$15,000 to Over $750,000 in 7 yrs Impossible? Think again!

[tech/a]

T/A... I completely agree that the system is quite irrelevant, but I'd be terrified in using a 70-75% LVR as you suggest!

Does there even exist a system that would not generate a margin call repeatedly during a bear market (without the benefit of knowing in hindsight that you were in a bear market)? I know you argue that you'd use a different system to T/A during a bear market, but

No.

a.) what sort of ideas would the system use

If I did trade it would be futures,but as it stands If I personally was exited out of my methods due to market conditions pushing the systems beyond my "Blueprints".I probably wouldnt trade.Id spend the time investigation something like Frank D's methods.

b.) would it impale you if it turned out you weren't in a bear market afterall

No,Id be following my method and its Numbers.

c.) could it survive a major shock?

My portfolios as they stand could yes.


If you started today the stops are at 10% of purchase price (My methods) and as such a shock tommorow could fail it.
But then any trader in the market will git hit by a shock just like me if Im in.

I'd take 15%... heh I think I'd take 10% p.a. over the next 7 years. Of course, I'm very open to proof that 10% returns are pathetic

Any return used wisely is a good return

SIR

Does living in a shoe box mean I am closed to ideas? Maybe this is some gang of weirdo's who think that backtesting statistics over a bull market should never be questioned?

No but your hooked on the semantics not the thinking outside the shoe box.

Granted, a virgin starts out with Techtrader a few years ago with market conditions as they have been, has pocketed a motza like everyone else. A virgin starts out with Techtrader in '87 and for 7 years what have they achieved, $750,000, $200,000, -$15,000?

Firstly the system used as example isnt Techtrader.
Secondly I have no idea.

My problem is not that $750,000 is impossible (in 7 years), simply that it is dependent on market conditions (using "long" only).

Yes that is true of any trading. Long or Short.But I will continue to argue that regardless of market conditions--returns,any returns,can be enhanced through compounding and leverage.Sure you could argue that your timing could be at the begining of a bear market and you could lose to the extent of the maximum drawdown of the method you have tested and decided to trade.

But then the alternative is to trade in a discretionary manner with NO blueprint whatso ever.At least I will know when to sit it out even leveraged Id lose 30% of initial capital,which I would also suggest to budding trader would not be your total nett worth!

You have made it look slick as and this is not a tricky question but again, how would trading on margin look in a market, say '87 thru '93?

I've not made it anything---its as it is tested.
Again I have no idea I dont have data back that far.
But again your missing the whole idea of trading with a blueprint.

What I have done though is tested the period 1998 to 2004 which is pretty flat.

The market rose from 2500 to 3300 in approx round terms.
Or around 33% $15000 would have grown to $19800.

I didnt think the results were that bad over that period---what do you think??


Detailed Report
( ASX100 XX1 03)

Simulation Summary
Simulation Date: 13/09/2006
Simulation Time: 9:54:09 PM
Simulation Duration: 0.24 seconds

Trade Summary
Earliest Entry Date in the Trade Database: 9/04/1998
Latest Entry Date in the Trade Database: 29/08/2003
Earliest Exit Date in the Trade Database: 17/04/1998
Latest Exit Date in the Trade Database: 19/11/2004

Start Trade Entry Date: 9/04/1998
Stop Trade Entry Date: 29/08/2003
First Entry Date: 9/04/1998
Last Entry Date: 28/03/2003
First Exit Date: 17/04/1998
Last Exit Date: 19/11/2004

Total Trading duration: 2416 days

Profit Summary
Profit Status: PROFITABLE
Starting Capital: $15,000.00
Finishing Capital: $522,871.39
Maximum Equity/(Date): $507,871.39 (19/11/2004)
Minimum Equity/(Date): -$3,666.13 (14/05/1999)
Gross Trade Profit: $561,575.72 (3743.84%)
Gross Trade Loss: -$53,704.33 (-358.03%)
Total Net Profit: $507,871.39 (3385.81%)
Average Profit per Trade: $7,468.70
Profit Factor: 10.4568
Profit Index: 90.44%
Total Transaction Cost: $8,160.00
Total Slippage: $0.00
Daily Compound Interest Rate: 0.1471%
Annualized Compound Interest Rate: 71.0036%

