# Drawdowns



## nizar (16 July 2007)

I once asked a mechanical trader if he uses all time high close as the entry for his system, as its a well-known method of entry that works. He replied "No, as its a fairly high drawdown system".

Is drawdown a function of entry, or exit, or both, or the system as a whole?

Some discussion/comments would be much appreciated.


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## It's Snake Pliskin (16 July 2007)

nizar said:


> I once asked a mechanical trader if he uses all time high close as the entry for his system, as its a well-known method of entry that works. He replied "No, as its a fairly high drawdown system".
> 
> Is drawdown a function of entry, or exit, or both, or the system as a whole?
> 
> Some discussion/comments would be much appreciated.




I certainly believe it is a function of entry. But more so system design.

If you are entering with a new low breakout for a long system you may have drawdowns too.


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## nizar (16 July 2007)

It's Snake Pliskin said:


> *I certainly believe it is a function of entry. But more so system design.*
> 
> If you are entering with a new low breakout for a long system you may have drawdowns too.




Snake can you please elaborate on the bold part.

And also what do you mean by new low breakout?

Thanks.


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## Nick Radge (16 July 2007)

I think it associated with the complete system, more specifically with the win rate, the win/loss ratio and in turn the mathematical probability of a losing streak.

The win percentage and win/loss ratio are inherent in any trading/investing strategy so if we take those then work for the losing streak we could get some kind of probability on drawdown size.


Therefore,

Losing Streak = ((log _*s*_)/-log((1-_*n*_)))

Where,

*n* = win rate
_*s*_ = trade sample


Assume,

Win rate of 50%,
Trade sample of 10,000

Losing streak = 13

Using a standard risk of 2% per trade on the above will give a theoretical maximum drawdown of 23%.


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## nizar (16 July 2007)

Nick Radge said:


> I think it associated with the complete system, more specifically with the win rate, the win/loss ratio and in turn the mathematical probability of a losing streak.
> 
> The win percentage and win/loss ratio are inherent in any trading/investing strategy so if we take those then work for the losing streak we could get some kind of probability on drawdown size.
> 
> ...




Thanks for that explanation Nick.

You mean 26 % (2%*13) yeh??


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## Nick Radge (16 July 2007)

No. Think it through carefully.


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## brettc4 (16 July 2007)

I will assume it is only 23% as each time you lose, your next 2% stop loss is slightly less in value than the preceeding one, and so on.

Correct? Please tell me thats correct.


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## GreatPig (16 July 2007)

A loss of 2% leaves 98% remaining. Do that 13 times and you have 0.98^13 = 0.769 ('^' means to the power of), close enough to 0.77.

So if you have 77% left, you've lost 23%.

GP


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## Nick Radge (16 July 2007)

Thats correct. Fixed Fractional allows smaller risk to be taken as you lose. In fact to lose 100% of your equity you'd need something like 140 consecutive losses, not 50.

We can also turn the equation around and say, "how much risk per trade can I use to lose _*n*_ amount during a drawdown?" This is a good exercise because every one has different maxDD tolerances so if two people are trading the same system and one can withstand a 20% maxDD whilst the other can deal with 50%, what is the best position size each should use?

We can use the same numbers as before with our 50% win rate, 10,000 trades and losing streak of 13.

Therefore,

Max Risk = (1-((1-_*DD*_)^(1-_*LS*_)))*100

Where,
_*DD*_ = maximum acceptable drawdown
_*LS*_ = losing streak

To have a chance at a 50% maxDD we can risk 5.19% per trade or for a 20% maxDD we can risk 1.70%


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## nizar (16 July 2007)

THose equations are gold.

MaxDD i dont mind a high one but obviously it has to be worth it in terms of returns.


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## GreatPig (16 July 2007)

nizar said:


> THose equations are gold.



Fools gold like that 

Try:

Max Risk = (1-((1-*DD*)^(1*/**LS*)))*100

Cheers,
GP


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## It's Snake Pliskin (17 July 2007)

nizar said:


> Snake can you please elaborate on the bold part.
> 
> And also what do you mean by new low breakout?
> 
> Thanks.




If you buy high or low there is the possibility of a prolonged drawdown.

System design is paramount and understanding WHY it works as others have said too. If you take any old entry then surely that will impact on whether there is a drawdown or not. Surely the entry determines where and how much the drawdown will be (no exit or timefame in this comment) - only it will be hindsight and paradoxically is of no value until it happens.


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## theasxgorilla (17 July 2007)

This is a question from ignorance rather than an attempt to complicate what should be simple.

If your equity curve tracks open-equity then can you experience drawdowns due to open-equity profit retracement?  Is this _portfolio heat_?

And if this is the case, then is it possible that the maxDD could actually be the value of portfolio heat _plus_ the formula that Nick posted earlier, even if some lower maxDD amount was actually 'observed' during testing?  If it's known that the system (keeping to the example system) can experience 13 consecutive losers and current portfolio heat is 10% then could the possible/expected maxDD in fact be 33%?

ASX.G


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## nizar (17 July 2007)

theasxgorilla said:


> This is a question from ignorance rather than an attempt to complicate what should be simple.
> 
> If your equity curve tracks open-equity then can you experience drawdowns due to open-equity profit retracement?  Is this _portfolio heat_?
> 
> ...




Hi ASX.G,

I dont know the answer to your question, but this is also why I thought exits would have something to do with drawdowns (not only the entry).

Because while cash drawdowns would be due to a string of losses (hence maxDD can be derived from max. string of losses), drawdowns in open equity would be due to profit giveback, which in turn is caused by having loose stops.

Yeh??

Or are drawdowns in open equity something else??


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## CFD (17 July 2007)

Nick Radge said:


> ~~
> Assume,
> 
> Win rate of 50%, Trade sample of 10,000, Losing streak = 13
> ...




My understanding of a maximum drawdown is some what different.
The amount of drawdown your bank needs to withstand is different to the amount lost during a losing streak. 

You calculate the likely longest losing streak from the strike rate in this case 13, but you may then only have, say, two or three wins before entering into another long losing streak. Your bank could have to survive a loss x 13,  win x 3, loss x 10. 

Now that's a drawdown and with a 50% s/r!


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## Nick Radge (17 July 2007)

CFD,
You're absolutely right, which is why I said this:



> ..then work for the losing streak we could get _*some kind of probability *_on drawdown size.


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## nizar (17 August 2007)

Im sure everyone who has ever designed a system has come across this dilemma.

Ok, so you have a system that has, in the past, delivered great returns, but the drawdowns are unacceptable.

How would you go about solving this problem?

I thought generally if you wanted a high return you'd have to accept a higher drawdown but for those who are proficient in systems trading know that this doesnt have to be the case.

Stevo's systems are pretty crazy, returns of 30-40%+pa and max. drawdowns in the single digits ! 

Any thoughts/comments/discussion would be much appreciated.


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## nizar (18 August 2007)

nizar said:


> Im sure everyone who has ever designed a system has come across this dilemma.
> 
> Ok, so you have a system that has, in the past, delivered great returns, but the drawdowns are unacceptable.
> 
> ...




Any thoughts??


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## Temjin (18 August 2007)

nizar said:


> Im sure everyone who has ever designed a system has come across this dilemma.
> 
> Ok, so you have a system that has, in the past, delivered great returns, but the drawdowns are unacceptable.
> 
> ...




Your best bet for developing high sortino ratio systems (annualized return over maximum historic drawdown) is simply to diversify and create as many opportunities as you can.

One example would be to diversify through trading with multiple "uncorrelated" systems. However, this does not mean you will develop several "trending" based system of different timeframe as the underlying methodology usually remain the same and gives positive correlation over the long term.

You should develop trading systems that can capture both trending periods and sideways through counter-trend strategies.

Another obvious example would be to diversify through trading with uncorrelated markets.


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## tech/a (18 August 2007)

nizar said:


> Im sure everyone who has ever designed a system has come across this dilemma.
> 
> Ok, so you have a system that has, in the past, delivered great returns, but the drawdowns are unacceptable.
> 
> How would you go about solving this problem?




Well you have to find a way to minimise drawdowns.
The answer is in the exits.Your obviously giving back too much while allowing profit to run. Discretionary traders use a Trailing stop.
You could introduce a trailing stop after X periods---I havent done this so dont ask how to code it!



> I thought generally if you wanted a high return you'd have to accept a higher drawdown but for those who are proficient in systems trading know that this doesnt have to be the case.
> 
> Stevo's systems are pretty crazy, returns of 30-40%+pa and max. drawdowns in the single digits !
> 
> Any thoughts/comments/discussion would be much appreciated.




See above. Look at exits.
If trading futures volitility would also have a large influence in this case Id be looking at timeframe.But I think your talking stock.

Crossed with Temjin ---some other good ideas there but doesnt deminish drawdown just disperses it..


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## theasxgorilla (18 August 2007)

Niz,

One of the things I plan to implement into the system I am working on is to tighen my intial stop after a given MFE.  This is a mechanisation of the trailing stop idea that tech/a talks about.  How many discreationary traders would move their intial stop to breakeven (inc. brokerage) after an MFE of greater than 10%?

If you don't do this and the stock fails the breakout then your trailing ATR or MA or whatever else you are using as your primary exit, may never _overtake_ your initial stop and you effectively give back a 20%+ on that trade (from the peak of the MFE, assuming an initial stop of 10%).

ASX.G


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## nizar (18 August 2007)

theasxgorilla said:


> Niz,
> 
> One of the things I plan to implement into the system I am working on is to tighen my intial stop after a given MFE.  This is a mechanisation of the trailing stop idea that tech/a talks about.  How many discreationary traders would move their intial stop to breakeven (inc. brokerage) after an MFE of greater than 10%?
> 
> ...




Hi ASX.G,

Thanks for your comments.

What does MFE mean?
I assume some sort of return?

Anyway, yeah it seems like a good idea to increase win% and potentially decrease longest string of losses, therefore minimising drawdowns.

Profit giveback is painful but for trend followers its part and parcel of the game. Curtis Faith speaks about is in his book about how the hardest part of trading were the exits. Sometimes you have to watch 100% profits halve before they go up again (or hit your exit).

And tech, what do you mean introduce a trailing stop after X periods?
Couldnt the trailing stop be the exit and this is in place from the very beginning.


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## theasxgorilla (18 August 2007)

nizar said:


> What does MFE mean?
> I assume some sort of return?




Maximum favourable excursion/maximum adverse excursion.  The maximum favourable and adverse distance a trade moved from your entry price.  I noticed in testing a system recently that a handful of trades managed an MFE in excess of 10% but ended up being stopped out by the initial stop.  I don't know if having a mechanism which moves the initial stop up before the trailing stop overtakes it would also take out good trades.  I haven't coded it yet...its the next phase of my project


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## bingk6 (19 August 2007)

theasxgorilla said:


> Niz,
> 
> If you don't do this and the stock fails the breakout then your trailing ATR or MA or whatever else you are using as your primary exit, may never _overtake_ your initial stop and you effectively give back a 20%+ on that trade (from the peak of the MFE, assuming an initial stop of 10%).
> 
> ASX.G




It is for this reason that your stop line should be the greator of either the initial stop (which may be 10% below your purchase price and is therefore fixed) or the trailing MA or ATR stop. That way, if at the start of the trade, your trailing stop is too far away from the price action, your initial stop will provide you with the protection until such time as the trailing stop will have risen sufficiently to take over (hopefully).


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## tech/a (19 August 2007)

bingk6 said:


> It is for this reason that your stop line should be the greator of either the initial stop (which may be 10% below your purchase price and is therefore fixed) or the trailing MA or ATR stop. That way, if at the start of the trade, your trailing stop is too far away from the price action, your initial stop will provide you with the protection until such time as the trailing stop will have risen sufficiently to take over (hopefully).




This is not going to help Drawdown.
Initial Capital loss possibly----but not peak to valley drawdown which is the issue here.



> would also take out good trades.




Highly likely.


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## theasxgorilla (19 August 2007)

tech/a said:


> This is not going to help Drawdown.




Why don't you tell us the answer...what helps peak to valley draw downs?  Is it only exits, the part where the trend bends??  Giving back something at the end of a trend is the inevitable part of a trend following system, but I don't think this is the only factor that contributes to the depth of a peak to valley drawdown.

The next market phase could be non-trending and volatile.  False breakout territory.  How do you prevent your system from digging itself further into the valley 1R at a time.  Moving the stoploss to prevent entire 1R losses every time your system gets suckered by a false breakout might be one way (the beauty is I get to test it).  Keeping your system out of an unfavourable market with a filter of some kind, like an index filter or a momentum filter for example, might be another way.


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## tech/a (19 August 2007)

*ASX*
Its a balance.
Your not going to get rid of drawdown you'll only keep it within acceptable limits.Then there is the possiblilty that your system and mine will trade in market conditions not seen in testing.
It is possible that the system will outperform in conditions more favourable and underperform ---even fail if unfavorable.



> Is it only exits, the part where the trend bends?? Giving back something at the end of a trend is the inevitable part of a trend following system, but I don't think this is the only factor that contributes to the depth of a peak to valley drawdown.




