# Breakout systems



## Synergy (26 April 2008)

Fairly general question, but has anyone got an opinion on the historical performance of breakout systems?

Are they something that have always worked to some degree?

The reason I ask is because I originally developed a breakout system based on 2005 - 2007 data. It worked well when ran live late 07, but now I've put data from 97 - 2004 into the system and results are fairly poor. I realise the general market performence over that period was fairly different but I thought i'd ask anyway. 

I'm curious as to whether breakouts are a thing of strong bull markets I guess, and whether they're worth trading at other times.


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## julius (26 April 2008)

Synergy,

Howard Bandy talks about the performance of breakout systems declining significantly since the turtle systems became widely known.

One of the problems with breakout systems is the large number of trades required to infer performance statistics. It's hard to know whether the system has become unprofitable or is just waiting for the next breakout. You need to look at historical win% and sample sizes to figure this out.

If you want to look at the influence of market conditions on the system it might be worth looking at random entries and exits applied with the same money mangement rules.


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## tech/a (26 April 2008)

Everything--thats* EVERYTHING *breaks out either to the up or downside of a chart.
"V" Tops and bottoms are rare and simply another trading condition.

From Support or Resistance or some sort of pattern.
There are methods using this right now which are up over 100% since Jan.

Applying trading methodology will turn the profit.
The exit becomes more important in conditions like those we have now.
You also need to be able to trade short.


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## MRC & Co (26 April 2008)

Agree 100% Tech.

Something I have been working on myself now intensly for several months, only just worked out Radge was the master of this exact method (my bad for not reading his book earlier and realising he was not simply using EW and Volume to decide his trades)!


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## Sean K (26 April 2008)

tech/a said:


> Everything--thats* EVERYTHING *breaks out either to the up or downside of a chart.
> "V" Tops and bottoms are rare and simply another trading condition.



Yes, but depends on time frame too. Short, medium, long, and all the bits between.


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## tech/a (26 April 2008)

kennas said:


> Yes, but depends on time frame too. Short, medium, long, and all the bits between.




All timeframes all "bits".


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## Sean K (26 April 2008)

tech/a said:


> All timeframes all "bits".



Tech, do you think longer time frames have more validity than shorter time frames?


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## tech/a (26 April 2008)

No.
All timeframes are valid.

The clue to how wel that breakout (Of pattern support/resistance) I believe is in the 5 bars preceeding the alert bar (Or breakout bar). In any timeframe.

Here is an example of "Reading the Action" in this trade.
I have a small position.
What do you think the LAST 2 bars are saying?


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## Porper (26 April 2008)

tech/a said:


> No.
> All timeframes are valid.
> 
> The clue to how wel that breakout (Of pattern support/resistance) I believe is in the 5 bars preceeding the alert bar (Or breakout bar). In any timeframe.
> ...




The new price levels have attracted sellers (supply) has come in to  the market.

The last bar is a very strong signal that prices have reached their peak for the short term at least.On the face of it a 5c rise looks good but don't be fooled, there was a strong rejection from well over a dollar.

Also a copy of the preceding price action  (5th and 6th bars) so it could be likely that we will get the same consolidation as before.Definitely i.m.o should be out of this trade if you are an intra day trader, if not a sell stop on a break of previous close.


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## julius (26 April 2008)

Are we talking mechanical systems or discretionary?


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## tech/a (26 April 2008)

Thanks Pete and a sound analysis.
The question still remains in this move wether all supply has been absorbed.
Demand wasnt overcome and as such this bar may become a sign of strength if trading can keep above its low. Until then at least my trade is left open.

But back to *KENNAS* question.

Looking at the same trade on a weekly chart.
Clearly not telling the exact same story.
Well not the ending at least.

*Julius.*
Simply place whatever criteria you wish to use in your system.
The point I'm making in system design is that the breakout ALONE is not the important issue.
Managing the trade and the exit will determine any system success not JUST the breakout.


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## Porper (26 April 2008)

tech/a said:


> The question still remains in this move wether all supply has been absorbed.
> Demand wasnt overcome and as such this bar may become a sign of strength if trading can keep above its low. Until then at least my trade is left open.




John,

Agree that if price can keep above the last bar low, it can still go higher, and in normal market conditions this would be my plan, however in this market a 100% rise accompanied by the supply that came in is pretty good, and tempting to take profits.

Maybe market conditions have stabilised and it is time to let the trend run a bit rather than having fixed targets and tight trailing stops.?

On a side note, these set ups are great i.m.o. usually offer good R/R and have a high probability outcome.INL on which I posted on just before the breakout a couple of weeks ago was a another example of what Tech is showing.


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## nizar (26 April 2008)

Synergy said:


> Fairly general question, but has anyone got an opinion on the historical performance of breakout systems?
> 
> Are they something that have always worked to some degree?
> 
> ...




Thats interesting.

My system is essentially a breakout system and it works phenomenally over 1998-2003, even better than it does over 2004-2007.

My own personal belief is that when it comes to equities, its better to always stay in the market due to the historical bullish bias, if you can afford to. If I was 50 or 60 then obviously I would think about it differently.

There are always stocks breaking out, there are just MORE OF THEM during bullmarkets.

A better way to approach filtering out bad trades would be to use sector analysis. I was going to seriously take this approach but the price S&P were quoting for sector/index data was far beyond what I was willing to spend. Maybe in the future.


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## julius (26 April 2008)

Chart for SUN below.

I've circled the NR7 bar which also aligns with the prior swing lows.

Reasonably bullish IMO, despite a couple of weak closes within the range...


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## tech/a (27 April 2008)

SUN 
Is displaying signs of no demand (Volume rising on down bars) within the consolidation.
Untill this alters its is likely to break to the downside.
In my opinion.

Weekly has a similar view.


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## Porper (27 April 2008)

julius said:


> Chart for SUN below.
> 
> I've circled the NR7 bar which also aligns with the prior swing lows.
> 
> Reasonably bullish IMO, despite a couple of weak closes within the range...




