Dump it Here

[Skate]

....and also curve fitting (so many system traders have "re-fitted" their index filters this year ??).

Skate, what MA period are you using now for your index filter?

@Trendnomics, I have a buy filter.

Why do some traders do better than others?
I've often said whilst watching sports "that's got to be a fluke" but they seem to fluke it 100% of the time. I believe some traders are better than others & I don't believe there is enough thinking "about" why they are.

I've put my trading success down to the strategies I trade
I find using metrics as part of my "buy condition" to be beneficial. Over the years I've made my share of indicators. Those indicators may not be perfect but they tend to fluke the results that I'm after more times than they don't.

My "Percentage Position Up" indicator & my "Ulcer Up" indicator
Both these indicators go a long way in helping me achieve profitability. My "Percentage Up Indicator" & the relationship it creates is shown on the chart below.

The "Percentage Indicator"
When the "percentage indicator" is above 50% there is a corresponding rise in the ASX All Ordinaries Index. Restricting the "buy condition" to only when the "Percentage Up Indicator" is above 50% helps avoid the nasties created by using an "Index Filter" in isolation. (which, by-the-way IMHO is better than none)

I believe there is a correlation
The "Percentage Up Index Filter" above 50% & the All Ordinaries pops at the same time. I don't believe this is a "fluke" or an "illusion" but a defined "correlation". Restricting trading during these periods (above 50%) gives you a fighting chance of profitably, which is basically "the name of the game".



Have a read here
@peter2 gave a practical example of why my "Buy Filter" is effective.

Dump it Here

I added the following line Allocation: S.StartEquity this basically means only calculate position size based on the initial equity. So in this case it is 10% of $100,000 for every new position. Like I said these things are so easy in real test. It is actually interesting how much of the edge...

www.aussiestockforums.com

Skate.

 

[rcw1]

@DaveTrade, coding a system with half-decent returns with a low drawdown is hard to achieve. There is a lot of mathematical gymnastics involved to achieve this.

Skate.

Good afternoon Skate
Yes that is true.

There are some trading constructs that opt out of drawdown methodologies. Best explained in this manner:
An economic cycle:
recovery and subsequent expansion;
the peak ...
contraction and subsequent recession ...;
and trough.

Peak to peak!!!
Some fast traders tend to stick with the top two, certainly never the 4th. That would be an abstract failure. rcw1 will not entertain the 3rd one either. That too is a trader's failure and skill tester, a long hard road towards perfection ha ha ha ha ha.


Kind regards
rcw1

 

[ducati916]

@ducati916 falsifiability is a word I haven't come across before, I had to look up the definition, and yes I think my statement would be falsifiability but I was making a statement as @Skate described. Thinking further on Drawdown between Discretionary & Mechanical systems I'm now wondering if there may be a difference not based on the type of system but on the type of structural money management that is employed. Money management will have an extra layer of complexity for me as I'm planning on using options to trade this system. If you have thought about this aspect of systems I would appreciate your feedback.

Yes I use Options combined with a stock position. There are however a number of ways to structure this: Futures/Options, Options/Options or Stock/Options.

I use them in a way that market direction is not a variable. Up or down, you show a profit. The risk is going sideways for an extended period of time, although a trading range is fine and very profitable.

Decisions that you need to pay attention to in setting up any new position:

(i) Duration (Expiry),
(ii) ITM, ATM or OTM,
(iii) IV/HV
(iv) Rebalancing timeframe (more based on commissions than anything else).

Once you have set up the trade correctly (or your best estimation) you have a guaranteed max. loss (barring total loss if the brokerage implodes or the market closes, but that is another topic) and an unlimited upside/downside (downside is limited to 100% x leverage so still high).