Its the length (Time and number) and depth of these which determines the maximum drawdown and in the end un acceptable drawdown.
Limiting depth and number (consective) is the only way--I-- know to deminish it.
Thats one of the reasons I exited all long portfolio positions in 3 longterm portfolio's at 6170 XJO. This wasnt part of the system conditions!!!



> The next market phase could be non-trending and volatile. False breakout territory. How do you prevent your system from digging itself further into the valley 1R at a time. Moving the stoploss to prevent entire 1R losses every time your system gets suckered by a false breakout might be one way (the beauty is I get to test it). Keeping your system out of an unfavourable market with a filter of some kind, like an index filter or a momentum filter for example, might be another way.




In a well performing portfolio the death by slow bleeding doesnt occur.
Testing has shown in a positive expectancy system that strings of losses and initial risk wont wipe it our.

Below is the current portfolio for the test portfolio of Tech Trader.
The "Initial stop in all cases is 10% of the initial purchase price.




Note stocks like QBE.
Initial stop or 1R 79c so far we have approx 25R in that one trade. Maximum string of losses was from memory 9 for the system.

I personally dont believe the answer or more to the point finessing relative to drawdowns--- is at this end (The buy end) of a system.


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## yonnie (25 August 2007)

I think it has to do with time frame.

the longer the time frame, the looser the stops will be and the bigger the potential drawdowns.


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## theasxgorilla (25 August 2007)

tech/a said:


> I personally dont believe the answer or more to the point finessing relative to drawdowns--- is at this end (The buy end) of a system.




It can seem this way, but I am discovering that system development is a bit like a rubiks cube, line up a few more of one color to see the side you have nearly completed go to bits.

To demonstrate this and as an example of how finessing down the entry end of a system can affect drawdowns I tried adding an entry volatility filter to a system I am playing with.  Why?  Because I noticed that on occassions (usually when tested on data that doesn't include the last 4.5 years of bull market, that should be a bit of a hint) my regular entry trigger was being drawn into stocks on bars with massive ATR.  By adding a filter I managed to reduce the average DD from 23.7% to 21.4% and more importantly significantly bunch up the distribution from stdev of 7.24 down to 6.  But my CAGR also fell from 18.35% to 17.3%, stdev was about the same.  Hence my rubiks cube analogy....in this case it would seem that one can smooth the ride by tinkering with the entry at the likely compromise of some CAGR.

ASX.G


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## stevo (3 September 2007)

theasxgorilla said:


> By adding a filter I managed to reduce the average DD from 23.7% to 21.4% and more importantly significantly bunch up the distribution from stdev of 7.24 down to 6.  But my CAGR also fell from 18.35% to 17.3%, stdev was about the same.  Hence my rubiks cube analogy....in this case it would seem that one can smooth the ride by tinkering with the entry at the likely compromise of some CAGR.
> ASX.G




You are right, it is a rubiks cube! One side comes together and the other side crumbles. if developing a system was easy then I don't think that I would enjoy doing it as much.

If a trader wants less drawdown then one approach is to take less risk - as you found above. Less risk can be achieved, whilst not touching the system entry / exit criteria, by altering the position sizing strategy. Try 1% risk position sizing rather than 2% risk or take more smaller positions. 

If a trader wanted to increase drawdown then use lots of leverage - it's very easy to have 100% drawdown with lots of leverage.

TradeSim looks only at closed trade drawdown and objectively that is the drawdown that is important, but emotionally the open trade drawdown (unless you are using lots of leverage) is the most difficult. Amibroker looks at open trade drawdown in it's standard report.

My drawdown won't be too healthy for August - probably double digits when I get around to balancing everything up!

regards


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## nizar (4 September 2007)

stevo said:


> If a trader wants less drawdown then one approach is to take less risk - as you found above. Less risk can be achieved, whilst not touching the system entry / exit criteria, by altering the position sizing strategy. Try 1% risk position sizing rather than 2% risk or take more smaller positions.




I have personally found 1.5% risk to be a good trade-off.

Just a question for everybody.

When your portfolio is experiencing a period of drawdown, how do you know whether its just another drawdown or whether the system no longer works because market dynamics/conditions have changed?

Howard mentioned on the Robustness thread that he thinks trend following (or at least that of the Donchian channel style) worked well in the 1970s and 1980s but does not work well now. He included John W. Henry as an example of a renowned trend follower who has struggled thus far in 2007. 

Couldnt it just be John W. Henry's funds are just going through a period of drawdown? Surely 8 months isnt enough to say a system has failed? 

Michael Covel in his book goes through some of Henry's performances. Its happened a few times through the history of his fund that he was in the red until October, then still finished the year nicely as some huge trends took off in the last 2 months of the year. 

Trend following, well at least is my understanding, isnt supposed to be a slow and steady method. Of course this doesnt mean that adding extra conditions to your system wont smoothen out the equity curve.


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## tech/a (4 September 2007)

nizar said:


> I have personally found 1.5% risk to be a good trade-off.
> 
> Just a question for everybody.
> 
> When your portfolio is experiencing a period of drawdown, how do you know whether its just another drawdown or whether the system no longer works because market dynamics/conditions have changed?




More so the market dynamics are outside of the tested period long enough to effect the positive expectancy of the system.
How do you know.
The system trades outside the maximum or minimum parameters returned by montecarlo testing,which will adversely affect the performance of the system.
IE String of losses/Maximum Peak To Valley Drawdown/Win rate.
Well thats my opinion.



> Howard mentioned on the Robustness thread that he thinks trend following (or at least that of the Donchian channel style) worked well in the 1970s and 1980s but does not work well now. He included John W. Henry as an example of a renowned trend follower who has struggled thus far in 2007.
> 
> Couldnt it just be John W. Henry's funds are just going through a period of drawdown? Surely 8 months isnt enough to say a system has failed?




Could be *HIS *system has failed---cant tell dont know it.



> Michael Covel in his book goes through some of Henry's performances. Its happened a few times through the history of his fund that he was in the red until October, then still finished the year nicely as some huge trends took off in the last 2 months of the year.
> 
> Trend following, well at least is my understanding, isnt supposed to be a slow and steady method. Of course this doesnt mean that adding extra conditions to your system wont smoothen out the equity curve.




Hmm disagree.
Longterm equity curves get smoother the longer they run---generally.
Open equity Curves are smoother as trades run often for years---yet accumulated open profit can be quite smooth.
Tradesim will show you an open equity curve.


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## wayneL (4 September 2007)

tech/a said:


> Longterm equity curves get smoother the longer they run---generally.



While not disputing this, it seems counterintuitive to me. 

Do you have evidence of this, and thoughts as to why this might be so?


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## stevo (4 September 2007)

*When your portfolio is experiencing a period of drawdown, how do you know whether its just another drawdown or whether the system no longer works because market dynamics/conditions have changed?*

Good question! I don't know the answer but do like the idea of a system turning itself off if the market conditions don't suit it.

Equity curve smoothness is quite subjective. Is there a reasonable metric that measures equity curve smoothness?  Sharpe ratio is part way there but if a curve has the occasional upward spike the Sharpe ratio drops even though the system is ok. I probably should do a Google search on the topic.

Where would the challenge and excitement be if we had no drawdown. 

stevo


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## howardbandy (4 September 2007)

Greetings --

Regarding John Henry, trend-following systems, and equity curve behavior.

John Henry had a great record and earned a lot of money for himself and his clients in his CTA accounts.  

According to the president of the CTA firm that I worked for a few years ago, who was a friend of Henrys, Henry's technique was primarily Donchian-style breakout -- that is, buy new highs, sell new lows.

CTA firms are required to disclose their methodology to the public and to the regulatory agencies.  Henry's disclosure documents also state that their systems are primarily trend-following.

Most of the CTA firms that used breakout-style systems have been doing poorly lately, not just Henry's.  

Trend-following systems are designed to take every signal, losing on most trades (70% or so), winning on a few (30% or so), with small losers and big winners.  The smoothness of the equity curve depends on having enough capital to trade many markets, and to have those trades be relatively uncorrelated.  While the many commodity markets traded would appear to be uncorrelated, readers of Lowenstein (When Genius Failed) and Taleb (Fooled by Randomness and The Black Swan) will not be surprised to hear that the trades made are often very correlated.

There are statistical tests can that can be performed to determine whether a trade system is in a drawdown or broken.  Two examples are a "runs" test that evaluates the number of wins and losses, and a "t" test that compares the mean of one sample (when the system is working) with another (recent performance) and gives a probability estimate of whether those two samples were drawn from the same distribution or not.

Thanks,
Howard
www.quantitativetradingsystems.com


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## It's Snake Pliskin (5 September 2007)

howardbandy said:


> Greetings --
> Most of the CTA firms that used breakout-style systems have been doing poorly lately, not just Henry's.
> 
> Trend-following systems are designed to take every signal, losing on most trades (70% or so), winning on a few (30% or so), with small losers and big winners.  The smoothness of the equity curve depends on having enough capital to trade many markets, and to have those trades be relatively uncorrelated.
> ...




Howard thanks for the posting.

Linda Rashke touched on the subject in one of her interviews I read.


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## tech/a (5 September 2007)

howardbandy said:


> Greetings --
> 
> 
> Trend-following systems are designed to take every signal, losing on most trades (70% or so), winning on a few (30% or so), with small losers and big winners.




*Surely you not saying ALL trend following systems take or SHOULD take every signal?*

If so I cant DISAGREE more.



> The smoothness of the equity curve depends on having enough capital to trade many markets, and to have those trades be relatively uncorrelated.




I see this as a general statement that would give a smoother curve but not a necessity in generation of a smooth eqity curve.  



> While the many commodity markets traded would appear to be uncorrelated, readers of Lowenstein (When Genius Failed) and Taleb (Fooled by Randomness and The Black Swan) will not be surprised to hear that the trades made are often very correlated.




Cant disagree here.



> There are statistical tests can that can be performed to determine whether a trade system is in a drawdown or broken.  Two examples are a "runs" test that evaluates the number of wins and losses, and a "t" test that compares the mean of one sample (when the system is working) with another (recent performance) and gives a probability estimate of whether those two samples were drawn from the same distribution or not.




Are these tests in your book.
IE how to set them up and how to apply them?

Thanks,
Tech


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## nizar (5 September 2007)

tech/a said:


> Are these tests in your book.
> IE how to set them up and how to apply them?





Id be keen to know as well.
Thanks for dropping by Howard.


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## stevo (5 September 2007)

*Trend-following systems are designed to take every signal, losing on most trades (70% or so), winning on a few (30% or so), with small losers and big winners.*

I think that this is dependent on the markets traded. I cannot take all the signals given when I scan 500 stocks using a long term system since I don't have that much money. If I was only following 20 stocks  would definately be able to take all signals. 

I am reading Way of the Turtle at the moment and it looks like it will offer some good insights in terms of drawdowns and trend following systems.


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## Nick Radge (5 September 2007)

Donchian style systems are too simplistic and is why they've failed over time. You need to go beyond simplistic. Anyone can bang out a breakout system in minutes these days. Some research on the way Campbell & Co have changed over time will lead to some great insights on how to improve the quality of a trend following system. I think you'll find that price and volume are now almost secondary inputs.

I should also say that many of these top fund managers being quoted look at risk adjusted returns and not necessarily absolute returns like many of us are attempting to achieve. This portends directly to the drawdown equation being discussed herein. A 25-yo who has the maturity and patience to look at a trend following method over the longer term should have greater tolerance for drawdowns than say someone who is older and more risk adverse.

Nick


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## howardbandy (5 September 2007)

tech/a said:


> *Surely you not saying ALL trend following systems take or SHOULD take every signal?*
> 
> If so I cant DISAGREE more.
> 
> ...





If I have developed a mechanical trading system, tested and validated it, I can only expect the real-time results to approximate the out-of-sample results if I take all the signals.  If I skip some signals, I have turned that system into a discretionary system.  There is no way to validate a discretionary system.  So, my answer depends on whether the system is mechanical or discretionary.  If it is mechanical, I must take ALL the signals.  If it is discretionary, I may skip whichever ones will turn out to be losers.

Yes.  Statistical testing can be done using any number of observations.  (Only out-of-sample observations may be used.  In-sample results have no predictive value.  But I've said that enough that you all know it by now.)  The ability of statistical tests to differentiate between alternatives is related to the number of observations in each alternative, and to the mean and standard deviation of the observations.  More observations make the decisions easier and quicker -- that is, they give an indication that a system is broken faster.  It will probably take at least ten (perhaps considerably more, depending in part on the mean and standard distribution of the trades) closed trades to have reliable statistical evidence that a system is broken.  But yes, the methods are explained in the book.

------

Just a point about statistical tests of trading data.

A common question to ask is "Is the mean profit (insert your own objective function in place of profit) for trading system A greater than zero?"  Or, "Is the mean profit for trading system A greater than the mean profit for trading system B?"  

It is not unusual for the standard deviation to be as great as, or greater than, the mean.  If so, it is very difficult to have confidence that the mean is different than zero.  The two-standard deviation bands around the mean include zero.


Thanks,
Howard
www.quantitativetradingsystems.com


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## howardbandy (5 September 2007)

stevo said:


> *Trend-following systems are designed to take every signal, losing on most trades (70% or so), winning on a few (30% or so), with small losers and big winners.*
> 
> I think that this is dependent on the markets traded. I cannot take all the signals given when I scan 500 stocks using a long term system since I don't have that much money. If I was only following 20 stocks  would definately be able to take all signals.
> 
> I am reading Way of the Turtle at the moment and it looks like it will offer some good insights in terms of drawdowns and trend following systems.





