Daffy Trades Micro Patterns under $1
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Add me to the list of appreciative readers.
.. but you knew that already.
.. but you knew that already.
skc
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For the benefit of those following this thread... here's the actual record, marked to close today.
Total profit = $2,503. Or 8.34% on $30k starting capital.
Some points about the performance:
- Over the period of this journal, XAO is down 7.8%, XSO is down 6.0%. So the trades have beaten the indices handsomely. It wasn't a great period for long only trades.
- Prudent risk management is clearly demonstrated. Of the losing trades, average loss is $265 or <1% of starting capital.
- There is also evidence of skewing the P&L distribution in your favour. The 3 biggest wins accounted for ~$7k out of the total $12.75k in winning trades, with the max win being 9x the average loss.
- The average win / average loss = 2.3x is workable, but the journal suffered from a low win% of only 28% of all trades.
- Much of the drawdown in the middle part of the journal occurred during August, which was an extremely volatile (and negative) period. Tech/a chose to keep trading in this period, presumably for continuity or demonstration purpose. Standing aside based on a macro market filter could have helped performance.
- Total commission paid = $912, vs a pre-commission profit of $3,415. Had you been using a more expensive broker paying $25 per trade, you would have paid $3,700 in commission and be in net loss. So minimising the commission drag is important.
Key lessons
- Luck will play a part in an approach like this. Whilst there are 74 trades, it is still a very small sample size. Take out just 1 of the 3 biggest wins (~$2400 mark) and the return is basically 0%. On the same token, getting another equal sized win would make the return a great looking 16% under 6 months.
- I am unclear if an edge has been demonstrated thru these trades (due to the low win%, small sample size and market condition), but the idea of managing the risk and letting luck work it out can still potentially work.
- It's not an approach that you can bank on to make profits consistently in all market conditions. It is best used for those with a regular income and trying to earn that bit of extra by trading on the side, or as one strategy as a portfolio of strategies for a full time trader. It may be negative over 12 months or it may be up 60% in 3 months.
- There were some discussions about whether these trades are actual trades (in full or in part) so slippage may or may not be included in these results. With stocks <$1, the spread is large in percentage terms (>1% on sub 10c stocks and up to 5% on a 10c stock). Contrast that with the weighted average movement captured of ~1.7%, so slippage absolutely matters. For example, you might have a signal to buy 12c breakout but by the time you trade you needed to cross to spread and buy 12.5c... you have just paid 4% more than what paper trading would have paid.
- Good record keeping is important if you want to take your trading to the next level. You need to see the areas you need to work on. E.g. plotting the equity curve will help you identify market conditions when the portfolio suffered drawdown.
So in summary, there is a lot to learn from just a small sample of trades. Take what is useful, note the potential and limitations, question what can be done better, and happy trading.
I am baffled by your response...
I am assuming it was just an innocent error so I let you blame it on your accountant! But you have kept this thread going for a long time so one cannot expect much more.
Thanks for your time and effort. I don't want to see it go to waste so I have taken the liberty to summarise and comment on the results. I'd encourage you to add / correct what I have missed.
Total profit = $2,503. Or 8.34% on $30k starting capital.
Some points about the performance:
- Over the period of this journal, XAO is down 7.8%, XSO is down 6.0%. So the trades have beaten the indices handsomely. It wasn't a great period for long only trades.
- Prudent risk management is clearly demonstrated. Of the losing trades, average loss is $265 or <1% of starting capital.
- There is also evidence of skewing the P&L distribution in your favour. The 3 biggest wins accounted for ~$7k out of the total $12.75k in winning trades, with the max win being 9x the average loss.
- The average win / average loss = 2.3x is workable, but the journal suffered from a low win% of only 28% of all trades.
- Much of the drawdown in the middle part of the journal occurred during August, which was an extremely volatile (and negative) period. Tech/a chose to keep trading in this period, presumably for continuity or demonstration purpose. Standing aside based on a macro market filter could have helped performance.
- Total commission paid = $912, vs a pre-commission profit of $3,415. Had you been using a more expensive broker paying $25 per trade, you would have paid $3,700 in commission and be in net loss. So minimising the commission drag is important.
Key lessons
- Luck will play a part in an approach like this. Whilst there are 74 trades, it is still a very small sample size. Take out just 1 of the 3 biggest wins (~$2400 mark) and the return is basically 0%. On the same token, getting another equal sized win would make the return a great looking 16% under 6 months.
- I am unclear if an edge has been demonstrated thru these trades (due to the low win%, small sample size and market condition), but the idea of managing the risk and letting luck work it out can still potentially work.
- It's not an approach that you can bank on to make profits consistently in all market conditions. It is best used for those with a regular income and trying to earn that bit of extra by trading on the side, or as one strategy as a portfolio of strategies for a full time trader. It may be negative over 12 months or it may be up 60% in 3 months.