Julius, here is my take on it.You would be trading the correction (nothing wrong with that).

It is definitely a corrective pattern going up, overlapping waves, while the impulse is obviously down.

There is high volume around the "double bottom" which is bullish, and as you rightly point out the bar I have labelled a wave 2 signalled that the sellers had dried up.

There has however been a lack of demand since that point, meandering up on light volume.

A break out of the consolidation pattern (13.71) on good volume would be bullish for the wave C to continue i.m.o.


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## Kauri (27 April 2008)

Synergy said:


> Fairly general question, but has anyone got an opinion on the historical performance of breakout systems?
> 
> Are they something that have always worked to some degree?
> 
> ...




   Most people look for breakout/pattern trades to the upside due to the longish bull run... I have found altering/adapting your method to look for breakdowns in the bearish phase we are going through serves me well...
 Cheers
...........Kauri


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## MichaelD (27 April 2008)

It is my belief that a breakout as an entry is a very poor entry per se when assessed over all market conditions, significantly underperforming random entry in profitability and drawdown.

I believe this is partly because it is known to be a very popular entry trigger and partly because there is a strong tendency towards mean reversion after a breakout.

Note that the above statements are NOT mutually exclusive of a statement that breakout systems can be very profitable - it's just that they can be profitable DESPITE the entry, not BECAUSE of it.


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## Sean K (27 April 2008)

tech/a said:


> But back to *KENNAS* question.
> 
> Looking at the same trade on a weekly chart.
> Clearly not telling the exact same story.
> Well not the ending at least.



Tech, still haven't seen any evidence to my perception that longer term breakouts hold more validity than short term ones (anomalies). I obviously have no data myself, so I wait to be corrected with your assertion. I have read somewhere that market psychology is more reliable over longer periods of time. Like anything. Perhaps short term break outs can be trusted - in the short term... Maybe Howard has an answer to this.


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## tech/a (27 April 2008)

*Kenna's.*
I'm not really suggesting that if the longerterm signals a bullish breakout then thats what we should be looking for in all timeframes. As we drill down lower in timeframe we will see both bullish and bearish trends within trends,and breakouts  preceeding many moves.
Trade each timeframe.

*Michael.*
I presume your talking of a conventional braekout from support or resistance.
Pattern Breakouts,Range Breakouts and Volume Breakouts are less explored.
Even gaps can be placed in the breakout basket.
Add to these timeframes (Have you ever thought of using say a 2 day bar chart?) and correlation of signals become remote.

Like you I have no definative evidence to support success other than my own trading and observations. If your going to have a trend of any sort in ANY timeframe price will breakout of something!


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## Sean K (27 April 2008)

Yep, I agree totally with the trade each time frame. 

That's pretty random though isn't it? 

Aren't you trading mechanically? 

Sorry if I've missed some other factors...


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## tech/a (27 April 2008)

> Aren't you trading mechanically?




Not since July last year.
But still in the context of Trading Breakout systems These are elements discussed above I would be considering.


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## julius (27 April 2008)

Could someone who is trading breakouts mechanically post a couple of entry parameters... just to clarify 'breakout'

I've always found mech. breakout systems test poorly.


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## nizar (27 April 2008)

MichaelD said:
			
		

> It is my belief that a breakout as an entry is a very poor entry per se when assessed over all market conditions, significantly underperforming random entry in profitability and drawdown.




Why havent you tested this belief?
I would be interested to see some results on this.

I believe -- and I could be wrong, that a breakout entry and a nice exit will outperform a random entry with the sane exit. Maybe not significantly -- But I would be very suprised to see a significant outperformance by the random system.



			
				MichaelD said:
			
		

> I believe this is partly because it is known to be a very popular entry trigger and partly because there is a strong tendency towards mean reversion after a breakout.




There is a strong tendancy towards mean reversion after the breakout I agree -- BUT this only occurs in the very short term (i have tested this).

If your stop/exit is wide enough to allow for this, and your average trade holding time (trade length is defined primarily by the exit) is several weeks,  then the breakout system will outperform I would think.



			
				MichaelD said:
			
		

> Note that the above statements are NOT mutually exclusive of a statement that breakout systems can be very profitable - it's just that they can be profitable DESPITE the entry, not BECAUSE of it.




Yes I agree. Doesn't mean a random entry would outperform it though.


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## nizar (27 April 2008)

julius said:


> Could someone who is trading breakouts mechanically post a couple of entry parameters... just to clarify 'breakout'
> 
> I've always found mech. breakout systems test poorly.




H>Ref(HHV(H,X),-1)

In english:
The last bar High is greater than the Highest High of the last X bars.


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## Nick Radge (27 April 2008)

The classic breakout model is the Donchian method. Basically if prices are above a 200-ma and then breakout above the highest high in _n_ days, where _n_ can be any length. The trade is closed when prices break back below x days, where _x_ is shorter than _n_.

In general terms, a high _n_ will create less trades and keep the system out of much noise. As a rule of thumb, the higher _x_ is the larger the trend that will be captured, although the larger the open profit giveback is. 

In modern day breakout systems, traders attempt to add other filters some of which are macro based. As an example, breakout systems will be working well in Coal, Oil and Energy sectors on the upside and perhaps Financials and Discretionary Spending on the downside. 

Many classic breakout models are used in commodities rather than equities for correlation reasons. 

I traded the original Turtle model, a variant of Donchian, back in 2001 for about 8-months and found it quite tough. 

_This post may contain advice that has been prepared by Reef Capital Coaching ABN 24 092 309 978 (“RCC”) and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision._


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## theasxgorilla (27 April 2008)

Synergy said:


> The reason I ask is because I originally developed a breakout system based on 2005 - 2007 data. It worked well when ran live late 07, but now I've put data from 97 - 2004 into the system and results are fairly poor.




Which market?  What was your universe?