Hi Stevo --

If you know of, or find, trend following systems that work for the majority of common stocks, please let us in on the techniques.

Works means that the system is mechanical, and that optimization, out-of-sample testing, and validation procedures have been followed and the systems pass.

It also means that the system is profitable (or fill in your own objective function) for most common stocks, not mutual funds or exchange traded funds.  (Funds, particularly sector funds, are easy.)  If the portfolio being traded is selected in some way, the selection process must pass validation procedures.

And it means that the system is reasonably profitable with acceptable drawdowns for long (and, if possible, short) positions in all market conditions.  Staying flat in adverse conditions is acceptable.  A system that is profitable for short positions is even more valuable.

I will be happy to code up, test, and distribute results for candidate systems.

Thanks,
Howard
www.quantitativetradingsystems.com


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## rub92me (5 September 2007)

howardbandy said:


> If I have developed a mechanical trading system, tested and validated it, I can only expect the real-time results to approximate the out-of-sample results if I take all the signals.  If I skip some signals, I have turned that system into a discretionary system.



I'm not sure I understand this. 
Wouldn't your testing take into account that you don't trade all the signals based on how you've setup your position sizing, etc.? 
So your testing results would also be based on the fact that it didn't/couldn't trade all buy signals. Otherwise you would only ever be able to test that mechanical systems are profitable assuming unlimited funds which wouldn't be very useful.


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## nizar (5 September 2007)

Howard, my query is similar to that of rub92me.

My understanding was that you could only take positions if you have capital to take the trade. On some days, and at some points during the trading/testing period, its possible that a trader may get more entry triggers than he has capital for, so some discretion must be applied here. This discretion cannot be tested and this is exactly why we apply montecarlo analysis when backtesting. And the minimum profit from the montecarlo applies to the poor bastard that picked all the dogs and the worst possible trading route whilst trading the system.

Systems which by their design take only a low amount of trades, and consequently have less number of possible trade permutations and combinations, have extreme profit/drawdown figures somewhere acceptably close to the mean. 

Such a system would be ideal to trade in the sense that you would have a very good idea of how it would perform in the future in terms of profit/drawdowns as opposed to knowing you will return somewhere between two values very far apart.


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## tech/a (5 September 2007)

I suspect Howard is a futures trader.
I'll respond later when I'm not so damned busy!


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## It's Snake Pliskin (5 September 2007)

Any form of discretion applied to a mechanical system invalidates that "mechanical tag".


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## nizar (5 September 2007)

It's Snake Pliskin said:


> Any form of discretion applied to a mechanical system invalidates that "mechanical tag".




Well if all mechanical systems were designed so that there was enough capital to buy every signal and at no point during the trading timeframe a single decision (e.g. between 2 stocks) had to be made, then there would be no need for monte carlo analysis.


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## It's Snake Pliskin (5 September 2007)

nizar said:


> Well if all mechanical systems were designed so that there was enough capital to buy every signal and at no point during the trading timeframe a single decision (e.g. between 2 stocks) had to be made, then there would be no need for monte carlo analysis.




I guess that highlights the "imperfect nature of system design and mechanical system reality".


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## rub92me (5 September 2007)

It's Snake Pliskin said:


> Any form of discretion applied to a mechanical system invalidates that "mechanical tag".



I would see the restriction of capital more as a filter rather than 'discretion'. Or do you mean that in the strictest sence mechanical systems are limitless automata, and only useful as a theoretical construct?


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## theasxgorilla (5 September 2007)

rub92me said:


> I would see the restriction of capital more as a filter rather than 'discretion'. Or do you mean that in the strictest sence mechanical systems are limitless automata, and only useful as a theoretical construct?




In my opinion it's also important to consider what it actually means to have your capital 100% invested.  It means that the opportunity factor presented to your system by the market is sufficient for you to be fully invested with the maximum number of positions that you deem is ideal for your system's money management and position sizing strategy.  This is a good thing.  In equities it seems that the leaders break first and trend longest.  If you load up on these theoretically you should get the longest trends.  At the end of a trend, a la what we saw a few weeks back, all stocks turn at once and typically trigger exits in concert.


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## Shane Baker (5 September 2007)

Hi Howard

I think that it comes down to your definition of common stocks. As you have alluded to ETF's or mutual funds have different trend characteristics to the S&P500. Other markets such as the ASX 300 or the  lower end of the Russell 2000 also exhibit different trend characteristics and in my experience produce quite acceptable results using weekly based trend following systems with appropriate index and position sizing based filters.

I quite enjoyed your book and was struck by the fact that you preferred shorter timeframes. This, apart from a personal preference, might I may suggest, possibly reflect the characteristics of a market such as the S&P 500 rather than other markets with different trend characteristics.

Your posting is greatly appreciated by all of us I am sure. My path along system tetsing has been five years so far and I am sure it will continue for many more. I enjoy all the discussion about system testing and thank you for your contributions.

Cheers

Shane


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## tech/a (5 September 2007)

I could be wrong but I think there are wires crossed .

If Howard designs tests and trades Futures systems then all his comments fall into place.

If you design a Futures system with* ONE *entity you'll take *EVERY* trade.
Thats what the system will do.It will take a trade exit it then take another.
You'll optimise (or Howard will) his parameters constantly on that entity.

Where everyone is getting in aknot is that most of us here are Stock traders who trade stock systems.
Our capital base wont allow us to take every single trade triggered by the system.
Thats fine as our systems testing shows us that regardless of which combination of trades we take in a portfolio of X stocks we will still have a positive expectancy (And all the other Numbers) within the upper and lower limits returned by our MonteCarlo analysis of our system tested over many 1000s of Portfolio combinations,Times and number of constituents.

To us(Me) optimising every possible portfolio varient seems pointless and testing has shown (Preliminary anyway) that doing so *STILL* only returns figures within those parameters found in my MonteCarlo testing of one of my methods anyway.--Hardly conclusive but unexpected--by me anyway.

I can and have tested the possiblility of trading *EVERY* signal generated by Techtrader and the return had I the finances of Bill Gates is rediculous and un applyable due to being able to buy more than the shares on offer in any one day.

So in summary I think we are talking similar NOT the same and therefore all is NOT applicable in every circumstance.

But I could be wrong maybe not in my mind but in perhaps others like Howard.
I'll still buy the book! There is much to be learnt.


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## howardbandy (5 September 2007)

Greetings --

Thanks for all the responses to my comments on "take every signal." 

I do trade futures and I do trade common stocks.  I agree that there are differences between them.  But I don't think those differences are the difficulty we are having in getting together on this discussion.  

I define a trading system as a combination of a trading model and a market or group of markets to be traded using that model.  Usually there is no confusion and model and system can be used interchangeably.  I think that is causing the difficulty in this discussion.

If I am trading just a single issue in an account, say five-year treasury notes and nothing else, a mechanical trading system will have me long, short, or flat.  The system has been designed, tested, and validated using the treasury note price data, and I am satisfied that it is tradable.  If what I am trading is a futures contract, the system will also specify the number of contracts to hold.  While flat, the funds in that account earn money market interest, but nothing else.  The system is a trading model and the treasury note series.

If I am trading a group of common stocks, the group must have been selected by some process.  Selection of tickers to include must be subject to the same procedures as selection of parameters for a model.       The system is a trading model that will be applied to all issues in the group, plus the price and volume series for the issues in that group.

Focusing on the system that is made up of a model and a group of common stocks.  During the process of developing the system, I will see that some days there are more buy signals than I have funds to cover.  The system must recognize that and handle it as part of the system.  There must be some mechanical way of assigning a score to each individual signal, then taking positions in those stocks with the highest scores.  

AmiBroker does this in a two step process, all within one system.  The model is run over all the tickers in the group.  Say the group consists of 20 stocks, each a candidate for a signal to buy, sell, or be flat.  I decide ahead of time, and build into my system, how many positions I wish to hold at any given time; say it is five.  Assume I am trading using end-of-day data and taking positions at the next day's open.  At the end of each day, I run the system.  If there are sell signals for stocks I own, those will be sold at the next open.  If there are buy signals for stocks I do not own, say there are seven buy signals, each individual signal will be assigned a number called its PositionScore.  If there are positions available after the sales, say three, then orders will be placed to buy three stocks -- the three chosen from among the seven are the three with the top PositionScore values.  The system knows how to do this and all I see (unless I want to see the deeper details) are the Sell and Buy orders for those tickers that the system chooses.  

If I want to change the stocks in the group, or add stocks to the group, that has the same implication as changing the length of a moving average.  The stocks in the group are as much a component of the trading systems as the length of the moving average, and must be chosen using good system design and validation techniques.

Thanks for listening,
Howard
www.quantitativetradingsystems.com


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## tech/a (5 September 2007)

Howard.

All makes perfect sense.
Some of us dont have amibroker so some of us dont have the ability to rank with Amibroker.
We can and some do using other methods/filters whatever you wish to call them.
Even so not all trades triggered as a buy are taken as a trade with or without Amibroker. Evidently amibroker ranks the best buy triggered on that day by some means possibly very different to that which I may chose,dont know.

I also know from my testing that it doesnt matter which trade I take from the group triggered (I dont select a stock from a group of triggered trades at random either) that regardless of which is chosen, I can expect a return of figures within tested parameters.

Thanks for replying.
tech


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## rub92me (5 September 2007)

Thanks for the explanation Howard - looks like we're on the same page again,  semantics aside.


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## howardbandy (5 September 2007)

Nick Radge said:


> Donchian style systems are too simplistic and is why they've failed over time. You need to go beyond simplistic. Anyone can bang out a breakout system in minutes these days. Some research on the way Campbell & Co have changed over time will lead to some great insights on how to improve the quality of a trend following system. I think you'll find that price and volume are now almost secondary inputs.
> 
> I should also say that many of these top fund managers being quoted look at risk adjusted returns and not necessarily absolute returns like many of us are attempting to achieve. This portends directly to the drawdown equation being discussed herein. A 25-yo who has the maturity and patience to look at a trend following method over the longer term should have greater tolerance for drawdowns than say someone who is older and more risk adverse.
> 
> Nick




Hi Nick --

I agree that simplistic systems, particularly when applied to long term holding periods, are unlikely to work well.  They are too easily implemented.  If it turns out that one is trading profitably, there are a lot of people who will notice, begin trading that system, and quickly remove the inefficiency that system recognizes.

There are only a few inputs available for trend followers -- prices for the tradable issue (including patterns, breakouts, moving averages, and indicators), prices for intermarket issues, and seasonality (time of year).  Volume data for futures is available, but is reported a day late.  Commitment of Traders data is available, but is reported several days late.  Government and non-government agency reports are reported many days late and are subject to later revision (if you believe them at all).

I completely agree with you about selecting systems based on highest absolute returns.  When running optimization searches and walk-forward tests, using absolute return as the objective function is seldom successful.  Some form of risk-adjusted return is almost always better.

[About Campbell -- Campbell describes themselves as medium to long term trend followers.  Annual Performance for their US$11 billion futures fund lists these results:
2002 1.23%
2003 20.41%
2004 6.96%
2005 11.02%
2006 5.48%
2007 (thru July) -6.02%

The data comes from:
http://www.autumngold.com/Advisor/CTAProfile.php?op=profile&id=23

Am I missing something?]

Thanks,
Howard


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## howardbandy (5 September 2007)

tech/a said:


> Howard.
> 
> Some of us dont have amibroker so some of us dont have the ability to rank with Amibroker.




Don't have AmiBroker???  

IMO, AmiBroker is spectacular.  It has (almost) all the features I want in a trading systems development platform, has outstanding support from its developer, and is very reasonable in price.  The features missing from the current version are being filled in very rapidly.  Version 5.00 was released yesterday.  Download a trial version at no cost at:
http://www.amibroker.com/

Sales pitch over.

What development platforms are forum members using?  For those who have tried AmiBroker and are not using it, what features does it lack?

Thanks,
Howard


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## nizar (5 September 2007)

I use metastock/tradesim.
Amibroker i did consider it, but decided the formula language would be too hard to learn.
We dont all have degrees in computer science


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## wayneL (5 September 2007)

nizar said:


> I use metastock/tradesim.
> Amibroker i did consider it, but decided the formula language would be too hard to learn.
> We dont all have degrees in computer science



LOL

Ami is easier than metamumbojumbo + Tradesim.


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## tech/a (6 September 2007)

When I started Systems testing Amibroker wasnt around.
Tradesim came on board as a serious tool about the same time Amibroker arrived.So I have been using Metastock and Tradesim.

Similar to Nizar I was/ am reluctant to put in the time to learn a new language. However As Tradesim can be linked to Amibroker and the power of Amibroker it makes sense to have it in the toolkit particularly as its so cheap.

If you dont want to learn the code Pay someone to code up!.

Howard 
Any further comments on my observation/comments?

Agree with Wayne metaspeak isnt the easiest to get your head around and Mine is only partially around it.


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## theasxgorilla (6 September 2007)

howardbandy said:


> What development platforms are forum members using?




Amibroker, love it.