Trade Statistics
Trades Processed: 164
Trades Taken: 68
Partial Trades Taken: 0
Trades Rejected: 28
Winning Trades: 30 (44.12%)
Losing Trades: 38 (55.88%)
Breakeven Trades: 0 (0.00%)

Normal Exit Trades: 68 (100.00%)
Delayed Normal Exit Trades: 0 (0.00%)
Open Trades: 0 (0.00%)
Protective Stop Exit Trades: 0 (0.00%)
Time Stop Exit Trades: 0 (0.00%)
Profit Stop Exit Trades: 0 (0.00%)

Largest Winning Trade/(Date): $162,588.00 (19/11/2004)
Largest Losing Trade/(Date): -$7,632.00 (12/07/2002)
Average Winning Trade: $18,719.19
Average Losing Trade: -$1,413.27
Average Win/Average Loss: 13.2453

Trade Duration Statistics
(All Trades)
Maximum Trade Duration: 749 (days)
Minimum Trade Duration: 6 (days)
Average Trade Duration: 144 (days)
(Winning Trades)
Maximum Trade Duration: 749 (days)
Minimum Trade Duration: 7 (days)
Average Trade Duration: 279 (days)
(Losing Trades)
Maximum Trade Duration: 154 (days)
Minimum Trade Duration: 6 (days)
Average Trade Duration: 37 (days)

Consecutive Trade Statistics
Maximum consecutive winning trades: 7
Maximum consecutive losing trades: 8
Average consecutive winning trades: 2.31
Average consecutive losing trades: 2.92

Relative Drawdown
Maximum Dollar Drawdown/(Date): $16,624.89 (14/08/2002)
Maximum Percentage Drawdown/(Date): 23.4800% (16/02/2001)

Absolute (Peak-to-Valley) Dollar Drawdown
Maximum Dollar Drawdown: $16,624.89 (11.4500%)
Capital Peak/(Date): $145,163.27 (28/06/2002)
Capital Valley/(Date): $128,538.39 (14/08/2002)

Absolute (Peak-to-Valley) Percent Drawdown
Maximum Percentage Drawdown: 32.4500% ($11,756.60)
Capital Peak/(Date): $36,234.08 (24/03/2000)
Capital Valley/(Date): $24,477.48 (16/02/2001)


And its over a shorter period!!

{ I can still get close to $750K actually $710K by altering the variables only slightly}

AT CFD leverage of 10:1 {Which of course is insanity even with a tested drawdown of 52%} is over $4 million.During the same flatish period.

 

[MichaelD]

its NOT ABOUT THE SYSTEM PRESENTED,we could dissect it endlessly

But it IS about the system. Long term trend following requires long term trends to make money. Years of range bound markets simply whipsaw the system, slowly depleting equity. Add margin into the equation and you simply deplete your capital faster.

If the market behaves cyclically as it has done for the last 20 years then there will be plenty of bullish times to more than compensate for the bearish times and long term trend following will continue to make good money over time.

But what happens to long term trend following traded on margin - to your business plan - when the edge disappears for years and years in a secular bear market?

 

[tech/a]

See above what do you think as well!

 

[lesm]

But it IS about the system. Long term trend following requires long term trends to make money. Years of range bound markets simply whipsaw the system, slowly depleting equity. Add margin into the equation and you simply deplete your capital faster.

The obvious question is why would you permit your equity to slowly bleed to death in a market that the system is no longer suitable for?

Using margin simply speeds up the end result, as you have stated.

This is one the reasons that some system developers are looking at switches to turn systems off when the system is no longer viable in changed market conditions

If the market behaves cyclically as it has done for the last 20 years then there will be plenty of bullish times to more than compensate for the bearish times and long term trend following will continue to make good money over time.

If you follow the logic of the first paragraph this is on true if you haven't bled to death first and can survive the potential drawdown and equity depletion. We cannot necessarily predict in advance the length of the next bear cycle. The premise in the above paragraph relies on the ability to survive the bearish cycle. It may actually be wiser to stop trading or change the trading approach to one that is better suited to the the relevant market conditions.

But what happens to long term trend following traded on margin - to your business plan - when the edge disappears for years and years in a secular bear market?

This assume that the long term trend following trader has a true edge, whihc is not necessarily true. A large number of long term trend followers are really just herd followers, with no (trading) edge.