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## MichaelD (27 April 2008)

nizar said:


> Why havent you tested this belief?
> I would be interested to see some results on this.



I *have* tested this belief quite extensively. Compared with random entry, ALL conventional methods of trading breakouts perform worse, particularly in the area of drawdown.

A good starting point for a breakout is the one built into Metastock;

ROC(CLOSE,1,percent) >= 5 AND VOLUME >= (Mov(VOLUME,50,EXPONENTIAL)*1.5)

Again, however, I am NOT saying that using a breakout as an entry signal is unprofitable, 'cause it is, just that it is profitable because of OTHER factors, not the entry per se.

Breakouts fascinate me.


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## theasxgorilla (27 April 2008)

julius said:


> Could someone who is trading breakouts mechanically post a couple of entry parameters... just to clarify 'breakout'
> 
> I've always found mech. breakout systems test poorly.




How about this one?

Entry setup:
* Today's high is greater than the 40-day exponential moving average (EMA) of closes AND
* Today's high is the highest high for the last 70 days AND
* Today's close must be higher than today's open.

Entry trigger:
* Buy at tomorrow's open when today's high crosses the highest high of the last 10 days.

Give that a whirl.  Be sure to try it between 1st of Jan 07 and today...


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## theasxgorilla (27 April 2008)

MichaelD said:


> Again, however, I am NOT saying that using a breakout as an entry signal is unprofitable, 'cause it is, just that it is profitable because of OTHER factors, not the entry per se.




I think it depends on how you 'frame' your entry.  The effectiveness of a breakout, and it's ability to overcome mean reversion, can be increased if you frame the setup conditions adequately and prevent the trigger from biting at ever breakout that swims by.


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## Nick Radge (27 April 2008)

> ALL conventional methods of trading breakouts perform worse




What is a conventional method?


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## weird (27 April 2008)

Hi Synergy, here is some historical backtested results over 10 years of a donchian based breakout system I traded during 2005-2008 on ASX stocks to compare.  

The actual results mirror the backtested results quite closely.  It uses a few filters to trigger the breakout.

The top of the equity curve is around the 1/7/2007.

This actual system does not play a large part in my actual trading, actually 0 atm (the system has pretty much switched itself off over the last 9 months), however the results perhaps may beat some instances of simple buy and hold.


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## tech/a (27 April 2008)

theasxgorilla said:


> How about this one?
> 
> Entry setup:
> * Today's high is greater than the 40-day exponential moving average (EMA) of closes AND
> ...





Looks familiar wonder where you got that one from?


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## Boggo (27 April 2008)

Tech, your recent acquisition NHC on "my" breakout system.

Mike

.


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## MichaelD (27 April 2008)

Nick Radge said:


> What is a conventional method?



Anything that the majority of traders are aware of and believe to be profitable. When one trades with the crowd, one will get crowd results.


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## stevo (28 April 2008)

julius said:


> Could someone who is trading breakouts mechanically post a couple of entry parameters... just to clarify 'breakout'
> 
> I've always found mech. breakout systems test poorly.




I think that some will benefit from such beliefs 

It's a bit like saying that you don't like vegetables. There must be as many breakout systems as vegetables to try, probably more. There must be some out there that are worth eating.

Does it really matter what we label a system - breakout, Overbought / Oversold, contrarian etc - as long as it works.

In terms of random entries and exits have a look at Random entries & Exits and Random Entry on my blog.


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## julius (28 April 2008)

stevo,

I've got no clue what your on about.

Vegetables?


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## tech/a (28 April 2008)

Julius 

Here is one of mine
Techtrader.
Its a long timeframe long only breakout system.
Its traded live here and has been for 6 yrs.
There are hundreds of pages of info including
coding and Q&A.

http://www.thechartist.com.au/forum/ubbthreads.php?ubb=postlist&Board=53&page=1


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## nizar (28 April 2008)

julius said:


> stevo,
> 
> I've got no clue what your on about.
> 
> Vegetables?




Julius.

His point is that just because you havent been able to find a profitable breakout system, doesnt mean there arent any out there.


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## julius (29 April 2008)

I just wanted to clarify the definition of a 'break-out' system...apples with apples, etc

To be honest, I haven't spent much time testing long term systems on equities.

I'm more inclined toward higher frequency models - just a personal preference.


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## tech/a (29 April 2008)

julius said:


> I just wanted to clarify the definition of a 'break-out' system...apples with apples, etc
> 
> To be honest, I haven't spent much time testing long term systems on equities.
> 
> I'm more inclined toward higher frequency models - just a personal preference.




And nothing wrong with that either.


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## stevo (29 April 2008)

julius said:


> I just wanted to clarify the definition of a 'break-out' system...apples with apples, etc
> 
> To be honest, I haven't spent much time testing long term systems on equities.
> 
> I'm more inclined toward higher frequency models - just a personal preference.



Sorry for being a little cryptic with my previous post on vegetables.

One trader can buy on a breakout for his / her system, whilst another sees the stock in a trading range. It all depends on timeframe. 

There are many possibilities (infinite??) in terms of breakout systems when possible strategies (including exit criteria), markets traded and timeframes are taken into account.

Some people were suggesting that the entry (breakout or otherwise) is irrelevant and that it is the exit that is important. The previous link I posted showed that a random entry underperformed a simple breakout entry using a random exit. Think of a random exit as a randomly timed exit (random nbars exit in Amibroker) within certain range parameters.

Following from this concept it is possible to design a very tradeable system that has a fixed trade length and a breakout entry. For example enter on price breaking predefined timeframe dependent criteria and sell 6 hours, 6 days, or 6 weeks later - depending on the time frame you want to trade. Add in a relatively wide trailing stop and you have a potential system. It could also be a fairly easy system to trade, depending on how good your broker is, because the timed exit is clearly defined on entry. 

There are so many possibilities when it comes to trading systems - think it, code it, test it, do it!


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## tech/a (29 April 2008)

tech/a said:


> And nothing wrong with that either.