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## Nick Radge (6 September 2007)

Howard,
There are numerous inputs beyond price and volume that can be used. Think quant traders as an example. My example of Campbell was they use different tools. Their returns are risk adjusted _and_ based on $11 billion _and_ they are commodity/fx based. I agree in context about what you say about commodity trends, but I disagree with stock trends.



> If you know of, or find, trend following systems that work for the majority of common stocks, please let us in on the techniques



I'm not going to reveal my system but perhaps you can dissect tech/a's TechTrader for the general population. However, why don't you select 10 common stocks - preferably at random - and I'll run my system over them and report back. This is not a pishing contest - I just disagree with your statements.

Nick


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## tech/a (6 September 2007)

> dissect tech/a's TechTrader for the general population.




Please go ahead.
I personally would like to know why it works when it evidently shouldnt .
Particularly as I have traded it and 2 similar.


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## nizar (6 September 2007)

Would it be an accurate statement to say that the proportion of those trading mechanical systems (as a proportion of all the market participants) is far greater in the futures market than it is in the stockmarket?

Maybe this is why mechanical systems such as the Donchian channel breakouts have lost their touch in the futures market (because of more people using the same or similar system) but still a goer in the stockmarket?


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## Chorlton (6 September 2007)

howardbandy said:


> Hi Nick --
> 
> I agree that simplistic systems, particularly when applied to long term holding periods, are unlikely to work well.  They are too easily implemented.  *If it turns out that one is trading profitably, there are a lot of people who will notice, begin trading that system, and quickly remove the inefficiency that system recognizes*.




Out of interest for someone new to System Development, is this always the case with *ALL* Mechanical Systems or only those which are built upon specific rules such as those designed to look for inefficiencies in the Mrkt??

Why will they always be ultimately untradable if many people look for similar buy/sell signals and trade them accordingly??

Afterall, wouldn't a system based on "solid" trading rules work over the long-term regardless of how many people where trading similar rules. For example. look at TechTrader. The system itself is very straightfoward and I'm sure that there are many systems out there which are looking for similar set-ups. Yet, it has consistantyly performed well over the last 4years.

Surely if many systems are identifying the same stocks on the same days for trading purposes, then (as long as we follow our systems without question & tampering) then this will surely only help to increase the chances of those stocks moving in our favour? 

I'm probably missing some very obvious point here but would welcome comments....

Thanks,

Chorlton


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## tech/a (6 September 2007)

There is an abundance of reasons why a system wont work.

Very little on why a system or systems *WILL* work.
I find it strange that more is written/discussed on the former.

Academics tend to turn systems testing into Voodoo/Rocket science.
It aint that hard.
Same is obvious in discretionary trading,from what I have seen.

I guess I'm a very lucky builder!


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## nizar (6 September 2007)

Chorlton said:


> Surely if many systems are identifying the same stocks on the same days for trading purposes, then (as long as we follow our systems without question & tampering) then this will surely only help to increase the chances of those stocks moving in our favour?




Well if several systems were to buy the opening price of the same stock on the same day, and as such the buy side would be stacked when the market opens (as it would open much higher than if few people were going to buy the stock) then extra consideration must be given to slippage.

But we can incorporate this into our trading simulations with tradesim (market order instead of default order).

Though it shouldnt matter a great deal if you are dealing with liquid stocks (liquidity filter) and if you are a small player (which i am, but hey you gotta start somewhere )


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## Chorlton (6 September 2007)

nizar said:


> Well if several systems were to buy the opening price of the same stock on the same day, and as such the buy side would be stacked when the market opens (as it would open much higher than if few people were going to buy the stock) then extra consideration must be given to slippage.
> 
> But we can incorporate this into our trading simulations with tradesim (market order instead of default order).
> 
> Though it shouldnt matter a great deal if you are dealing with liquid stocks (liquidity filter) and if you are a small player (which i am, but hey you gotta start somewhere )




I agree Nizar, slippage would potentially be an issue but as you say this could (to some degree) be accounted for when backtesting.....

On a seperate note, I'd like to thank all for their replies on this thread and others regarding System Development. I have learned a lot simply by reading these posts....

Cheers...

Chorlton


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## Temjin (6 September 2007)

nizar said:


> I use metastock/tradesim.
> Amibroker i did consider it, but decided the formula language would be too hard to learn.
> We dont all have degrees in computer science




Man, Amibroker looks so much easier than MetaTrader, which is the development platform I am using. It's lack of any simulation features but learning the ability to code such features allow me to be more flexible with different softwares / capability of transfering systems in the future.



			
				nizar said:
			
		

> Though it shouldnt matter a great deal if you are dealing with liquid stocks (liquidity filter) and if you are a small player (which i am, but hey you gotta start somewhere )




This is also one of the reason why being "small" has an edge over large players because of the liquidity factors. 

I tend view the entire market as a pond of liquid gold that spills some of its content out regularly due to inefficiency. A large player will try to capture all the spilling by the bucket load, while as smaller players, we can take the spilling by the droplets without upsetting the whole "scavenging" so much. And droplets might seem small, but can still remain a very lucrative business when the pond of liquid gold we are talking about are in the orders of trillion of dollars every day. 

This would explain why certain simple systems may still work because it is not employed by the bucket boys who hire professional traders/IT geeks to develop quantum mechanic based alorgorim trading systems. (i.e. banks/large financial insituations)

My beliefs anyway. (and out of topic too, sorry) 

By the way, love the discussion here, keep it going.


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## theasxgorilla (6 September 2007)

tech/a said:


> Please go ahead.
> I personally would like to know why it works when it evidently shouldnt .
> Particularly as I have traded it and 2 similar.




I'll pre-empt a response from Howard and have a go:

* Start date bias
* Leveraged exposure to a strong and protracted bull market
* Non-cap-weighted exposure to the market leading to index out-performance
* Price filter encourages taking positions in what are likely to be lower liquidity issues with inherently greater growth potential
* Discretionary entry trigger over-ride may have added some performance edge

ASX.G


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## stevo (7 September 2007)

howardbandy said:


> Greetings --
> If I am trading a group of common stocks, the group must have been selected by some process.  Selection of tickers to include must be subject to the same procedures as selection of parameters for a model.       The system is a trading model that will be applied to all issues in the group, plus the price and volume series for the issues in that group.
> 
> Focusing on the system that is made up of a model and a group of common stocks.  During the process of developing the system, I will see that some days there are more buy signals than I have funds to cover.  The system must recognize that and handle it as part of the system.  There must be some mechanical way of assigning a score to each individual signal, then taking positions in those stocks with the highest scores.
> ...




Howard
My approach is to test a system on a large number of stocks using *PositionScore set to random*. The system has to give positive results for all portfolio runs in a Monte Carlo simulation - any of the outcomes in the backtest must give results that I would be willing to receive. Then I might use PositionScore to rank the trades to be taken. 

But *if the system requires PositionScore to be considered tradeable then I will not trade it*. I suppose that I could test how robust the PositionScore value is - something that is worth pursuing.

I have traded a long term system for 5 years now where if I have 5 trades but can only take 2 then I use my discretion to select the 2 I want to take. *At times I have flipped a coin*. Over the last 5 years I have made 153 trades using this approach - so I guess it is fair to say I have walked the system forward. I have even tested different, randomly generated stock universes to see what sort of variation I may get with different universes, because the universe I trade in the future will not be the same as the universe I tested in the past. 

*Using random, or subjective judgement, to make the final stock selection is not really similar to varying the values of a moving average in the buy and sell criteria - as long as you know what the probabilities and potential outcomes are.* 

*Is it possible to take whatever criteria you want to use for PositionScore ranking and incorporate it into the buy signal? *For example if ROC(C, 1) is what is used to rank stocks in PositionScore then determine a cutoff point below which the trade is not worth taking and use in the buy signal. This would reduce the number of buy signals potentially to the point that there are no extra buy signals that need to be scored.

*I think it would be true to say that I am as close to an investor as a trader can get* - I have trades that have been running for 3 years, although I have also cut trades within a couple of weeks of taking them. Many of the big winners go in excess of 1 year and my average hold time is 9 months. I also don't even look at daily charts, let alone intra-day charts. I only use the weekly time frame and I don't use leverage. 

These types of time frames and holding periods are probably quite foreign to a futures trader. But it works for me and *the basic principles and techniques used to develop a trading system are the same.*

I look forward to reading your book - I am sure that it will get me thinking judging by your posts to this forum.

thanks
stevo


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## tech/a (7 September 2007)

theasxgorilla said:


> I'll pre-empt a response from Howard and have a go:
> 
> * Start date bias
> Unknown at the start date
> ...




Even so I dont think this explains WHY this system succeeds.
It only points out some conditions of the system and past conditions of the market which have contributed to its performance.Many other systems have failed even during this bull market.

The market conditions of the last 5 yrs are exactly the conditions the system was designed for.
*As far as I'm concerned job done!*


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## theasxgorilla (7 September 2007)

tech/a said:


> Even so I dont think this explains WHY this system succeeds.
> It only points out some conditions of the system and past conditions of the market which have contributed to its performance.Many other systems have failed even during this bull market.
> 
> The market conditions of the last 5 yrs are exactly the conditions the system was designed for.
> *As far as I'm concerned job done!*




I forget one last element, the tweak in the entry trigger that tries to capture only breakouts that are forming higher lows and highs improves the entry efficiency or edge ratio or whatever you want to call it.  In other words, fewer breakouts ought to be false breakouts.

There is also an edge apparent in something as simple as the position sizing ie. not oversizing into risky or slow moving positions or undersizing into those stocks with the potential to make the greatest difference to the system's returns.



tech/a said:


> * Start date bias
> Unknown at the start date
> Understood.  A linear regressed line through the equity curve might help address this.
> 
> ...




I'm still not really sure what you're holding back tech/a...do you have a why that is unclear to everyone else?  The system is on the table.  I don't see anything magestic about it beyond the things I've already pointed it.


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## howardbandy (7 September 2007)

Greetings --

Stevo said in one of his postings:  "But if the system requires PositionScore to be considered tradeable then I will not trade it. I suppose that I could test how robust the PositionScore value is - something that is worth pursuing."

PositionScore is just a part of the trading system.  It can be included or excluded, as you wish.  If it is excluded, AmiBroker will use a default process that functions as PositionScore just as though you wrote it that way and intended it that way -- see my note later in this post.

When I am using PositionScore, I think of the system as operating in two phases.

Phase one.  Process all the tickers in the list of possible issues.  If you are trading all the stocks in the S&P 100 index, that list is 100 long.  For each ticker, use whatever rules or indicators are need to generate a Buy signal.  If 14 of the issues generated Buy signals, pass the shorter list of 14 on to phase two.

Phase two (only needed if there are more Buy signals than there are "slots" available).  Rank the issues that have current Buy signals according to PositionScore.  Buy the ones listed at the top of the list, starting at the top and continuing down until you have filled all the slots.

Setting PositionScore to a random number is fine.  What that says is that all of the alternatives are of equal goodness as measured by your objective function, and the choice should be made at random.  

But, if there is some additional information that can help select those alternatives that are more likely to be profitable, or more profitable, or have lower drawdown, or add diversity, or whatever else is important, PositionScore makes it possible to identify the best of the alternatives.

If there are more Buy signals than slots and PositionScore has not been specified, AmiBroker sorts the list into order alphabetically, then starts at the top, just as though you specified PositionScore to be Alphabetical rank.  If there are often more signals than slots, you will see positions being taken in tickers starting at the beginning of the alphabet much more often than tickers later in the alphabet.  Be sure you mean that.

Note:  Setting PositionScore to Random sets up a MonteCarlo process.  You may want that or you may not.  If the initial random number seed is random -- such as the lower digits of the clock -- and it probably should be random rather than specified in the code -- then the sequence is not repeatable and the trades cannot be replicated.  In order to evaluate a trading system like that, many runs should be made and the resulting distribution(s) evaluated using statistical methods.  One run is not enough. 

Thanks,
Howard
www.quantitativetradingsystems.com


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## tech/a (7 September 2007)

> I don't see anything magestic about it beyond the things I've already pointed it.




*Nor do I*.
The biggest kick I get out of it is that its simplicity and public performance pissses the hell out of a lot of people who would love to have seen it fail miserably.

I'll say it again its not that hard.
Humans have the capacity of turning the most simple into the most complex.


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## stevo (8 September 2007)

tech/a said:


> *Nor do I*.
> The biggest kick I get out of it is that its simplicity and public performance pissses the hell out of a lot of people who would love to have seen it fail miserably.
> 
> I'll say it again its not that hard.
> Humans have the capacity of turning the most simple into the most complex.




It may not be that hard for some but there are 2 things that make it hard for us normal irrational humans. Firstly our emotions and, secondly, we don't really know what is going on - what the psychologists call "cognitive difficulties" . 

The lines on a computer generated equity curve don't convey the emotional turmoil when a trader hits a 20% plus drawdown - "what if my system doesn't really work", "what will happen tomorrow, is this 1929 / 1987 all over again" or "I am going to lose all my money" etc. We see this sort of navel gazing on these forums.

tech trader is a great exercise. Ideally people get to understand it, do some system testing themselves, run through the signals it has given in the past and get a handle on what they are getting into. I am sure that lots of people have gained a huge amount of knowledge from understanding tech trader better.

