One of the indicators I put up on my Equity curve backtests is a count of weeks in DD. The depletion of "trading morale capital" will of course depend on how deep but also how long a DD lasts. Another tool for judging "would I really be able to keep trading consistently through such a period?".
@Newt, that is also an important metric for me as well. It's so important I have it coded into all my strategies having it displayed in every "Exploration Analysis" report.
I'm curious Skate - the PP strategy results you posted seem to have sailed through that period better than CAM and MAP, or am I mis-reading?
@Newt - here's the rub. On face value the "Pocket Pivot" Strategy looks an outright winner. I measure a strategy worth by the consistency of the results not the profitability of a strategy. With all strategies there is a trade off between the two. I personally find the "consistency metric" the easiest to trade & live with.
Warning
This is going to be a boring long post to many but staying with me will give an insight into the amount of research that goes into any report.
Let's talk about flaws
Backtesting O'Neil's methodology raised a few concerns (inherent flaws IMO) but what saved O'Neil trading a "Pocket Pivot" strategy was his ability to make judgement calls using his experience leading him to "take some signals while bypassing others" - that was "IMHO" his secret in trading the "Pocket Pivot" strategy with success.
O'Neils saving grace
What saved the day for O'Neil was his ability to pick which signals that had the best chance of a follow through, a visual of the charts & what he gleaned was held tightly to his chest & rarely discussed. Now combine that with his uncanny ability to have a "feel" for the markets & his unique way of reading charts & the market direction - the gift he has honed over many years of trading. I now better understand when one of his disciples made a quote "trading his own account" that he had to endure a few "massive drawdowns" including some over 50% highlighting one of those flaws.
"Pocket Pivot"
O'Neil used a "Pocket Pivots" strategy to find initial candidates than they were filtered in a discretionary manner. O'Neil's ability to read a chart ultimately decided the timing of the entry. Many times O'Neil refers to a "base formation & strength of the position within a consolidation period".
Research
While I was researching "Pocket Pivots" it was apparent there are multiple ways to calculate the "Pocket Pivots" & as they say "all roads lead to Rome". As there are many different ways to code "Pocket Pivots" entry signal I decided on the most basic, passing up the more elaborate ways to get to the same place.
@peter2 in a previous post gave an alternative view regarding how the entry makes a difference to the RR. (alternative views are the heart & soul of this thread)
It's worth repeating
O'Neil used the
"base formation & strength of the position within a consolidation period" to enter a position from support, not a breakout from resistance. Entering a position from resistance is the most common way being utilised by current crop of traders. I've tested most of the common entry conditions off the "Pocket Pivots" leading me to the conclusion of "entering a position off support rather than resistance" I believe this is the best use of the "Pocket Pivot" indicator.
Staying true
When I coded my "Pocket Pivot" Strategy I stayed true to O'Neil's original concept of buying from a consolidation period - whereas I enter a position off a "secondary support". Yes, my code uses two "Support" lines. The first support (S1) is the consolidation period, the second support line (S2) demonstrates the strength of the position in the consolidation period. When the second support is breached this generates the buy signal. This was O'Neil's secret that I found the most difficult to code. O'Neil gauged the strength of a position by looking at the charts, using his wealth of experience.
Remarks about the charts
I'm posting two charts, the first chart is the "Pocket Pivots" strategy so you can see why O'Neil prefered buying in a "consolidation zone" picking the move "before the breakout" ensuring a higher RR ratio. The second chart is the "1st Green Bar CAM Strategy" buying the breakout as discussed by Peter in his previous post. (NEXT: I'll make a few additional comments that Peter has raised in my next post)
Bullet points
1. O'Neil would sit in a consolidation zone for lengthy periods if the underlying strength of the position was being maintained (evident by the chart)
2. My StaleStop exit "is not time dependent" as mentioned recently. My StaleStop exit code uses a few metrics to measure & ultimately deciding when momentum is slowing, stagnating, stopped or heaven forbid "retreating" to generate an exit signal. FYI - my StaleStop is not time dependant - it's a woven part of my Looping trailing stop.
3. The charts - As they say: "a picture paints a thousand words"
# The O'Neil methodology of the Pocket Pivot Strategy (Enters off support)
# The 1st Green Bar CAM Strategy (Enters on a confirmed Breakout)
Skate.