Was going to add why does any breakout method have to be longterm?

Stevo however has covered that above.


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## MichaelD (29 April 2008)

stevo said:


> Some people were suggesting that the entry (breakout or otherwise) is irrelevant and that it is the exit that is important. The previous link I posted showed that a random entry underperformed a simple breakout entry using a random exit.




You'd be referring to me, here. I don't understand how you can come to the conclusions above - your blog entries do NOT support your conclusions as you are changing TWO variables, not one.

System 1: ROC Breakout Entry + Random Exit
System 2: Random Entry + MA Exit

These two systems have NOTHING in common and cannot be compared.

If you really wanted to compare systems, you'd compare;

System 1: Random Entry + Random Exit
System 2: ROC Breakout Entry + Random Exit

You'd then be able to find out if the entry added or subtracted value.


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## stevo (29 April 2008)

MichaelD said:


> You'd be referring to me, here. I don't understand how you can come to the conclusions above - your blog entries do NOT support your conclusions as you are changing TWO variables, not one.
> 
> System 1: ROC Breakout Entry + Random Exit
> System 2: Random Entry + MA Exit
> ...




I can't disagree with this rational, although anything can be compared. System 1 beat system 2 - why is another issue

Have a look at http://drawdown.blogspot.com/2006/03/comparing-systems-using-monte-carlo.html

Whilst the post doesn't answer your point in the timeframe that I trade I have found that the entry / exit  combo is very important. The exit isn't the only aspect of the system that is adding to performance.

I know because I tested random entry versus breakout entry and the same exit criteria for both systems. 

Obviously it is worthwhile for every trader to objectively define what they mean by "beat" and do their own work on determining what works for them.


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## MichaelD (29 April 2008)

stevo said:


> Have a look at http://drawdown.blogspot.com/2006/03/comparing-systems-using-monte-carlo.html
> 
> ...I tested random entry versus breakout entry and the same exit criteria for both systems.




I'm confused. Your blog text refers to four systems in the graphs;

1. Random Buy / Random Sell
2. Weekly MACD
3. RS III
4. S6

There doesn't seem to be any system other than system 1 there that uses Random Sell as the exit.

There also doesn't seem to be a Monte Carlo distribution comparing systems 3/4 with the same systems with random entry.


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## MichaelD (29 April 2008)

Time for some specifics. Here is a comparison between a random entry system and a breakout entry system. The two systems are identical apart from their entry;

Universe: ASX200
Test Period: 10 years back from today
Exit: 6.5 ATR
Position Sizing: 2% risk
No pyramiding
Monte Carlo runs: 1000

System 1: RANDOM ENTRY (EntryTrigger:=1)
Total Profit: 657%
Winners: 44%
Drawdown: 12%

System 2: BREAKOUT ENTRY - ROC(CLOSE,1,percent) >= 5 AND VOLUME >= (Mov(VOLUME,50,EXPONENTIAL)*1.5)
Total Profit: 623%
Winners: 44%
Drawdown: 15%


System 2 performs significantly worse than System 1 - it is less profitable, but far more importantly, the drawdown is significantly higher for this lower profit.

Entering on a breakout does NOT add value to long term trend following systems. In fact, it does the opposite.


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## theasxgorilla (30 April 2008)

MichaelD said:


> Entering on a breakout does NOT add value to long term trend following systems. In fact, it does the opposite.




IMO, you need to observe the distribution of results.  The average doesn't tell anywhere near as much as the way results are distributed, skewed etc.

Also, if you start both tests from the same date on every run through there is a fair chance you are introducing start-date bias.  For example, the point where you start your test may have had historically good returns, but been poor at producing breakout triggers.  The breakout system will always miss this period, and as a kind of tipping point, can account for anomalies between your results.

In all my random testing I randomise that start-date by up to 3 months to try and avoid this as a factor.

In addition, you haven't stated the total number of trades each system is making.  Assuming the holding times are comparible this will tell you the relative exposure each system has to the market.  In an upward trending bullmarket, like the one we've just had, just being in the market more often, can often lead to better returns.  For this reason, when I do random testing I also randomise a wait period between trades, to simulate the time when a real system would be waiting for it's next signal.

The difference in those results is not conclusive.  I've done a fair bit of testing with random systems and the truth IMO is that nothing really is conclusive...but I'd be well wary of drawing conclusions from those results.

You should also consider some MAE/MFE analysis if you want to measure the effectiveness (or prove the ineffectiveness) of an entry of n-periods.

Maybe also consider introducing a random function into the breakout test results to generate even more paths through the data than a simple Monte Carlo will manage.


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## MichaelD (30 April 2008)

theasxgorilla said:


> IMO, you need to observe the distribution of results.  The average doesn't tell anywhere near as much as the way results are distributed, skewed etc.
> 
> Also, if you start both tests from the same date on every run through there is a fair chance you are introducing start-date bias.  For example, the point where you start your test may have had historically good returns, but been poor at producing breakout triggers.  The breakout system will always miss this period, and as a kind of tipping point, can account for anomalies between your results.
> 
> ...




I'll answer these objections, but let's leave it at that. As far as my trading goes, I have long gone beyond the issue of entry for long term trend following and have no reason to revisit it - my view is that the real money for long term trend following is elsewhere (optimizing money management, which I have spent much time working on). I no longer have the psychological need nor energy to expend on converting others to my view.


1. The standard deviation and distribution of the results for both systems was much the same.

2. You can start the simulation on any date - the results come out basically the same. I remind you, however, that I used a 10 year date range to include a range of markets in the test.

3. Total number of trades was much the same, around 550 or so.

4. You're also missing the point that a breakout entry was NOT clearly and obviously superior to random entry.


The big problem with trend followers is that we remain convinced that we can add value to our systems by what is simply curve fitting and we will spend endless hours curve fitting the entry to give the best historical results (which paradoxically will likely give the worst results going forwards).