Cheers

 

[MichaelD]

Earliest Entry Date in the Trade Database: 9/04/1998
Last Exit Date: 19/11/2004

Ah, our posts crossed paths.

This shows up another TradeSim/backtesting gotcha which you expose yourself to when you deselect Ignore Open Trades.

The XAO went from 2806 to 3846 during the period actually simulated (9/4/1998 to 19/11/2004). This is NOT a flat market that you've simulated over. Instead, there's a huge tail of bull market winners in there for the last 12 months past where you think you stopped testing which will be severely biasing the results.


However, having said all of that, I think we are indeed losing sight of the wood for the trees.

Your assertion is that adding compounding and leverage to a robust trading system will multiply results. I agree with this. However, I differ on what I consider robust. I do not believe that long term trend following of one market is sufficiently robust in all market conditions to be traded safely as you advocate.

I believe for a trading business plan to be truly robust (and thus capable of safely utilizing leverage) it needs the following features;

1. There must be more than one time frame traded with different edges. This does NOT mean a daily long term trading system and a weekly long term trading system. These are basically correlated systems. Trading different edges can be simplistically considered as trading markedly different exits. (Money and risk management are givens in all of this.)

2. Non correlated markets should also be traded.

To me, the issue of leverage and compounding is not about how much more you could make. It is about how best you can utilize leverage to minimize your drawdown and smooth your equity curve. The profits will then come as a byproduct of trading well.

 

[MichaelD]

Why would you permit your equity to slowly bleed to death in a market that the system is no longer suitable for?

I wouldn't. My (and no doubt all of Tech's long term trading systems) have termination parameters of % drawdown.

But...that's not the real issue. HOW do you know at the time whether a market is unsuitable for long term trend trading? Answer: you cannot know this until after the fact. All the switches I have looked at to date end up simply being curve-fitted and not robust.

When is a system's true maximum drawdown apparent? During backtesting? After live trading for 1, 2, 5, 10 years? When do you reasonably stop trading a system with a backtested edge that is steadily drawing down? How do you know that the day after you stop isn't the day that market conditions suddenly become favourable to your system again?

The answers to all of these questions are unknowable in advance.

 

[lesm]

Michael,

You are absolutely correct, we will never know in advance, but we do know the design characteristics of our system.

Sytem tesing enables us to gain an understanding of the systems expected behaviour prior to using it in the live market.

As an aside, another unknown is how the system will actually perform when it goes live. Again, this will only be known after the fact.

Hence, once we start trading the system live we will be gathering information as to its acutal performance. This information enables us to refine the information with respect to the system and to monitor its performance.

Some of the characteristics we my observe are that the number of identified potential trades drop off or goes to zero over an extended period of time, or that the run of losing trades is increasing over the expected number, or the winning trades are decreasing both in number and size of return, or the stop loss is being hit more frequently. I am sure that you could expand/extend the list.

Just simple observation of the market behaviour or its dynamics could indicate a change in conditions, or even just simple common sense. No curve fitting is really required and is a dangerous approach in any situation.

If market conditions appear to be changing we can always look for confirmation of the change, but to keep trading a system in a market that it is not suited to it on the basis that it might become favourable is a gambling approach and not a smart trading approach.

Due to the lack of a holy grail or a reliable crystal ball, we need to learn to become wise traders and realistic in our approach to trading and longevity in the market. In this regard, we need to learn when to be active or be cautious, or step back from the market. Some of this comes from experience rather just blind reliance on writing system rules, as there is need to write rules that are effective and representative of the potential situations that may arise.

On another aspect, technical analysis in its pure form, I would argue, leaves most technical traders exposed to market risk. A single major event could wipe a significant amount of profit off the table and without a GSL facility, as available using CFDs, would also leave them exposed to potentially significant slippage, whihc could result in major losses. So much for a stop loss if there are no buyers and in the process you are thinking that market might be favourable. All because you keep trading your system and can't pull the trigger and switch the system off. Again we can't know in advance when an event like this may occur, but only after the fact.

Cheers.

 

[Bobby]

Michael,

You are absolutely correct, we will never know in advance, but we do know the design characteristics of our system.

Sytem tesing enables us to gain an understanding of the systems expected behaviour prior to using it in the live market.