I would rather not be tech/a to all those traders that see it as a pot of gold but have no idea how it works. The first big drawdown  will see them blaming everyone else and probably abandoning the system because it doesn't work - probably just before it takes off again!

I have seen it happen in a small way with a friend, although he just over-rides the system because he has a "feel" for the markets and doesn't need it anymore. Supreme confidence, most of us think that we are god when it comes to the markets 

I know my ability to trade by gut feel and animal cunning - no chance!

I personally believe that simplicity is vastly over-rated, but then I ignore most of the market information and look for a solution based on incomplete knowledge.:

Enough of my ranting. 

stevo


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## tech/a (8 September 2007)

stevo said:


> It may not be that hard for some but there are 2 things that make it hard for us normal irrational humans. Firstly our emotions and, secondly, we don't really know what is going on - what the psychologists call "cognitive difficulties" .




Thats why we design systems.But yes if you dont design it yourself and have confidence in your testing,UNDERSTAND why a system works,UNDERSTAND that the numbers generated are your ultimate stop,you will fall into the psychological war within yourself in times of under performance.
I think that being in Business for 30 yrs and having the ability to make instant decisions,often when vast sums of Money are at stake (Plus having been on the brink of Bankrutcy twice) has stood me in good stead to UNDERSTAND what makes sound business decision making,and in a timely fashion.



> The lines on a computer generated equity curve don't convey the emotional turmoil when a trader hits a 20% plus drawdown - "what if my system doesn't really work", "what will happen tomorrow, is this 1929 / 1987 all over again" or "I am going to lose all my money" etc. We see this sort of navel gazing on these forums.




Ive learnt too that there comes a time when you'll be exited and stopped,pretty close to where pain is at its most.Armed with your exits,Stops and Blueprint of systems parameters which tell you if your trading in a market not seen in testing,you should never be in panic mode.



> tech trader is a great exercise. Ideally people get to understand it, do some system testing themselves, run through the signals it has given in the past and get a handle on what they are getting into. I am sure that lots of people have gained a huge amount of knowledge from understanding tech trader better.




Well its taught me a lot.



> I would rather not be tech/a to all those traders that see it as a pot of gold but have no idea how it works. The first big drawdown  will see them blaming everyone else and probably abandoning the system because it doesn't work - probably just before it takes off again!




*T/T is at an interesting phase now *with only a few open positions, a great deal of cash and still within its blueprint.More learning will come I'm sure.



> I have seen it happen in a small way with a friend, although he just over-rides the system because he has a "feel" for the markets and doesn't need it anymore. Supreme confidence, most of us think that we are god when it comes to the markets




From the years Ive been on 2 forums Ive seen it year in year out with many many traders coming and going.Few return.Some are brilliant analysts both Fundamental and Technical.
BUT APPLICATION of your trading method is the hardest of all.Application of some method youve come up with that logically should return great profit (Buy low sell high as an example) isnt as simple as doing just that.
*Of ALL *the reasons traders fail this is the single biggest reason for failure that I have seen.



> I know my ability to trade by gut feel and animal cunning - no chance!
> 
> I personally believe that simplicity is vastly over-rated, but then I ignore most of the market information and look for a solution based on incomplete knowledge.:
> 
> ...




The question should be simplicity in WHAT!
Simplicity in WHY your business will succeed and others fail.
*Thats the SIMPLICITY I speak of!*
It--- Business of any sort is THAT simple.


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## Chorlton (8 September 2007)

tech/a said:


> *T/T is at an interesting phase now *with only a few open positions, a great deal of cash and still within its blueprint.More learning will come I'm sure.




Tech/A,

Is the above a result of the system simply not taking any current signals (and is therefore still running) or have you now turned the system off???


Regards,

Chorlton


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## tech/a (8 September 2007)

The System that is traded on Radges site is still business as usual.
Its right up to date and there to veiw if people wish.
It took a new trade last week.

Personally is another matter.
I did trade 3 similar systems to T/T.
All I exited on July 27.
The reasoning behind this right or wrong is posted on the techtrader thread.
I am currently only taking a few short term trades.


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## motorway (8 September 2007)

> * Non-cap-weighted exposure to the market leading to index out-performance
> Hmm dont know that anyone would weight their positions to capitalisation---do people do that?
> Heard of an index fund? Mutual funds look a lot more like the index than a trend following stock system with 10 - 20 equal sized positions that also avoids the ASX50 altogether, by design. You bet people do it, and it's a hand brake on performance. Therefore, not doing it is an edge and IMO a reason why a system like TechTrader works.




Someone who is very critical of mechnical trend following is Victor Niederhoffer ...



> Victor Niederhoffer Reviews 'Does Trend Following Work On Stocks?'
> 
> This paper, by Cole Wilcox and Eric Crittenden of Blackstar Funds, makes a worthy and thoughtful effort to answer the question of whether it's possible to devise a trend following method that works in stocks. Their method is to buy stocks at all time highs then they sell them after a 20% decline or so using the true range as a cut-off to sensitize. In order to do a valid study of such a phenomenon they have had to be careful to adjust properly for survival bias. They do this taking account of all NYSE, AMEX, and NASDAQ stocks listed and de-listed from 1983-2004.
> 
> ...


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## tech/a (8 September 2007)

> When restricted to the S&P 500 we found an inverse relationship between the tendency to have substantial and prolonged % moves and market capitalization.




Seems it could be used as a buy filter (Like bang for buck).
I guess trading a Margin list as I have brings the market cap of stocks traded 
generally higher.
Anyway I'm Ok with academics who prove its not possible to make a profit trading trends.

I had a Chartered accountant once tell me to stop working for myself and seek employment.
2 Doctors and a solicitor heatedly trying to convince me that I was going to face ruin holding the number of properties I had.That was in 1998.

I changed accountants.
My professional friends snatch the odd weekend getaway in our apartments.


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## theasxgorilla (8 September 2007)

motorway said:


> Someone who is very critical of mechnical trend following is Victor Niederhoffer ...




I'm not surprised Niederhoffer feels this way.  Michael Covel hangs him out to dry quite a bit in his book titled "Trend Following", and from the account of Niederhoffer's story in this book he seems like the kind of _smart_ person who couldn't appreciate what trend following is about.  These people seem to believe that their smarts are the secret to their success in the market and the market itself is responsible for their failures.  Self-attribution bias I believe it's called.



motorway said:


> Trend System results are hard to distinguish from the results of a randomly-selected, equal-weighted portfolio, or at least that the mean and standard deviation of the returns of such a portfolio should be the benchmark for the Trend System, rather than a cap-weighted index.




I don't pretend to be experienced or extensively knowledgeable on this topic.  I started writing code for a system about 2-3 months ago.  But I had a hunch that this needed to be the case and I agree with his statement.  For this reason before working on any system I created a random entry/exit system to which I added various componentents such as equal-weighting of positions and price filters.  I then made 2500 random runs over 10 years of data (imperfect data by Howard and Blackstars definition and survivorship biased too, but it's a benchmark so I believe relative comparisons between different systems can still be made...if it can't I'm not sure I want to know ) and observed the changes in distribution of CAGR and Max DD.  These become part of my benchmark to which a system with superior edge should have superior Monte Carlo distributions.

ASX.G


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## tech/a (8 September 2007)

No offence ASX but do you actually trade?
and if you do do you or have you made enough to lets say pay for a reasonable home?



> I don't pretend to be experienced or extensively knowledgeable on this topic. I started writing code for a system about 2-3 months ago. But I had a hunch that this needed to be the case and I agree with his statement. For this reason before working on any system I created a random entry/exit system to which I added various componentents such as equal-weighting of positions and price filters. I then made 2500 random runs over 10 years of data (imperfect data by Howard and Blackstars definition and survivorship biased too, but it's a benchmark so I believe relative comparisons between different systems can still be made...if it can't I'm not sure I want to know ) and observed the changes in distribution of CAGR and Max DD. These become part of my benchmark to which a system with superior edge should have superior Monte Carlo distributions.




All this and lots of educated head nodding---hear hear good point.
Anyone made a profit here?

Your a smart guy.
So is Howard and so are many others here.
Is it really necessary to have a degree in statistics to be successful?

My hunch is that some people (Not saying yourself or anyone here for that matter) get so tied up in the design and analysis that they question the validity of just about everything.
Complicate the crap out of everything and *forget to actually TRADE*.

Ive watched at least 10 attempts to design and trade a system here and on Reefcap.Other than Stevo and a very few others Ive seen failure after failure.Only 3 have logged their trading that I know of. None who have succeeded as far as I know are statistical graduates.

Its like a little snippet is found in one persons writings and another in anothers then a contradiction followed by a gem.

What the hell makes a good system.---I reckon I know and If I dont trade again in my entire life the market has been highly profitable for me.

I reckon its pretty easy.
Stock goes up get on it for as long as you can.
Turbo charge it with sensible leverage and re invest profit.
Cut losses short.
Keep out of stagnant stock.
Code a method that does that.
Test it and TRADE IT.

Sorry having a bit of a rant.
I'm frustrated that it "Appears" amazingly difficult to "Get it right".
I simply dont agree.


----------



## wayneL (8 September 2007)

No offense Tech, but that was really an obnoxious post.


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## weird (8 September 2007)

Motorway interesting post. 

I recently read a old-ish blog by Jack o'Clubs, concerning his experience using MTPredictor following the 3 trade setups ... TS1, TS2 and TS3. 

http://www.trade2win.com/boards/blogs/viewblog.php?userid=42821

My understanding of his conclusion , is that he had more success with the TS2 trade setup. Although this is only from 3 months of paper trading.

From MTPredictor website,

"A TS2 trade set-up is where the ABC correction forms as a correction when the main trend is already well established and has already had an earlier correction. In Elliott wave terms, this is a Wave 4 correction."

The TS2 setup reminds me a little of the Type-1 BUY setup in Advanced get.  

That is in both cases we are entering based on the existence of an established trend. EW has been used as a trend identifier.

This in essence is trend following, although in this case, we may be wishing to utilise this momentum for a short or medium term gain.

Chick Goslin, in Trading Day by Day, makes an interesting set of 3 laws of trading, where the 2nd is "continuation is more likely than change".

The MT Predictor guys also place alot of emphasis on money management and position sizing along with their scans, particularly reward risk ... we then have a few different things in play here which could further contribute to success.


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## stevo (8 September 2007)

Tech
"None who have succeeded as far as I know are statistical graduates."

You don't have to be a statistical graduate to understand that it would be good to trade a system that beats throwing darts at the middle pages of the Financial Review! 

stevo


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## theasxgorilla (9 September 2007)

tech/a said:


> No offence ASX but do you actually trade?
> and if you do do you or have you made enough to lets say pay for a reasonable home?




Haha, I post on forums, write in my blog and in between waiting for responses I go out and dig holes in the garden.  *What makes you think that I don't trade?*  Yes I trade and my CGT liabilities for the last 5 years suggest on the balance of things I'm not losing, FWIW.  But this doesn't mean ****!  Its been almost impossible to lose in this market.  

I made 50% last year, *net* of expenses, and I don't mind admitting my account size isn't that large so this is quite a feat, IMO.  Yes I can and do trade.  No I didn't buy a house with the money.  What does this have to do with anything??  You want to measure where I'm up to on my journey relative to you?  I've started the journey...forget the details.

I agree with you, it's not that hard.  But it can be time consuming and full of cognitive biases.  I have a demanding profession, so I don't need even less free time and more stress.  A key reason why I don't document any of my trades in the public domain is that I am trying as best as possible to preserve the integrity of the decision making.  Call it an _information diet_.  I don't need yours or anyone elses opinion to validate my decisions.  You'd be familiar with this attitude I suspect.



tech/a said:


> Is it really necessary to have a degree in statistics to be successful?
> 
> My hunch is that some people (Not saying yourself or anyone here for that matter) get so tied up in the design and analysis that they question the validity of just about everything.




Frankly I can't think of a better way to be.  I thrive on questioning the hell out of everything.  If people can't tollerate that, well, I'm sorry, work a bit harder to get your ideas across if you think you're right or decide it's not worth the effort, up to you.  I'm not unreasonable, I willingly change my point of view but not just because someone uses CAPITAL letters and *bold in their posts*.

Give me something of worth and value.  In the meantime I'll be out in the garden digging a hole.


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## theasxgorilla (9 September 2007)

stevo said:


> "None who have succeeded as far as I know are statistical graduates."
> 
> You don't have to be a statistical graduate to understand that it would be good to trade a system that beats throwing darts at the middle pages of the Financial Review!




Just on this topic, I think it can be on the virge of insulting to some well schooled people how technically easy it is to design and implement a trend following system...even one that goes beyond being what everyone seems to agree is a _simple_ system, a la Tech Trader.  But for me, I think it's still better to go full circle through the process of understanding why its ultimately simple than to just believe it, find you do well, and not be able to recognise the difference between well done and dumb luck.

ASX.G


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## Nick Radge (9 September 2007)

weird,
The constant similarities between MTPredictor and AGET are because Steve, the developer of MTP worked with Tom Joseph, the developer of AGET. He left to make a simpler approach to the setups and MTP was born.