Long term trend following derives its edge purely and simply by cutting out the big losers whilst letting the big winners run. All the rest is window dressing to make us feel as if we have some degree of control over our results.

Accepting the fact that entry is mostly insignificant in long term trend following is highly liberating, and allows you to move beyond the "5%". I have come to accept, however, that the vast bulk of long term trend followers will never accept this, but as long as they honour their stops, they'll still be profitable.


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## theasxgorilla (30 April 2008)

MichaelD, with all due respect, it's your study.  If you didn't want it to be critiqued, why post it?

In addition to my previous comments, using today's ASX200 as your universe, with 10 years of past data is NOT a way to compare a breakout system to a random entry system that has "entry=1" as the trigger.

The latter system will always be in the market...and when those markets are today's ASX200 constituents and we know where they're going to end up, you wouldn't do yourself any favours waiting for a breakout would you?

Anyway, this isn't my point.

Entries become important when you have initial stoplosses.  Your study did not have any initial stoplosses.  My own research into random entry/exit testing has suggested that adding a stop to such a system reduces CAGR, but vastly improves Max DD.

Working on entries can help keep the system up off it's initial stops, if that makes sense.

My study:

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


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## tech/a (30 April 2008)

Michael.

I really cant believe that your making your point with such weak arguement.
Youve basically classified all breakouts as conforming to your singular entry criteria.

There are literally 100s of ways to define a breakout.

I could point out Techtraders Breakout criteria as a positive example but that has no validity as a singular entity.

To argue that Random entry is more profitable than all breakout entrys is crazy in my view.

EVERY trend in EVERY timeframe begins with a breakout from something.

Add another 10 or more valid breakout criteria to filter entry against random.

Add to that criteria which place a POTENTIAL breakout in to a higher probability such as that in T/T (Which is very basic) and you have a far more potent entry that the canned version you have supplied.

Add to that your exit which you ignore as relevant.
Failure is deamed relative to longterm result only???

TH works in 60 second timeframes and Ill bet there is a breakout of some sort
in his timeframe.

Out of interest,do you believe ANY entry is better than Random or are all entries in your view a delusional "Feel good" method of entering a trade?


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## bingk6 (30 April 2008)

MichaelD said:


> If you really wanted to compare systems, you'd compare;
> 
> System 1: Random Entry + Random Exit
> System 2: ROC Breakout Entry + Random Exit
> ...




I fail to see how even these two systems can be compared. At the end of the day, random is exactly that, random, and for system 1 which incorporates two random factors, the results returned could potentially range from -100K to 100K, depending on the iteration chosen. For the results of a *singular* iteration from system 1 to be compared to a *singular* iteration from system 2, which also incorporates a random exit, is to my line of thinking, a meaningless exercise, akin to comparing two "stabs in the dark".

I am of the opinion that even for long term trending systems, some entries are consistently better than others. ASX has documented some code in Amibroker in his blog for testing the effectiveness of entries alone, using the Edge ratio (derived from the Turtles Trading book ??) which is I believe gives a very good indication as to the edge that your entry provides.


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## MichaelD (30 April 2008)

theasxgorilla said:


> Entries become important when you have initial stoplosses.  Your study did not have any initial stoplosses.




An initial stop loss increases trade frequency (and decreases win %). It thus increases trade costs. All the studies of initial stop loss that I've seen (including yours - systems 2 and 3) fail to take trade costs into account - if they do include trade costs, all of a sudden the initial stop doesn't seem quite so attractive, as the drawdown and CAGR then end up much the same as a system that doesn't use an initial stop. Having said that, further investigation of an initial stop loss is the one entry-related item on my to do list as the work I did a while back suggested there might be something a bit worthwhile there.

In regards to universes - you get much the same comparative results when using a delisted universe as you do when you use the current ASX200. It was just a convenient folder I had lying around.

It is my view that a long term trend following system should always be fully invested in the market. This is consistent with my views that the entry has no positive predictive value and that the edge in these systems is the upwards bias in the market, which is omnipresent in the time frame we are trading in. This is also consistent with the observations that I have never been able to develop and have never seen an index filter which improves results, with all filters hurting results.

Anyhow, if you want to muck about with a few % difference in outcome, then keep working on the entry. If you want to change your results by orders of magnitude, then work on money management.


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## MichaelD (30 April 2008)

tech/a said:


> Out of interest,do you believe ANY entry is better than Random or are all entries in your view a delusional "Feel good" method of entering a trade?




All components of a trading system are important, including the entry, but the relative importance of each component is dependent on the edge you are exploiting.

For long term trend following, the entry is practically insignificant - it's the risk & money management where the bang for buck is.

ps I don't have any problems at all in not being believed and being laughed at - the continuing belief of traders in breakouts is one of the edges I exploit. For that particular edge, the entry is THE most important aspect of the trade.


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## Boggo (30 April 2008)

Aside from the 'mine is bigger than yours' cycle, lets put up some trades.

Mine, BOL - Boom Logistics.

.


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## stevo (30 April 2008)

bingk6 said:


> I fail to see how even these two systems can be compared. At the end of the day, random is exactly that, random, and for system 1 which incorporates two random factors, the results returned could potentially range from -100K to 100K, depending on the iteration chosen. For the results of a *singular* iteration from system 1 to be compared to a *singular* iteration from system 2, which also incorporates a random exit, is to my line of thinking, a meaningless exercise, akin to comparing two "stabs in the dark".




The entry and exit is random, but the market tends to have a bias. If I was flipping a perfect coin I would agree that the results would be ranged evenly around an average. But a random entry / exit test will show a profit in the majority of cases, at least in the Aussie market over the last 10 years.

I guess that point to the exercise is that if a system can't soundly beat random entry and exit then it's not worth trading it. 

MichaelD's argument is along the lines of the discussion in the book "Fooled by Randomness". It goes along the lines of - "I have examined 2000 swans and none of them are black. Therefore there are no black swans." Then someone discovered Australia and found black swans.