As an aside, another unknown is how the system will actually perform when it goes live. Again, this will only be known after the fact.

Hence, once we start trading the system live we will be gathering information as to its acutal performance. This information enables us to refine the information with respect to the system and to monitor its performance.

Some of the characteristics we my observe are that the number of identified potential trades drop off or goes to zero over an extended period of time, or that the run of losing trades is increasing over the expected number, or the winning trades are decreasing both in number and size of return, or the stop loss is being hit more frequently. I am sure that you could expand/extend the list.

Just simple observation of the market behaviour or its dynamics could indicate a change in conditions, or even just simple common sense. No curve fitting is really required and is a dangerous approach in any situation.

If market conditions appear to be changing we can always look for confirmation of the change, but to keep trading a system in a market that it is not suited to it on the basis that it might become favourable is a gambling approach and not a smart trading approach.

Due to the lack of a holy grail or a reliable crystal ball, we need to learn to become wise traders and realistic in our approach to trading and longevity in the market. In this regard, we need to learn when to be active or be cautious, or step back from the market. Some of this comes from experience rather just blind reliance on writing system rules, as there is need to write rules that are effective and representative of the potential situations that may arise.

On another aspect, technical analysis in its pure form, I would argue, leaves most technical traders exposed to market risk. A single major event could wipe a significant amount of profit off the table and without a GSL facility, as available using CFDs, would also leave them exposed to potentially significant slippage, whihc could result in major losses. So much for a stop loss if there are no buyers and in the process you are thinking that market might be favourable. All because you keep trading your system and can't pull the trigger and switch the system off. Again we can't know in advance when an event like this may occur, but only after the fact.

Cheers.

Yes Lesm you have got it !

When the markets go funny so do the systems.
I.m going to pay the small Ins for GSL ( CFDs ) and go discretionary.

Bob.

 

[lesm]

Re: A demonstration $15,000 to Over $750,000 in 7 yrs Impossible? Think again!

So how important is exit/entry/how you choose a prospect,Tech analysis or fundamental???

I dont care how much you tweek the way you trade you wont come close to the improvement you'll get with the way you USE your and other peoples money

tech/a,

You have actually made a very good point here and probably one that people lose sight of.

Cheers

 

[Shane Baker]

When is a system's true maximum drawdown apparent? During backtesting? After live trading for 1, 2, 5, 10 years? When do you reasonably stop trading a system with a backtested edge that is steadily drawing down? How do you know that the day after you stop isn't the day that market conditions suddenly become favourable to your system again?

This is true of all systems over all timeframes not just long term systems. In fact short term systems can reach their maxDD a lot quicker simply because they trade so frequently.

1. There must be more than one time frame traded with different edges. This does NOT mean a daily long term trading system and a weekly long term trading system. These are basically correlated systems. Trading different edges can be simplistically considered as trading markedly different exits. (Money and risk management are givens in all of this.)

I agree with this. Obviously non-correlated markets will help.

To me, the issue of leverage and compounding is not about how much more you could make. It is about how best you can utilize leverage to minimize your drawdown and smooth your equity curve. The profits will then come as a byproduct of trading well.

This is an age old argument about smoothing the equity curve. It is based on managing money rather than your own account (although I will concede your own psychgology comes into play a lot). It is pretty well accepted that traders that are in the game for long term growth should use the highest geometric rather than arithmetic mean return. Tony Crabel manages funds with 10% CAGR and extremely little drawdown whereas Ed Seykota runs his funds on 25% CAGR with much greater variance in returns and drawdown. Over twenty five years of trading I know where I would rather have my money even if the ride might be a little rougher.

 

[tech/a]

Re: A demonstration $15,000 to Over $750,000 in 7 yrs Impossible? Think again!

tech/a,

You have actually made a very good point here and probably one that people lose sight of.

Cheers

Ah!! A TREE

 

[tech/a]

Again we can't know in advance when an event like this may occur, but only after the fact.

Im not totally convinced of this statement.
Frank D has part one in my view.
Econophysics may have part 2.

Being
Pt 1
Systematic dynamics of price action coupled with TIME.
Pt 2
Mathamatical observance of price action over time which can give accuracy to direction up or down and magnitude of out of the Normal price moves.

 

[WaySolid]

Well I did say that it was an interesting thread.