The basis of their approach is, and dare I say it here, simple. They look for a pre-defined pullback within a strong trend. We could substitute the TS2 for any number of patterns, such as a micro triangle ala' Curtis Arnold, and get the same outcome. There is no secret to TS2 nor any other pattern for that matter, MTP simply take comfort from it because it suits them. What they really promote is the positive expectancy created from a low risk setup. When you have a win rate, such as theirs, near 35%, you need to run the winners out past 3R. That's it in a nutshell.

What is being said in these pages is that the psychological application of trading is what is difficult, if not impossible for the majority. My opinion on this, as stated in my book, is that we're brought up to be right in anything we do. Having a 35% strike rate goes against everything our schooling taught us. I believe that the vast majority of traders fail because they (a) do not understand this concept and always look for a better way, better being higher win rate, and (b) they risk too much of their capital.

I think it prudent that we all learn as much as we can about what we're attempting to do although I do think there is point at which comfort/payoff becomes inefficient. However, its also easier for me to say that because of personal experience which is what ASX_G is alluding to above.


----------



## tech/a (9 September 2007)

wayneL said:


> No offense Tech, but that was really an obnoxious post.




Was meant to be. Gets the type of responses above.

People who have written books have contributed here.These people are seen as experts,and they may well be in their field of system design.Do they trade?
Do they place serious money on the table (ASX,anyone can use play money.Vast difference investing serious money.----As I have asked a few---would you go get a $500,000 loan and invest it in your trading method?).1000's do just that to buy a home/s as an investment/s.

My questions to the experts and Radges suggestion were basically ignored.Yet Howard went to great pains initially to mention that discussion should be on topic and civil. I get annoyed when ignored ---just a personal thing.As has already been pointed out writting books doesnt necessarily equate to consistently profitable trading.



> agree with you, it's not that hard. But it can be time consuming and full of cognitive biases. I have a demanding profession, so I don't need even less free time and more stress. A key reason why I don't document any of my trades in the public domain is that I am trying as best as possible to preserve the integrity of the decision making. Call it an information diet. I don't need yours or anyone elses opinion to validate my decisions. You'd be familiar with this attitude I suspect.




Anyone who makes a consistent profit would.Your not alone with time demands thats why simplicity is king.You'll note the T/T is recorded by Daryl every week and he takes care of house keeping.
T/Trader is not a showcase of how I trade.It is and was always an exerscise to see if a method could be systemised and traded forward to profit.
How it managed to out perform by the 100s of % in all its simplicity has been the basis for my own trading and from the mails I recieve many others.
Doesnt mean they use the system---just the building blocks,the simple yet effective ways of turning a very mediocure method into a very profitable one.It aint mathamatical genius.Its IS simple business application.



> Frankly I can't think of a better way to be. I thrive on questioning the hell out of everything. If people can't tollerate that, well, I'm sorry, work a bit harder to get your ideas across if you think you're right or decide it's not worth the effort, up to you. I'm not unreasonable, I willingly change my point of view but not just because someone uses CAPITAL letters and bold in their posts.




Nor do I ASX,provided in the end you or I arent inflicted with Analysis Paralysis.Ive always enjoyed sound---heated at times debate with many here and on Reefcap.You learn more.But I do get annoyed when there are just hollow comments ,heaps of nodding in unison,about some statement that sounds right but no evidence to suggest that infact it has a basis of fact.
ASX I'm not asking you or anyone to change their view.Perhaps question some things.
Capitals and bold stem from my old marketing days.



> Give me something of worth and value




I'm asking the same and guess I'll get it from the books offered up.

Personally I think I have given the odd "something" of worth and value over the years.If nothing else---If I can trade profitably---anyone can.
Yeh yeh a raging bull market--5 yrs the market doubles plus a bit.
5 yrs initial capital increases 10 fold plus a bit.---dumb luck!

Simply sound business.


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## theasxgorilla (9 September 2007)

Nick Radge said:


> What is being said in these pages is that the psychological application of trading is what is difficult, if not impossible for the majority.




Exactly...I hope I'm not the only one who realises that a _model_ portfolio system 'housekept' in a forum thread somewhere doesn't involve an iota of this rather large part of the trading equation.


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## tech/a (9 September 2007)

I think you and Radge speak of different psychologies.

You the psychology of actually trading.
Radge the psychology of getting to the point of and indeed taking part in trading.---where my ramblings fall.


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## weird (9 September 2007)

Nick Radge said:


> weird,
> The constant similarities between MTPredictor and AGET are because Steve, the developer of MTP worked with Tom Joseph, the developer of AGET. He left to make a simpler approach to the setups and MTP was born.




According to Tony Beckwith ,

http://www.trade2win.com/boards/showthread.php?p=84299&highlight=Steve+Griffiths#post84299

Steve Griffiths worked at Dynamic Traders, which is Robert Miner.

http://www.mtpredictor.com/company/SteveGriffiths.html



> As Steve's trading career progressed, he became more involved in supporting other traders, especially trying to trade Elliott waves - in particular, running the Advanced GET™ usergroup in 1997-1999. Steve also represented both Advanced GET and Dynamic Trader in the U.K., and wrote trading reports for Dynamic Trader in 1999-2000.


----------



## Chorlton (9 September 2007)

tech/a said:


> The System that is traded on Radges site is still business as usual.
> Its right up to date and there to veiw if people wish.
> It took a new trade last week.
> 
> ...




Cheers Tech...  I'll take a look at the T/T thread.........


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## Nick Radge (9 September 2007)

> Steve Griffiths worked at Dynamic Traders, which is Robert Miner




aaahhh...I stand corrected. Thanks.


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## wayneL (9 September 2007)

tech/a said:


> Was meant to be. Gets the type of responses above.



Only because the responder is balanced. Stuff like that can quickly turn a forum to sh!te.

You don't like it when your integrity is challenged, please don't do it to others.


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## tech/a (9 September 2007)

Fair enough.

ASX I apologise openly if you felt that I had questioned your integrity.
I can see where it could be seen as a personal attack.
Didnt mean it that way---Was attempting to hone in on aspects you had bought up.
Evidently very badly.


----------



## theasxgorilla (9 September 2007)

tech/a said:


> ASX I apologise openly if you felt that I had questioned your integrity.
> I can see where it could be seen as a personal attack.
> Didnt mean it that way---Was attempting to hone in on aspects you had bought up.
> Evidently very badly.




The apology should be to the contributors of the thread for once again trying to push a theoretical discussion forward to a place where it could bring to light your personal practical achievements.  All paths lead to this place when you are posting tech/a.

Maybe you'd like to critique the original post which brought us here which surmises that a simple long term long-only trend following system may have little to no apparent edge when compared with a random entry-exit system that includes identical position sizing, leverage, stop losses, price and liquidity filters tested on the same data.

Why does cutting winners short via random exit and entering where ever the dart hits work?  Because in a rising market, all ships float...you hop off one rising share and onto another...there is no need for finesse in the system because it almost can't fail!

Random entry/exit with all other relevant factors kept constant (including leverage) ought to be your benchmark, not the index.  My non-expert, albeit common sense opinion only of course.


----------



## tech/a (9 September 2007)

theasxgorilla said:


> The apology should be to the contributors of the thread for once again trying to push a theoretical discussion forward to a place where it could bring to light your personal practical achievements.  All paths lead to this place when you are posting tech/a.




Ive sent you a private mail.
But this (conclusion that I'm massaging an ego) always occurs when I use the one live traded methodology in support of an arguement. If it was designed by someone else then I'm sure the reaction would be different.
Radge has 4 I know of which support all the arguements I put forward relative to T/T. I dont use his as you and anyone else cant verify it unless your a member of "The Chartist" .Stevo has one and I guess you can verify his results through his blog.



> Maybe you'd like to critique the original post which brought us here which surmises that a simple long term long-only trend following system may have little to no apparent edge when compared with a random entry-exit system that includes identical position sizing, leverage, stop losses, price and liquidity filters tested on the same data.




Ive bought arguement to the thread against statements which say that what T/T has achieved (or any other longterm long system) cant be achieved.Using it to supprt my arguement/s



> Why does cutting winners short via random exit and entering where ever the dart hits work?  Because in a rising market, all ships float...you hop off one rising share and onto another...there is no need for finesse in the system because it almost can't fail!




Many do (Fail).Why is it that a profitable system hasnt come about in the thread on designing a system? Its not the only workable method its just A method which has worked in a market it was/is designed for.
Please post up this almost non failure system,Must admit Ive never seen one which takes a random exit and a dart board entry which makes a profit.
or is this an hypothesis you have?



> Random entry/exit with all other relevant factors kept constant (including leverage) ought to be your benchmark, not the index.  My non-expert, albeit common sense opinion only of course.




You have amibroker which apparently can do random entry and exit please show me.Take out the Entry and exit code and run the rest.If it outperforms any varifyable systems I know of then I'll shout the bar!
If T/T doesnt out perform it I'll shout it twice!

Carry on.
My apologies if Ive upset you in any of the above.
I'll just nip outside and fill up your hole.


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## Sir Burr (9 September 2007)

tech/a said:


> I'll just nip outside and fill up your hole.



esok:


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## nizar (9 September 2007)

I just want to say a big THANK YOU to all the contributors to (especially) this thread and also the "system robustness" thread.

When i start these types of threads, its the thoughts and insights from top experienced traders like Nick, tech/a, Stevo that im looking for, and iv got that in spades. Im also very lucky to have got some input from famous authors and big money managers from the States.

When i become one of the great ones, i will be sending a big cheque to Joe saying thank you for bringing all these talented people together on this board.


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## Temjin (9 September 2007)

nizar said:


> I just want to say a big THANK YOU to all the contributors to (especially) this thread and also the "system robustness" thread.
> 
> When i start these types of threads, its the thoughts and insights from top experienced traders like Nick, tech/a, Stevo that im looking for, and iv got that in spades. Im also very lucky to have got some input from famous authors and big money managers from the States.
> 
> When i become one of the great ones, i will be sending a big cheque to Joe saying thank you for bringing all these talented people together on this board.




Second that, interesting discussions going on around here, but we can all see that eventually, one will have to agree to disagree on a certain topic.


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## theasxgorilla (10 September 2007)

tech/a said:


> Please post up this almost non failure system,Must admit Ive never seen one which takes a random exit and a dart board entry which makes a profit.




You've got to look in order to find   This is not futures remember, most agree that over time the stock market has an upward tending bias, particularly in the last 10 or so years on the ASX, just being in the market seems to have been enough.  I'm sure you know some people in your peer group who marvel at how well their buy & hold super fund is doing.




tech/a said:


> or is this an hypothesis you have?
> 
> You have amibroker which apparently can do random entry and exit please show me.Take out the Entry and exit code and run the rest.If it outperforms any varifyable systems I know of then I'll shout the bar!
> If T/T doesnt out perform it I'll shout it twice!




I ran TT over 10 years worth of data that I have.  1/1/97 until 1/1/2007, CAGR and Max DD were 39.8% and 50.7% respectively, there were 123 trades taken.  I ran the random entry/exit system over the same data.  The first three runs exhibited a CAGR on the high side of 34%.  The fourth run had a CAGR of 44.6% and a Max DD of 52.7%, there were 224 trades taken.

If you are shouting, must we also drink that Westend sh1te they serve up over there?  I prefer Coopers, thanks.


----------



## tech/a (10 September 2007)

theasxgorilla said:


> You've got to look in order to find   This is not futures remember, most agree that over time the stock market has an upward tending bias, particularly in the last 10 or so years on the ASX, just being in the market seems to have been enough.  I'm sure you know some people in your peer group who marvel at how well their buy & hold super fund is doing.




Wouldnt say marvel but happy.



> I ran TT over 10 years worth of data that I have.  1/1/97 until 1/1/2007, CAGR and Max DD were 39.8% and 50.7% respectively, there were 123 trades taken.  I ran the random entry/exit system over the same data.  The first three runs exhibited a CAGR on the high side of 34%.  The fourth run had a CAGR of 44.6% and a Max DD of 52.7%, there were 224 trades taken.




I'm very interested in these results.
Id like you to run the Culled BT margin list I use.If your willing Id like to email you the list.
Then Id like to see the Montecarlo results of both T/T and the Random entry exit method.

I'll also see if I can find another person with Amibroker/Tradesim combo to corroberate findings. 



> If you are shouting, must we also drink that Westend sh1te they serve up over there?  I prefer Coopers, thanks.




So do most of us.
Pale OK?


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## nizar (10 September 2007)

theasxgorilla said:


> I ran TT over 10 years worth of data that I have.  1/1/97 until 1/1/2007, CAGR and Max DD were 39.8% and 50.7% respectively, there were 123 trades taken.  I ran the random entry/exit system over the same data.  The first three runs exhibited a CAGR on the high side of 34%.  The fourth run had a CAGR of 44.6% and a Max DD of 52.7%, there were 224 trades taken.




Why do you even bother with 3 or 4 runs ASX.G ?

Nowhere near being statistically significant. The next 4 runs of random entry/exit could easily be negative.

Thats the whole reason i got tradesim.