So -  "I have examined a couple of thousand breakout systems and the entry doesn't help the results. Therefore breakout entries don't work." Maybe if 10000 different entries were tested one of them would work. But of course there are time limitations to such work.


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## MichaelD (30 April 2008)

stevo said:


> I guess that point to the exercise is that if a system can't soundly beat random entry and exit then it's not worth trading it.



100% agree with this.

I'm also amused by a quote I read somewhere that goes along the lines;
"If you torture a given dataset for long enough, it will admit to anything."

It really all boils down to our inability to accept that fact that we cannot control the markets.


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## julius (30 April 2008)

Michael,

I agree with you on a number of points, particularly the impact of the money management on system performance. You can make most systems profitable if you get it right...

However I'd argue that certain breakout entries provide an edge because of the risk/reward r'ship they present. Essentially, the entry may as well be random but the pattern provides a risk/reward 'filter'.

Not neccesarily the 'best' R:R but the most robust protective stop which minimises the chances of getting 'whipped' out of the position, while also minimising the loss if the pattern does fail.

I'm just not sure if you could effectively program these types of entries.


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## bingk6 (30 April 2008)

stevo said:


> The entry and exit is random, but the market tends to have a bias. If I was flipping a perfect coin I would agree that the results would be ranged evenly around an average. But a random entry / exit test will show a profit in the majority of cases, at least in the Aussie market over the last 10 years.
> 
> I guess that point to the exercise is that if a system can't soundly beat random entry and exit then it's not worth trading it.




I agree that the market has a bias and that the random entry/exit would tend to skew more towards profitability than not. Indeed, I would say that if sufficient iterations were put through the random entry/exit tests and there were no skewing in the conditions within which these tests were run, that the results would tend to towards the performance of the index.

Therefore, if one wanted to see whether a system was worth trading, won;t it be a simplier exercise just to compare its performance to the index? I just don't see what random entry/exit offers above comparing to index performance.


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## bingk6 (30 April 2008)

MichaelD said:


> I don't have any problems at all in not being believed and being laughed at - the continuing belief of traders in breakouts is one of the edges I exploit. For that particular edge, the entry is THE most important aspect of the trade.




Michael,

Are you trading Turtlesoup ??


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## MichaelD (30 April 2008)

bingk6 said:


> Michael,
> 
> Are you trading Turtlesoup ??




No, but the thought process behind Turtle Soup - figure out what other traders are doing and work out how to trade against them - is robust and the way I predominantly think these days.



julius said:


> However I'd argue that certain breakout entries provide an edge because of the risk/reward r'ship they present. Essentially, the entry may as well be random but the pattern provides a risk/reward 'filter'.
> 
> Not neccesarily the 'best' R:R but the most robust protective stop which minimises the chances of getting 'whipped' out of the position, while also minimising the loss if the pattern does fail.
> 
> I'm just not sure if you could effectively program these types of entries.



I tend to agree with you here, and also acknowledge other points in this thread as to exactly what a breakout/breakdown is.

There are significant limitations in what you can code and thus mechanically backtest for an entry. I have to this date never seen mechanical code for a breakout which enhances system performance in a significant manner.

This limits any conclusions you can draw about the effectiveness of such entries as the evidence is mostly anecdotal and in the form of "look at this particular chart" - it is not particularly helpful to look at when the pattern works out. Rather, you want to know what happens when the pattern doesn't work out and whether the R:R is worth it overall.

One particular pattern that has caught my eye of late is a breakdown through a double bottom - a nice example has been posted in this thread. Coding a breakdown through a double bottom to test the hypothesis...now THAT'S hard.


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## It's Snake Pliskin (30 April 2008)

MichaelD said:


> One particular pattern that has caught my eye of late is a breakdown through a double bottom - a nice example has been posted in this thread. Coding a breakdown through a double bottom to test the hypothesis...now THAT'S hard.




Herein lies the problem of thinking purely in testing to give the answers.


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## tech/a (30 April 2008)

> I have to this date never seen mechanical code for a breakout which enhances system performance in a significant manner.




Techtrader?

Or is it the exit that enhances the system?
Or the Stop?

If I removed the entry and replaced it with Random I'd be no worse off ?


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## theasxgorilla (30 April 2008)

bingk6 said:


> Therefore, if one wanted to see whether a system was worth trading, won;t it be a simplier exercise just to compare its performance to the index? I just don't see what random entry/exit offers above comparing to index performance.




I think that because most system traders trade in a non-market-cap-weighted fashion that any comparison measuring whether a system is an improvement on something else should try to keep as many money management factors consistent as possible.

Take one of the rawest forms of a random entry/exit test; one that not only randomises when it buys and sells, but also how much to invest per trade (up to say, 50% of total capital).  In one random iteration it might continuously invest 50% x 2 in small-cap miners and make a killing.  In another it might choose TLS and some other struggling stalwart and underperform.

Then add fixed position sizing (eg. 10% per trade) and test again.  You are now exposing your capital to the market in a non-random, non-market-cap-weighted fashion.  My testing showed that this bunches and shifts the distribution of CAGR and Max DD in favourable directions.  Just doing this should help you beat the index.

If you then add some purposeful entry, or exit conditions it is that study that you should compare your results with to see if you are improving consistency and effectiveness.


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## MichaelD (30 April 2008)

tech/a said:


> Techtrader?
> 
> Or is it the exit that enhances the system?
> Or the Stop?
> ...



If you replace the entry with random you'd be marginally worse off. Most of the filtering benefit of the T/T entry comes from selecting for stocks above a medium term moving average - that's robust and that works.

You'd find, though, if you went back and redid the T/T creation process that most of the entry filters wouldn't work anywhere near as effectively as they used to - most of the T/T entry is merely curve fitting to the data of the day.

But that's not the point. That's time-wasting on whether a 30 EMA is better than a 15 EMA and other such irrelevant details.

What works is the consistent following of the rules to limit the losses and let the winners run. Do that, and long term trend following will work no matter what the entry contributes or doesn't contribute.

