocks). You can use the screener to test your concepts in a universe of stocks. Once you have a strategy that works on this level, use the simulation to test the strategy using real-world portfolio constraints. When you have an acceptable model in simulation, create a portfolio to be sent rebalance notices through your e-mail.


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