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## buggalug (10 September 2007)

theasxgorilla said:


> You've got to look in order to find   This is not
> I ran TT over 10 years worth of data that I have.  1/1/97 until 1/1/2007, CAGR and Max DD were 39.8% and 50.7% respectively, there were 123 trades taken.  I ran the random entry/exit system over the same data.  The first three runs exhibited a CAGR on the high side of 34%.  The fourth run had a CAGR of 44.6% and a Max DD of 52.7%, there were 224 trades taken.




I get pretty different results, I ran it from 1/1/97 till today, I used the following to match up with TT's average of around 50 bars hold. I ran both the random and TTs 50 times.

Random code below and results attached.

TimeFrameSet(inDaily);
Loop = Optimize("Loop", 1, 1, 50, 1);

SetOption("MaxOpenPositions", 10 );
SetOption("InitialEquity", 100000 );
SetTradeDelays( 1, 1, 1, 1 ); /* delay entry/exit by one bar */

PositionSize = -10; // always invest only 10% of the current Equity

Buy=Random()*100 > 95; // 5% chance of entry
Sell=Random()*100 > 98; // 2% chance of exit


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## Nick Radge (10 September 2007)

Perhaps something else to consider, see as we've touched on psychology, is Profit Factor. Drawdown can define risk but Profit Factor can define comfort level. Finding a suitable method to one's personality is important but so is the comfort of actually trading it. I would assume that if one feel comfort in applying the signals then they'll stay with it for long haul.

Personally I think 2.0 is the minimum for most traders, although those with thicker skin may go for a lower score so long as trade frequency is high enough.


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## nizar (10 September 2007)

Below are TradeSim monte carlo analysis results for a random entry and random exit system.

5% chance of entering on any given bar.
2% chance of exiting on any given bar.

Data from 1-1-1997 until 1-1-2007.

No initial stop loss used.

20000 simulations completed to give a statistically significant outcome.


Monte Carlo Report	

Trade Database Filename	
C:\TradeSimData\RandomEntryAndExit.trb	

Simulation Summary	
Simulation Date:	10/09/2007
Simulation Time:	12:57:00 PM
Simulation Duration:	721.91 seconds

Trade Parameters	
Initial Capital:	$100,000.00
Portfolio Limit:	100.00%
Maximum number of open positions:	100
Position Size Model:	Equal Percent Units
Trade Size (% of total cap):	10.00%
Pyramid profits:	No
Transaction cost (Trade Entry):	$44.00
Transaction cost (Trade Exit):	$44.00
Margin Requirement:	100.00%
Magnify Position Size(& Risk) according to Margin Req:	No
Margin Requirement Daily Interest Rate (Long Trades):	0.0000%
Margin Requirement Yearly Interest Rate (Long Trades):	0.0000%
Margin Requirement Daily Interest Rate (Short Trades):	0.0000%
Margin Requirement Yearly Interest Rate (Short Trades):	0.0000%

Trade Preferences	
Trading Instrument:	Stocks
Break Even Trades:	Process separately
Trade Position Type:	Process all trades
Entry Order Type:	Default Order
Exit Order Type:	Default Order
Minimum Trade Size:	$500.00
Accept Partial Trades:	No
Volume Filter:	Ignore Volume Information
Pyramid Trades:	No
Use Level Zero trades only:	Yes

Simulation Stats	
Number of trade simulations:	20000
Trades processed per simulation:	38493
Maximum Number of Trades Executed:	479
Average Number of Trades Executed:	359
Minimum Number of Trades Executed:	188
Standard Deviation:	29.03

*Profit Stats	
Maximum Profit:	$20,568,383.91 (20568.38%)
Average Profit:	$252,371.84 (252.37%)
Minimum Profit:	-$96,587.26 (-96.59%)
Standard Deviation:	$1,549,289.02 (1549.29%)
Probability of Profit:	81.61%
Probability of Loss:	18.39%*

Percent Winning Trade Stats	
Maximum percentage of winning trades:	52.92%
Average percentage of winning trades:	42.67%
Minimum percentage of winning trades:	23.08%
Standard Deviation:	3.17%

Percent Losing Trade Stats	
Maximum percentage of losing trades:	76.92%
Average percentage of losing Trades:	57.33%
Minimum percentage of losing trades:	47.08%
Standard Deviation:	3.17%

Average Relative Dollar Drawdown Stats	
Maximum of the Average Relative Dollar Drawdown:	$4,166.64
Average of the Average Relative Dollar Drawdown:	$1,867.08
Minimum of the Average Relative Dollar Drawdown:	$957.16
Standard Deviation:	$334.33

Average Relative Percent Drawdown Stats	
Maximum of the Average Relative Percent Drawdown:	8.1761%
Average of the Average Relative Percent Drawdown:	1.9270%
Minimum of the Average Relative Percent Drawdown:	0.5482%
Standard Deviation:	0.6308%

Maximum Peak-to-Valley Dollar Drawdown Stats	
Maximum Absolute Dollar Drawdown:	$151,569.61
Average Absolute Dollar Drawdown:	$60,828.24
Minimum Absolute Dollar Drawdown:	$17,817.55
Standard Deviation:	$16,754.15

*Maximum Peak-to-Valley Percent Drawdown Stats	
Maximum Absolute Percent Drawdown:	96.6537%
Average Absolute Percent Drawdown:	49.8063%
Minimum Absolute Percent Drawdown:	7.2538%
Standard Deviation:	15.5731%*


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## nizar (10 September 2007)

Annualised the average profit is 9.68%.
Over the same period the market returned 8.84%.

*So we can conclude that yes, random entry and random exit, did beat the market.*

Also note that TT doesnt perform wonderfully over the whole market. No dramas because it wasnt designed to trade the whole market. Rather the BT margin list. The realtime results have been very impressive.


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## nizar (10 September 2007)

Well from 1992-2002 random entry and random exit would have, on average over 20,000 possible combinations, returned -45%, and from the 20,000, probability of loss was 84%.

Market returned about 100%.

Just for the purposes of comparison.


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## stevo (10 September 2007)

I took Buggalugs random & TT Amibroker above runs and put them into my Monte Carlo spreadsheet. I find it easier to look at a graph than I do numbers. 

Profit factor results are also shown.

Obviously the results for random and TT will vary considerably depending on the database selected for testing, the position sizing strategy, the start and end dates and the randomising method chosen - to mention the one's that come readily to mind.

stevo


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## tech/a (10 September 2007)

This is all very interesting.
Didnt know you could do random entry AND exit with Tradesim. Nizar you have taught me something.

The whole idea is to test the T/T conditions only minus the entry and exit.
SO
Position size 10% of capital
Stop 10% of initial purchase price.
Starting capital $100,000
Set margin at 40%
Min order 10
Pyramid profits.

Thanks to those taking the time on this.
Its only curiosity on my part.


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## Nick Radge (10 September 2007)

Looks like a slight skew to the right for the profit factor using TT rather than random. That would also fit that we'd never probably trade a random system with any conviction.

Here is something else to think about. Systems will shows periods of acceleration and deceleration during different market conditions. For example my trend following system is generating a lot more signals over the last 15-months than what it normally does. This stands to reason basis the market conditions. However, the annual return has also accelerated away from the long term mean (currently running at 60% vs. 28%). I view this as a good sign in that it's generating more trade frequency in favorable periods. In order to generate the average it will obviously revert back below the mean in worse times, that is, generating less signals which again I view as a positive.


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## theasxgorilla (10 September 2007)

Just to recap this thread before it got derailed.

Earlier on there was a request by Nick Radge for Howard to look at TechTrader, seconded by tech/a.  There has been a lot of talk over the past months about understanding 'why' a system works.  I have felt there has been a lot of repetition of this message without any actual answers and lots of delivery of this paraphrased message from tech/a saying, "it's not that hard people, look at me, I'm just a builder and I managed to become a successful system designer, here's some bank details so you can all see how successful I am".

No-one actually critiqued TT with the seemingly elusive answers to this , WHY question?  

So a little while ago, before this thread got onto the track that its now on, I asked the question: in this market ('96 -> '06), how lucky or unlucky can a trader actually be?  The summary of the conclusion is: _not that unlucky_...and providing you create some basic parameters for your trading, the probabilities of being unlucky drastically decrease.

My initial study created a system with the following parameters:

# Universe of shares, the current All Ords lists minus listed trusts, > 3 letter tickers etc. (I've since added about 100 delisted and non-XAO shares to try to counter what everyone keeps telling me is start-date bias, so I can't reproduce this study with my current list...*tech/a, would love to do it with the BT300 list!*)
# 10 years of test data from 1/1/96 until 31/12/06.
# Each test was conducted with 2500 runs to raise statistical significance.  More would have been better, but system execution is slow due to the way the Amibroker code had to be implemented and in any case relatively smooth distributions were still apparent with this small number.
# A randomised start date was generated for each run of between 21 and 60 days delay from the 1st of January 1996. This was done so as to reduce start date bias.
# Subsequent new trades were delayed by a random number of bars between 1 and 20. This was also to reduce the effects of having the system load up too rapidly, which would introduce another kind of start date bias.
# Each position was held for a random number of days between 20 and 120 bars (1 to 6 months, approximately).
# Maximum concurrent open positions were only limited by available equity.
# Position size was randomised to be between 5% and 50% of total equity. This was to simulate a punter who did not practice diversification.
# Commissions were included.
# No margin was used.
# The TT > $500k moneyflow filter was used.
# From memory the < $10 price filter was in there too.

The original question was: can a random entry/exit system outperform TT?  The answer is, yes!  There is an overlap in CAGR in the Monte Carlo distribution of TT and this system.  But given the above set of parameters the overlap represents a relative handful of runs...regardless, there are certainly paths through the data which beat it (Coopers Pale is a top drop, so yes, gladly  ).

Next phases of the testing added these components:

# Position size restricted to 10% of equity.
# As above, with a 10% stoploss.
# As above, with a ROC filter.

Position sizing increased CAGR, decreased Max DD and bunched both distributions.  A 10% stoploss decreased CAGR, massively improved Max DD and substantially bunched the Max DD distribution.  Adding the ROC filter increased CAGR again, reduced Max DD and bunched both even further.

This is a really, really simple system.  Distribution histograms can be seen here:


http://theasxgorilla.blogspot.com/2007/08/2500.html

It can be argued that these distributions are more representative of the market conditions than a TradeSim Monte Carlo run on TT for the reasons Curtis Faith describes when talking about the limitations of Monte Carlo runs that breakup the sequence of big market events like the Asian crisis and 9/11.

So, to try to come full circle back to where this got derailed and answer the question WHY does TT work exactly as it has during the single run documented?

* Start date bias
* Leveraged exposure to a strong and protracted bull market
** Non-cap-weighted exposure to the market leading to index out-performance
* Price filter encourages taking positions in what are likely to be lower liquidity issues with inherently greater growth potential
* The entry trigger has an edge that improves entry efficiency (or whatever you want to call it). So fewer breakouts ought to be false breakouts...reducing the number of initial stops being hit.*
* Discretionary entry trigger over-ride may have added some performance edge

Those points in bold are validated by the random entry/exit study, IMO.  I haven't included a point about the exits here, for a few of reasons.  One, based on the study I tend to agree with what Curtis Faith discovered when he tested a _time-based_ exit: simple exits are over-rated.  Two, a 180-day EMA is not a particularly sophisticated exit, so I don't believe it provides much of an edge.  Three, tech/a, you turned the system off yourself before trailing stops were enacted using this exit, which suggests to me that you don't even trust this part of the system.

Nizar, thanks for your wise question about statistical relevance.  My advice, don't just ask this question when token data is used to disprove something, also ask when it's being used to prove something.  Suckers buy black box systems this way too.

There is a lot of one sided thought around this subject on this forum for obvious reasons: those making the "for" points have a tendency to talk the most.  I don't mind playing devils advocate and representing a more balanced view...even though in the background I could well be creating TechTrader3, aka. Revenge of the Long Term Long Only Stock Trend Following System.

In the meantime, it's hole-digging time...I wasn't joking you know:

esok:

ASX.G


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## theasxgorilla (10 September 2007)

Nick Radge said:


> Looks like a slight skew to the right for the profit factor using TT rather than random. That would also fit that we'd never probably trade a random system with any conviction.




Exactly!

I didn't say anyone could/would actually trade a random/entry exit system   Some of the high CAGR runs required 70% drawdowns to achieve...ouch.


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## nizar (10 September 2007)

tech/a said:


> This is all very interesting.
> Didnt know you could do random entry AND exit with Tradesim. Nizar you have taught me something.




For once!!

EntryTrigger:=ExtFml( "TradeSim.Rand")<0.05;

EntryPrice:=OPEN;
ExitTrigger:= ExtFml( "TradeSim.Rand")<0.02;

ExitPrice:=OPEN;

5% chance of entering on a given bar.
2% chance of exiting on a given bar.
As per specifications set by Buggalug.


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## tech/a (10 September 2007)

Well thanks for all your work ASX.
There are also paths within the MonteCarlo testing which beat the T/T live traded.But hey youve proved your point and after so much work,not even considering the number of holes you have dug,I'll be more than happy to ship a couple of cartons of Coopers pale to you with my compliments.
Just private mail me an address and it will be done----enjoy.

I lookforward to checking your blog over the next 5 yrs to see how the random portfolio is performing.If you decide to forward test it.
I'm sure that I will learn a lot from it as time rolls by as I will from the continuation of T/T on its thread.