- There were some discussions about whether these trades are actual trades (in full or in part) so slippage may or may not be included in these results. With stocks <$1, the spread is large in percentage terms (>1% on sub 10c stocks and up to 5% on a 10c stock). Contrast that with the weighted average movement captured of ~1.7%, so slippage absolutely matters. For example, you might have a signal to buy 12c breakout but by the time you trade you needed to cross to spread and buy 12.5c... you have just paid 4% more than what paper trading would have paid.
- Good record keeping is important if you want to take your trading to the next level. You need to see the areas you need to work on. E.g. plotting the equity curve will help you identify market conditions when the portfolio suffered drawdown.
So in summary, there is a lot to learn from just a small sample of trades. Take what is useful, note the potential and limitations, question what can be done better, and happy trading.
I am baffled by your response...
I am assuming it was just an innocent error so I let you blame it on your accountant! But you have kept this thread going for a long time so one cannot expect much more. Thanks for your time and effort. I don't want to see it go to waste so I have taken the liberty to summarise and comment on the results. I'd encourage you to add / correct what I have missed.
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I think he's already given us his expertise with that last post. That is a better trade journal process than you'll find 99% of people doing with their own trading - let alone someone elses!
Not sure your comment is fair. :bad:
SKC is a prolific poster that often provides insightful comments in a wide variety of topics on the forum.
He's also pretty active in the pairs trading thread (he may have even started it in the first place).
Pretty good idea to check his post history (found on his profile).
For interests sake, here's one of SKC's older journals (real-time):
https://www.aussiestockforums.com/forums/showthread.php?t=21005
I agree with him that good record keeping is important. I kind of get sick of seeing all sorts of claims of fantastic returns and when someone else does the sums on the history provided it's a different story.
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Great analysis and points SKC.
Thanks for offering that up.
It's a pity pucker ran out of energy.
It was a good effort in volatile times.
But like you said trading with large volumes on these little babies in real life is not nearly so easy as you cannot often exerciser your full hand at the levels you plan to. So it's a little unrealistic and time consuming to get a return that would be worth the effort.
Thanks for offering that up.
It's a pity pucker ran out of energy.
It was a good effort in volatile times.
But like you said trading with large volumes on these little babies in real life is not nearly so easy as you cannot often exerciser your full hand at the levels you plan to. So it's a little unrealistic and time consuming to get a return that would be worth the effort.
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I beg to differ, Notting;
If you can lay your hands on a copy of last weekend's SMH or West, check out Marcus Padley's column. He makes precisely the point that knowing how to pick microcaps gives the astute investor a distinct advantage.
Yes, it does take some work to beat the Market that way; that's why I, along with many fellow members, have appreciated tech/a's effort: Not only did he do the groundwork to identify possible entries, but he also spent a lot of extra time posting those suggestions. If some numbers didn't add up - So What! The value of his posts lies in the basic research and the extensive explanation how he set entry price, position size, and stops.
The trades were still discretionary, meaning readers were free to apply their own margins.
... and do their own sums.
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Your not differing from me.
Padley isn't a trader and what he sais is true. He's an investor meaning he will hold for far longer periods and hence getting in and out isn't such an issue and looking at the ones that traders find harder to flip is a good strategy.
And I agree there is plenty of value in Techa posts despite the profit probabilities.
This adds more confirmation to something I already suspected, pattern/breakout trading while likely profitable in the long run (if you do it on US stocks, since Australian commission will break you) is a very inconsistent earner, has severe drawdowns, and the rewards do not justify the risk when compared to the opportunity cost of other strategies. The problem with large drawdowns is that it may have an emotional impact and your trading suffers, causing further losses.
I understand if people don't want to become experts in macroeconomics, it's not for everyone. But I think you at least have to look at whether we are in a bull market or bear market. Trading a strategy that involves going long when the markets are tanking would seem poor. If you could perhaps have reliable reversal patterns and breakouts below support that can be traded, taking into account the primary trend of the market, maybe the strategy would have less drawdowns. I tend to think if the economy is doing poorly it is less likely there will be acquisitions so there are less chances of take overs in small stocks, so if the market is plummeting, even if it isn't being reflected in the small caps, the strategy may still fail.
I understand if people don't want to become experts in macroeconomics, it's not for everyone. But I think you at least have to look at whether we are in a bull market or bear market. Trading a strategy that involves going long when the markets are tanking would seem poor. If you could perhaps have reliable reversal patterns and breakouts below support that can be traded, taking into account the primary trend of the market, maybe the strategy would have less drawdowns. I tend to think if the economy is doing poorly it is less likely there will be acquisitions so there are less chances of take overs in small stocks, so if the market is plummeting, even if it isn't being reflected in the small caps, the strategy may still fail.
CanOz
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It is possible to manage the risk in such a way that you minimize losses even more during choppy and bear market regimes and maximize profits during bullish low vol regimes. An index filter incorporating a volatility measure would do it.....Trade a smaller position size, say .25 to .5% of risk capital in the former vs 1-2% in the latter...