Though we do tend do be collective knockers I don't think that applies to this thread, the questioning points were raised in a friendly and constructive matter, and there are some big issues to examine with backtesting, certainly a potential value add proposition and nothing to do with boxed thinking.

Inclusion bias? This is a new one for me, perhaps this could be explained with an example.

And I believe that survivorship bias is a really big issue, and not a small one, not only can it get you in dud trades it might also keep you out of your better trades (assuming limited capital) for a long term system. I'm not certain how to best go about that, certainly you would need older data.

Accumulation index figures should be used and not XJO when measuring market performance. As I posted the AOAI was running +12% over the test period, so the question needs to be asked of a system what value is it adding?

For a general outside the box thinking thread, perhaps better to leave the system entirely out of it and just run with the compounding issues and a question like is 1% compounding daily possible? Do the maths on that one

 

[MichaelD]

Inclusion bias? This is a new one for me, perhaps this could be explained with an example.

And I believe that survivorship bias is a really big issue, and not a small one, not only can it get you in dud trades it might also keep you out of your better trades (assuming limited capital) for a long term system. I'm not certain how to best go about that, certainly you would need older data.

An example of inclusion bias;

Universe traded: ASX300
Trade Paladin Resources from 0.02 to 5.00. Make a HUGE profit on the one trade.

The problem? The test universe you are running the backtest on is TODAY's ASX300, not the ASX300 of a few years ago.

At 0.02, Paladin was not in the ASX300, so the trade in real life would never have been taken, but the backtesting took the trade.

Inclusion bias means a bunch of penny dreadfuls which have made it big can inflate your backtesting return even though when the system is traded forwards in real life these trades would never be taken.


Survivor bias has an insignificant effect. I've backtested on stock universes including multiple delisted entities and even on a reconstructed ASX300 as it was when the ASX300 was first devised - the results are no different.

Or to put it another way - the trailing stop usually gets hit before the company gets suspended from trading. There's usually plenty of technical warning of trouble ahead.

In regards to the one that got away - that's why you use MonteCarlo testing to get a feel for the possible range of results expected. It's really not that much of an issue as it all tends to average out in the long run.

 

[Sir Burr]

The problem?

Good lord. Michael, you need to mix in some slightly different backtesting circles where there is no pessimism and everything is simply business as usual.

SB

 

[tech/a]

It's really not that much of an issue as it all tends to average out in the long run.

This is true of the inclusion basis problem AND the survivor issue as well.

To get a more conservative result from testing you can remove the top 3 and bottom 3 from the test results.

 

[Shane Baker]

At 0.02, Paladin was not in the ASX300, so the trade in real life would never have been taken, but the backtesting took the trade.

This is quite true and there are methods to exclude this issue including using lists comprised from old asx 200 lists as an example.You can then test from that date forward eg list from asx 200 as at Jan1, 2000 tested forward to say Jan 1 2003.Then use the list from Jan 1 2003 etc etc.

One method to exclude the bulk of the problem is to set a lower price limit of say 0.50. Only 6% of the current asx 300 have a price less than 0.5% but 57% of the FPO list are less than 0.5. Price and liquidity filters will eliminate most but not all candidates. Very few penny dreadfuls will pass price and liquidity filters if correctly constructed.

Proper backtesting creates a robust set of parameters that give an indication of expected results and parameters that show when the system is not performing as expected. Nothing in trading is a guarantee but I must say I struggle to understand how someone can have acheive meaningful statistical results for discretionary trading when they would have to trade for at least five years to have some form of database comprising enough data and stages of market activity.

 

[tech/a]

Where can I get such a list?

 

[Sir Burr]

Where can I get such a list?

Obviously know that it is difficult (to get) but if you go back to page 3 you will see a way to get the same result which is achievable without a "list". Just requires you to do a little work. :whip

SB

 

[tech/a]

Obviously know that it is difficult (to get) but if you go back to page 3 you will see a way to get the same result which is achievable without a "list". Just requires you to do a little work. :whip

SB

Have you got a list?

If so then all I need is the list of symbols and Tradesim will do the rest.

I dont have total market or even daily market turn over.

Hmm maybe I have Just data have all sorts of charts I have no idea what they record I'll also ask them.

In answer to your questioning as part of being a trader---yes.