T/T is profitable DESPITE all efforts to corrupt it by overanalysis because it has an exit which skews the R:R in the correct direction.


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## theasxgorilla (30 April 2008)

tech/a said:


> Techtrader?
> 
> Or is it the exit that enhances the system?
> Or the Stop?
> ...




Actually, TechTrader is difficult to 'admit as evidence' because the entry isn't mechanical.  If it were the equity curve would be very different to the publicly traded model.

One of the best aspects to the system is the manual override that has allows cherry-picking of entries.


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## theasxgorilla (30 April 2008)

MichaelD said:


> But that's not the point. That's time-wasting on whether a 30 EMA is better than a 15 EMA and other such irrelevant details.
> 
> What works is the consistent following of the rules to limit the losses and let the winners run. Do that, and long term trend following will work no matter what the entry contributes or doesn't contribute.




It's not the specific point of this thread but you are touching on a very important point IMO.  We have to be able to follow 'the rules', as you put it.  This is a given and it's 100% psychological.  I don't think I could psychologically follow a system where I haven't spent some time coming to the conclusion that this parameter value suits me because of this reason, and that one because of that etc.  I don't think it's a waste of time at all to convince yourself that your system has been purposefully designed and to understand when it will work well and it's shortcomings.  

So long as people realise that they need to take this into account I think they stand a better chance of eventually trading something that they will be able to follow.


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## tech/a (30 April 2008)

theasxgorilla said:


> Actually, TechTrader is difficult to 'admit as evidence' because the entry isn't mechanical.  If it were the equity curve would be very different to the publicly traded model.
> 
> One of the best aspects to the system is the manual override that has allows cherry-picking of entries.




Hahaha I gotta love this.
I'm that good I can cherry pick those trades which skew results----yeh right!

Thats the whole point of Montecarlo testing.
After testing 50000 combinations,
I know that no matter what trades I take that I'll have results fall within the parameters returned in the testing.
So far thats exactly the case.

Mind you I agree with Michael that IN THE END entry is irrelevant on longterm trades.
But to get it going.


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## theasxgorilla (30 April 2008)

tech/a said:


> Thats the whole point of Montecarlo testing.
> After testing 50000 combinations,
> I know that no matter what trades I take that I'll have results fall within the parameters returned in the testing.
> So far thats exactly the case.




I thought we came to the conclusion that Monte Carlo testing only 'forked in the road' when there were many trades being presented and limited capital.  Using a discretionary override to choose whether or not to take a trade would be better compared with randomly ignoring a proportion of buy signals.  It's two different things from where I'm sitting.


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## tech/a (30 April 2008)

> Using a discretionary override to choose whether or not to take a trade would be better compared with randomly ignoring a proportion of buy signals. It's two different things from where I'm sitting.




Not at all. ASX.Thats *EXACTLY* whats happening.

You'll note that T/T isnt fully filled.
There is only a partial portfolio.

Thats more due to my slackness than design.
There are trades presented every night.
I dont run a scan more than once or twice a week.
So 100s go by without ever being viewed!
Mainly due to not trading it myself as you know.Trading discretionary shorter term.

Im blown away that it can still out perform the market in less than good trading conditions and less than Ideal trading.


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## nizar (30 April 2008)

theasxgorilla said:


> One of the best aspects to the system is the manual override that has allows cherry-picking of entries.




One of the best aspects?

We have absolutely no way of knowing whether the reason behind the outperformance of the public T/T is due to tech/a's cherry picking or whether in fact he was just lucky.

For me, any discretion that leads to better performance would be one of the WORST aspects of the system because you can never know if this added to the edge of the system and consequently whether or not to keep using this discretion.

The very best systems require no discretion at all, in my opinion.


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## wayneL (30 April 2008)

nizar said:


> One of the best aspects?
> 
> We have absolutely no way of knowing whether the reason behind the outperformance of the public T/T is due to tech/a's cherry picking or whether in fact he was just lucky.
> 
> ...



Most breakout systems will have a preponderance of signals, far far more than capital, or the system is designed to trade. Therefore there MUST be discretion on which signals to actually trade.

Like any rule based t/a system, the success depends on the trades NOT taken.

You cam only be truly mechanical on a single, or limited number of tickers (such as is the case with The Turtles).

Show me one trader that, when faced with twenty stocks in their scan, won't try to discretionarily(?) pick the best prospect(s).


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## theasxgorilla (30 April 2008)

tech/a said:


> Im blown away that it can still out perform the market in less than good trading conditions and less than Ideal trading.




I suspect that has more to do with not understanding WHY you system is working :  As tongue in cheek as that might have sounded, try starting up TechTrader from the 1/1/07, using today's ASX300, leverage and other rules kept the same, no discretionary filter...then see if you can explain the divergence in results between the 'slack' version and the 'tested' one.


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## stevo (30 April 2008)

wayneL said:


> Most breakout systems will have a preponderance of signals, far far more than capital, or the system is designed to trade. Therefore there MUST be discretion on which signals to actually trade.
> 
> Like any rule based t/a system, the success depends on the trades NOT taken.
> 
> ...




A mechanical system can rank stock selections using objective rules and the trader executes the trades in ranking order. This is used on 500 plus possible stock tickers in mechanical systems being traded today. 

It's arguable if it's truly mechanical even then since a lot can happen between getting the signal and actually getting filled (or not). It's probably the trader that has to be "mechanical" as well!


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## MichaelD (30 April 2008)

wayneL said:


> Like any rule based t/a system, the success depends on the trades NOT taken.
> 
> Show me one trader that, when faced with twenty stocks in their scan, won't try to discretionarily(?) pick the best prospect(s).




I'm not sure I understand what you mean by the first sentence, but on the second point - it interests me that when I do have a choice of trades, I am now tending to pick the worst looking charts rather than the "sure bet" charts.