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## howardbandy (10 September 2007)

theasxgorilla said:


> Just to recap this thread before it got derailed.
> 
> Earlier on there was a request by Nick Radge for Howard to look at TechTrader, seconded by tech/a.  There has been a lot of talk over the past months about understanding 'why' a system works.  I have felt there has been a lot of repetition of this message without any actual answers and lots of delivery of this paraphrased message from tech/a saying, "it's not that hard people, look at me, I'm just a builder and I managed to become a successful system designer, here's some bank details so you can all see how successful I am".
> 
> ...




Oops.  I missed this.  Is there a listing of the TechTrader code handy?

Thanks,
Howard


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## nizar (10 September 2007)

As posted by tech/a on the "TradeSim" thread on this board a few weeks ago.

TechTrader
Ent:= Cross(H,Ref(HHV(H,10),-1)) AND H>Mov(C,40,E) AND HHVBars(H,70)=0 
AND Fml("Liquidity")>500000 AND C>O AND C<10.00;
Ent;

EntryTrigger:=Ent;

EntryPrice:=OPEN;
ExitTrigger:= Cross(Ref(Mov(L,180,E),-1),C);

ExitPrice:=OPEN;

InitialStop:=If(Ref(C,-1)>0.90*EntryPrice,0.90*EntryPrice,Ref(C,-1));
ExtFml( "Tradesim.Initialize") ;

ExtFml( "Tradesim.EnableDelayOfEntryByOneBar") ;
ExtFml( "TradeSim.EnableTradePyramiding", percentprofit,10,3);

ExtFml( "TradeSim.SetReturnInfoType", AllTriggers);

ExtFml("Tradesim.EnableDelayOfAllExitsByOneBar");
ExtFml( "Tradesim.EnableProtectiveStop",1) ;

ExtFml("Tradesim.SetStartRecordDate",1,09,1998);
ExtFml("Tradesim.SetStopRecordDate",19,05,2006);


ExtFml( "TradeSim.RecordTrades", 
"TT Master",
LONG,
EntryTrigger,
EntryPrice, 
InitialStop, 
ExitTrigger,
ExitPrice,
START);


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## theasxgorilla (10 September 2007)

AFL code:

// techtrader v2 amibroker version
// here we define buy conditions and name each one as a variable
PositionSize = -10; // always invest only 10% of the current Equity 
cond1=Cross(H,Ref(HHV(H,10),-1)); // when todays high crosses last highest high over the last 10 periods
cond2=H > EMA(C,40); // todays high is greater than the 40 day Exp MA of closes
cond3=HHVBars(H,70) == 0; // todays high is the highest for 70 periods
cond4=EMA(V*C,21) > 500000; // ensure at least $500k of money flow
cond5=C < 10.00; // only trading in stocks less than $10
cond6=C > O; // todays close higher than open

// the following line is the trigger if all conditions satisfied
Buy=cond1 AND cond2 AND cond3 AND cond4 AND cond5 AND cond6;

// here we define variables used once in the trade
ApplyStop( stopTypeLoss, stopModePercent, amount=10 );
Sell= Cross(Ref(EMA(L,180),-1),C); // close crosses below yesterdays average of the low
// here we define what gets displayed on the chart
shape = Buy * shapeUpArrow + Sell * shapeDownArrow;
PlotShapes( shape, IIf( Buy , colorYellow, colorRed ), 0, IIf( Buy , Low, High));

Filter = Buy; // lists exploration results conforming to our buy criteria
AddColumn(Buy, "buy", 1.0); //


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## howardbandy (11 September 2007)

Greetings --  



theasxgorilla said:


> AFL code:
> 
> // techtrader v2 amibroker version
> // here we define buy conditions and name each one as a variable
> ...





Why does it work??

The simple reason is that the broad market, and most of the stocks in it, have been rising strongly for the past 25 years.

This system restricts purchases to stocks with prices below $10.  I made a posting to one of the threads here at ASF about historical prices, and how splits, distributions, and dividends distort historical prices.  The point is, you cannot trust that the price in the historical data base was the price the stock actually traded at.

I ran the system on the S&P 500 stocks beginning 1/1/1995.  

The system bought ebay on 11/23/98 at $8.04.

ebay did not trade at $8.04 in 1998.  There have been four splits, totaling 24:1.
http://investor.ebay.com/faq.cfm
ebay was about $192.96 on 11/23/1998.

It would be interesting to test over a period of market decline, but that would require either removing the $10 limit (and changing the system), or having unadjusted historical data.

When I changed the test dates to begin 1/1/2005, using the 500 stocks in the S&P 500, only 15 stocks had trades, 6 were winners, 9 were losers.  (I did not check to see if all of the trades could have taken place at less than $10.)  The total exposure of the resulting trades (all 500 stocks for all 2.7 years) is 0.00006 -- 0.006% of the time.  That is not enough data to allow meaningful statistical tests.  And it is not enough data to give me a subjective feeling of comfort.

So --- why does it work?  At the risk of getting some flack back, the cheeky answer is -- the system is confusing brains with a bull market.  

Thanks,
Howard


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## theasxgorilla (11 September 2007)

howardbandy said:


> It would be interesting to test over a period of market decline, but that would require either removing the $10 limit (and changing the system), or having unadjusted historical data.




So the sub-$10 filter is a quick and easy filter to try and limit the universe to stocks that have the greatest growth potential.  I think it's too low for the US market.  Does such a psychological price level exist on US stocks?

Also, due to the relative size differences between the 2 markets if I were to apply TT on the US I reckon you'd want to include some of the Russell 2000 stocks.  On the ASX companies from 100th to 300th by market cap are categorically small caps, but you can trade them on margin.  Does such a group exist in the US?  

I agree 100% with what you describe re: unadjusted historical data.  I can't see a way to solve the dividend problem, but I think we're in a somewhat fortunate position here on the ASX as stock splits occur seldom, compared with the US.

Take QBE for example...back in 1985 it was trading at just over 50c.  Now its up over $34.  From what I can tell it's never split.  In the US you might say don't buy stocks under $10 or $15 USD because they're there for a reason ie.  That level in Aust (as per an estimate by Nick) could be as low as 20c AUD.  Even if it's 50c,  that means in US market terms QBE is currently trading at $1,170...if 20c is that level then QBE is trading at just under $3,000 a share!


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## tech/a (11 September 2007)

> So --- why does it work? At the risk of getting some flack back, the cheeky answer is -- the system is confusing brains with a bull market.




You know I'm happy to wear that.
I managed to trade the bull market and do OK with no brains.
A few others with no brains either also did well.Stevo's method would no doubt come under a similar umbrella.

On the other side I know quite a few with plenty of "Brains" who failed dismally.



> It would be interesting to test over a period of market decline,




Howard why is it that youd like to test a method designed for trading long in bullish conditions in a prolonged bear market? Its not designed for that?

Howard with an average holding period of over 300 days No doubt your sample period of 2005 till now showed a poor result. Id be interested in the open profit in those trades still open at the end of the test period.

I also believe that any system that performed well in a bull or bear market could be easily explained away as succeeding ONLY due to market conditions.
It appears that the trick seem to be in systems design to design a method which works in conditions in which its not designed.

At the risk of again being labelled Egotistical again.
Market rises 100% in an un precidented Bull run.
Dumb system out performs that 10 fold.
I can live with that and the label.

I can actually afford to shout ASX a beer!

*This is WHY it works---SIMPLE!*

(1) It holds its winning trades Far far longer than its losing trades.
(2) It makes much much more from its winning trades than it does from its losing trades.

Whos the smarter.
He who has a degree or he who employes those with degrees?


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## tech/a (11 September 2007)

Perhaps I could be so "Cheeky" as to suggest that perhaps brains are being confused with potential profits.

I am really suprised that Both Howard and ASX have missed the *ONLY* reason this systems makes above average $$s.

Just wanted to highlight and seperate so that the poor unfortunates who dont have the acumen of some here can see that you really dont need it---well not all of it.

*This is WHY it works---SIMPLE!

(1) It holds its winning trades Far far longer than its losing trades.
(2) It makes much much more from its winning trades than it does from its losing trades.*

However for another couple of cartons each (Perhaps Bud would be more to Howards liking).I'm happy to be proven incorrect by our learned gentlemen.


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## Nick Radge (11 September 2007)

Howard,
On the contrary, the adjusted chart of our market since 1952 is nothing short of one way traffic. I do have the data back to 1875 but it just offers more of the same. There have been 3 generational bull markets since 1952:

1950 - 1969
1974 - 1987
1991 - ?

The other "common sense" assumption which may be out of the realms of academia is that companies naturally grow and with that growth comes share price increase. We're not talking commodity prices.

Perhaps the US markets are "mature" and have stopped this process and that Aust is still a "developing" market. However, as I stated in another post, I'd gladly take a _random_ set of stocks from the US market and run my system over them.


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## stevo (11 September 2007)

> The simple reason is that the broad market, and most of the stocks in it, have been rising strongly for the past 25 years.




There have been pockets of decline that are probably worthy of focus. 2002 was not the best year and there was a very rapid spike down in 2001. 2000 was also very volatile. 

I started system testing at the end of 2001 and didn't really have a system that I was comfortable with until the beginning of 2003 - right at the start of an incredible bull market! So I was happy to take what the market gave.

If I made the system longer term and used monthly charts I got great returns but was uneasy because the number of trades taken dropped in the system test and the sample size reduced. Data quality is also an issue - data gremlins are nearly impossible to avoid. 

I am more comfortable testing over a large number of stocks 500 to 1000 ideally over a 10 year period. Testing just 20 or 30 stocks, or even 100 makes me quite uncomfortable. I like to think that I am not testing on 500 stocks rather just one stock (500 stocks joined end to end) over a very long time. 

System testing will only give us a rough approximation of a possible future. If we are in a bull market then why not take advantage of it, fully aware that market conditions change. It is possible to go to cash if the markets change - something that has happened to me a couple of times over the last 5 years. 

Trying to buck the long term trend by shorting stocks is like trying to swim against the rip at North Avalon beach - I stop swimming and wait.

stevo


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## theasxgorilla (11 September 2007)

tech/a said:


> *This is WHY it works---SIMPLE!
> 
> (1) It holds its winning trades Far far longer than its losing trades.
> (2) It makes much much more from its winning trades than it does from its losing trades.*




I think you should introduce Howard to Coopers, it's one of the better Aust beers IMO 

Tech/a, you're right.  I still feel there is one final ingredient...luck, or intuition.  Far be it for anyone of us to kick a gift horse in the mouth...but by at least acknowledging fortunate timing you won't mislead anyone into thinking you hold the master key to riches and copies are available in TradeStation, Metastock and Amibroker format.

I wonder if we are now at a point where we seperate out the semantics of what we're discussing, as being a budding system designer myself I'm more interested in the HOWs.

For those that are willing to take advantage of the WHYs without the inclination or wherewithal to investigate the HOW, then I agree with Nick Radge that the best thing you can do is find somone who runs a sophisticated system, invest money with them and stay the course.

I'm personally wary of turning on a simple system like TT at this potentially late stage of a bull market...not without some 'insurances' coded in at least.


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## stevo (11 September 2007)

theasxgorilla said:


> I'm personally wary of turning on a simple system like TT at this potentially late stage of a bull market...not without some 'insurances' coded in at least.




Startup can be quite tough for a long term system since the system hasn't got any winning trades running and can take a while to latch on to some. 

Have a look at the first 12 months of the closed trade equity curve - and then walk it forward 6 months at time from 2000 onwards to see how it performs on startup.

stevo


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## tech/a (12 September 2007)

theasxgorilla said:


> I think you should introduce Howard to Coopers, it's one of the better Aust beers IMO
> 
> Tech/a, you're right.  I still feel there is one final ingredient...luck, or intuition.  Far be it for anyone of us to kick a gift horse in the mouth...but by at least acknowledging fortunate timing you won't mislead anyone into thinking you hold the master key to riches and copies are available in TradeStation, Metastock and Amibroker format.




You could call any longterm investment in a business "Luck" when it finally hits.If you place your self in the position with the right tools its amazing how luck will find you.

*Trading a long system through not so favorable times to find yourself in a new bull market
*Buying houses and sitting on them for years while others tell you your an idiot,to then take part in a housing boom doubling and trebeling sale prices.
*Working within your business to gain maintain and expand your edge after years finding yourself at the very top and securing the larger majority of business within your field.

Luck--??



> I wonder if we are now at a point where we seperate out the semantics of what we're discussing, as being a budding system designer myself I'm more interested in the HOWs.
> 
> For those that are willing to take advantage of the WHYs without the inclination or wherewithal to investigate the HOW, then I agree with Nick Radge that the best thing you can do is find somone who runs a sophisticated system, invest money with them and stay the course.




ASX your not alone this is where all start but never end their journey or more to the point get past.
Unless you know WHY and there are only 2 others I know of (WHY'S)---you'll be for ever twiddling and tweeking the HOW.



> I'm personally wary of turning on a simple system like TT at this potentially late stage of a bull market...not without some 'insurances' coded in at least.




Again not alone.
Often looking at individual stock in a portfolio gives you the same feeling.How can this keep going,the temptation to sellout is huge.The chart below could be any stock and any index.The comments apply to any chart which looks similar.


----------