Profitability may increase if trades are only done in sectors that are doing well/leading the economy as well. A small cap in a sector doing well is more likely to be taken over or do something productive then a small cap in a sector doing poorly. I don't know if this would be the time to try to trade a breakout in a small cap gold mining company, given that the price of gold is falling.
CanOz the problem though with using less risk on every trade is the strategy then also will likely suffer a poor return compared to other strategies that are more consistent and can use 1% or 2%. We just then get into an opportunity cost issue. If you are exposing yourself to a certain amount of risk because you're bullish you may not want to tie up the capital you're willing to devote to that in a small cap, hoping for a breakout, you could just buy index futures. This wouldn't give you the super high returns of a small cap breaking out successfully, but you could also take a larger position in an index than you would, so it's probably more consistent, with less drawdowns and the similar overall returns. I don't have proof of that though, but I suspect that would be the case.
I wonder if money would have been made shorting every trade in this thread, provided stop losses were set appropriately. If shorting every breakout would have made more money then that's really the nail in the coffin.
CanOz the problem though with using less risk on every trade is the strategy then also will likely suffer a poor return compared to other strategies that are more consistent and can use 1% or 2%. We just then get into an opportunity cost issue. If you are exposing yourself to a certain amount of risk because you're bullish you may not want to tie up the capital you're willing to devote to that in a small cap, hoping for a breakout, you could just buy index futures. This wouldn't give you the super high returns of a small cap breaking out successfully, but you could also take a larger position in an index than you would, so it's probably more consistent, with less drawdowns and the similar overall returns. I don't have proof of that though, but I suspect that would be the case.
I wonder if money would have been made shorting every trade in this thread, provided stop losses were set appropriately. If shorting every breakout would have made more money then that's really the nail in the coffin.
CanOz
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Exactly, the US universe is big enough that you can apply your index and volatility filters to the sector indices and look to change your risk allocation accordingly.
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I doubt that Daffy started this topic as a Holy Grail or pretense to Get Rich Quick. I simply interpreted it as tech/a generously sharing his thoughts on one particular technique to successfully trade some micro caps.
I'd be equally interested in your suggestion to short those patterns. Maybe a great idea for a new thread:
"Valued Shorts Breakouts of Microcaps"
Trembling Hand
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I'd be equally interested in your suggestion to short those patterns. Maybe a great idea for a new thread:
"Valued Shorts Breakouts of Microcaps"
These stocks are mostly not short-able - especially to the retail trader.
I doubt that Daffy started this topic as a Holy Grail or pretense to Get Rich Quick. I simply interpreted it as tech/a generously sharing his thoughts on one particular technique to successfully trade some micro caps.
I'd be equally interested in your suggestion to short those patterns. Maybe a great idea for a new thread:
"Valued Shorts Breakouts of Microcaps"
It may work because it would just be a mean regression strategy in a trading range and you cover if it breaks out. However, if it does work, while the win rate would be high, any losses would be large relative to wins. It would be more consistent though.
I am not willing to try it with my own money though. It's too risky, I don't know if it will work, and I dislike trading in individual stocks.
Edit: and TH raises a good point, you can't just short some of these.
Trembling Hand
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It is not too hard to imagine that you would get run over big time being short a small cap portfolio if any bullish periods did turn up. It only looks like a short set up because during the middle of the trades Tech hit a market not suited to this method. It's a shame he didn't get a period where it suited long small caps(hasn't been one since 2006!).
But in any case the thread was always about managing trades and application of a method rather than the next making of an internet Hero. You would have to give Tech a 9 outta 10 as far as the original aims of the thread.
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I think everyone should be thanking skc for the professional and honest breakdown and summary of the journal.
In trading, honesty with one's process and outcome is absolutely essential. Honesty with one's emotions is the holy grail (IMO - many will object to that).
In trading, honesty with one's process and outcome is absolutely essential. Honesty with one's emotions is the holy grail (IMO - many will object to that).
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Tech,
I think that pattern breakout strategies are extremely hard to make profitable. What about looking at some other methods of introducing profit? I've heard many successful traders say that entries are of very little importance. And I know from my own testing that the small end of town is simply impossible to systematize.
Maybe take the same trade list and try pyramiding in, dynamic position sizing. Use the same entries as you took, but play with the size and exits. Or just forget about sub $1 stocks and do the same on bigger and more liquid stocks?
There could be money hiding in that trade list. Don't let the work go to waste.
I think that pattern breakout strategies are extremely hard to make profitable. What about looking at some other methods of introducing profit? I've heard many successful traders say that entries are of very little importance. And I know from my own testing that the small end of town is simply impossible to systematize.
Maybe take the same trade list and try pyramiding in, dynamic position sizing. Use the same entries as you took, but play with the size and exits. Or just forget about sub $1 stocks and do the same on bigger and more liquid stocks?
There could be money hiding in that trade list. Don't let the work go to waste.