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## theasxgorilla (30 April 2008)

nizar said:


> One of the best aspects?
> 
> We have absolutely no way of knowing whether the reason behind the outperformance of the public T/T is due to tech/a's cherry picking or whether in fact he was just lucky.
> 
> ...




Yep, fair call.  Although I suggest you compare the results of TechTrader using various recent start dates (within the last couple of years) with the public results of the system as traded with discretion.  You will clearly see shortcomings of the system if left to it's own devices, and the importance of employing discretion to prevent it from digging itself down into rather perilous drawdown situations.

As for testing the impact of discretion on results, of course that is difficult.  You can't Monte Carlo that, so it's not feasible to compare the distribution of two sets of results.  And as you point out, to compare the position of a single traded path within the distribution of Monte Carlo'd results from testing without discretion doesn't answer the questions: was it luck? can it be consistently repeated?

IMO, with TechTrader the discretion and/or slackness has inadvertently done what some kind of switch like an index filter might have done mechanically.  The current mechanical entry is not sufficient to keep the system out of an inappropriate market.


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## tech/a (30 April 2008)

Thought Id run that for interest.
Not a lot of difference.
From one simulation and the same capital as the Traded one $392,000
loss was around $20k over that period.
In realtime its a profit of $25,000.
But if we look at 20000 simulations its a little above average.
Dont think it proves anything.


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## nizar (30 April 2008)

wayneL said:


> Most breakout systems will have a preponderance of signals, far far more than capital, or the system is designed to trade. Therefore there MUST be discretion on which signals to actually trade.
> 
> Like any rule based t/a system, the success depends on the trades NOT taken.
> 
> ...




Wayne.

I dont disagree with what you are saying. My point was that the use of discretion in a mechanical system is a weakness.

My system often has more stocks triggering buys that what i can afford -- But I wish it didn't!

With this in mind, the next system I will design will be structured in such a way so that I can take every trade that triggers (only 2-3 pairs).

As for your last comment, ideally you shouldn't have to look at charts/fundamentals to decide which stock to buy, though I still do.

Rank the candidates according to price or ROC or something that has been backtested and can be traded systematically.

Michael.

I can relate to your comments 100%.
I thought LGL would go to the moon. REX looked very promising as well. And then there was BKN....


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## tech/a (30 April 2008)

theasxgorilla said:


> IMO, with TechTrader the discretion and/or slackness has inadvertently done what some kind of switch like an index filter might have done mechanically.  The current mechanical entry is not sufficient to keep the system out of an inappropriate market.




Whilst not entirely agreeing there is some merit in what you say.


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## weird (30 April 2008)

I agree with Stevo concerning the importance of entry. I would use a fixed bar length for the exit though to compare, instead of random exit to test the effectiveness of entries.

A few short-term future systems, pretty much rely on entry alone, including the stop (perhaps used more for account continued survival, which could also eventually in some circumstances cause the trader to give up in frustration if the stop is not dynamic or the risk perceived is no longer comfortable), with the exit being fixed at the close of the day. 

I know of systems which are based purely on entry, and using a fixed exit, and if ignoring a tight stop  the system may even perform fantastic during the most volatile periods (although nicely accepted in hindsight), however if actually employing a tight initial stop during those type of periods, it would most likely have caused frustration in following such a system. An adaptive stop may not always suit the risk profile of the trader. The very tight stop can sometimes cause frustration.

The only benefit of the random entry theory I can see, is helping a trader perhaps focus more on the rest of the system, which predominately looks at trade management. 

But dismissing the importance of entry (which could also be used to define where to place the initial stop for determining a low risk entry (leading into the important area of trade management) is not practical in my opinion.


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## theasxgorilla (1 May 2008)

tech/a said:


> Thought Id run that for interest.
> Not a lot of difference.




We must be testing differently.  I'm simulating system start-up on 010107, using the ASX300 minus listed managed investments as of 100408, and testing up until 100408.


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## tech/a (1 May 2008)

theasxgorilla said:


> We must be testing differently.  I'm simulating system start-up on 010107, using the ASX300 minus listed managed investments as of 100408, and testing up until 100408.




Did you include open equity?
If you just included closed trades then thats what you'll get.
At the close of the period there are trades which have been going for months.


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## nizar (1 May 2008)

tech/a said:


> Did you include open equity?
> If you just included closed trades then thats what you'll get.
> At the close of the period there are trades which have been going for months.




Yeh common mistake.
I was thinking the same thing when I saw his results.


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## theasxgorilla (1 May 2008)

tech/a said:


> *Did you include open equity?*
> If you just included closed trades then thats what you'll get.
> At the close of the period there are trades which have been going for months.




No, but the trades that were open were not in profit anyhow.  Adding a sell signal to the last bar to force them to be closed only exacerbates the poor results.  Like I said though...maybe we're testing differently:


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## tech/a (1 May 2008)

theasxgorilla said:


> No, but the trades that were open were not in profit anyhow.  Adding a sell signal to the last bar to force them to be closed only exacerbates the poor results.  Like I said though...maybe we're testing differently:




Maybe.


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## It's Snake Pliskin (2 May 2008)

Different testing and results. Wow, it must be an art form. Don't artists trust ther own instincts?

Just to add, can testing be considered an art?


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## tech/a (2 May 2008)

Snake.

Lets say on 1/1/07 until the whole portfolio is filled there are 25 stocks triggered to fill the 10 stocks in the portfolio.
Even 1 stock difference in ASX and my portfolio will mean that our portfolios diverge as stocks will open/close and prospects will be found at different times.

So a singular test on a set of data can and will often give very different results.
Again why Montecarlo is used.


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## It's Snake Pliskin (2 May 2008)

tech/a said:


> Snake.
> 
> Lets say on 1/1/07 until the whole portfolio is filled there are 25 stocks triggered to fill the 10 stocks in the portfolio.
> Even 1 stock difference in ASX and my portfolio will mean that our portfolios diverge as stocks will open/close and prospects will be found at different times.
> ...




Thanks for the insight T/A.


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