This is stress free trading. I'm indifferent to market direction. All rebalancing is simply a calculation based on Black Scholes Model.

jog on
duc

 

[DaveTrade]

I have previously posted in this thread about a weekly system that I want to start trading in the future. The type of system that I want is relative conservative with the focus on minimizing the drawdown of the system. With this in mind I've drafted the potential money management for this system and I'd like feedback from all who wish to give it, don't hold back, give me the good and the bad. I thought that I may as well take advantage of being a member of this forum and draw on the experience and the diversity of the viewpoints of it's members. The way I see it is that any other opinions on this can only help me end up with a better money management system.

First draft of a plan to manage system risk

Maximum 10% of a/c allocated to each trade; e.g. a/c $100,000 would be $10,000 per trade. Therefore the number of options purchased for each trade will be equal to ‘$10,000’ divided by the ‘Option Premium’

Potential maximum number of trades would be 100000/10000 = 10. If this is halved to a maximum of 5 trades then the maximum amount of the a/c in the market at one time would be 50%. A 50% reduction in a/c risk.

If the initial stop-loss for each trade is 25% of the premium then amount at risk on each trade would be 10000/4 = $2,500. This would mean that 2500 x 5 = $12,500 would be the max risk on all 5 trades. This means that 12500x100/100000 = 12.5% of the total a/c would be at risk at any one time. This would be the percentage a/c loss if all 5 trades in the market were stopped out for a maximum loss at the same time.

 

[Skate]

I have previously posted in this thread about a weekly system that I want to start trading in the future. The type of system that I want is relative conservative with the focus on minimizing the drawdown of the system. With this in mind I've drafted the potential money management for this system and I'd like feedback from all who wish to give it, don't hold back, give me the good and the bad. I thought that I may as well take advantage of being a member of this forum and draw on the experience and the diversity of the viewpoints of it's members. The way I see it is that any other opinions on this can only help me end up with a better money management system.

First draft of a plan to manage system risk

Maximum 10% of a/c allocated to each trade; e.g. a/c $100,000 would be $10,000 per trade. Therefore the number of options purchased for each trade will be equal to ‘$10,000’ divided by the ‘Option Premium’

Potential maximum number of trades would be 100000/10000 = 10. If this is halved to a maximum of 5 trades then the maximum amount of the a/c in the market at one time would be 50%. A 50% reduction in a/c risk.

If the initial stop-loss for each trade is 25% of the premium then amount at risk on each trade would be 10000/4 = $2,500. This would mean that 2500 x 5 = $12,500 would be the max risk on all 5 trades. This means that 12500x100/100000 = 12.5% of the total a/c would be at risk at any one time. This would be the percentage a/c loss if all 5 trades in the market were stopped out for a maximum loss at the same time.

Response
@DaveTrade, it seems like you have a plan in place to manage the risk of your trading system. It's important to have a clear understanding of the potential risks and how to manage them in order to trade effectively and minimize potential losses.

Market events
One thing to consider is the potential for the market conditions to change, which could impact the performance of your trades and the effectiveness of your risk management strategy. It's important to be prepared for the possibility of unexpected market events and to be flexible in your approach to risk management.

Allocation
Another thing to consider is the potential for the option premiums to change. If the option premiums increase significantly, it may not be possible to allocate the maximum of 10% of your account to each trade, as you have planned. This could potentially limit the number of trades you can make and the potential profit from your system.

Risk management
Overall, it's important to continuously review and evaluate your risk management strategy and make adjustments as needed in order to ensure that it is effective in minimizing potential losses and maximizing potential profits.

Skate.

 

[Skate]

Yes I use Options combined with a stock position. There are however a number of ways to structure this: Futures/Options, Options/Options or Stock/Options.

I use them in a way that market direction is not a variable. Up or down, you show a profit. The risk is going sideways for an extended period of time, although a trading range is fine and very profitable.

Decisions that you need to pay attention to in setting up any new position:

(i) Duration (Expiry),
(ii) ITM, ATM or OTM,
(iii) IV/HV
(iv) Rebalancing timeframe (more based on commissions than anything else).

Once you have set up the trade correctly (or your best estimation) you have a guaranteed max. loss (barring total loss if the brokerage implodes or the market closes, but that is another topic) and an unlimited upside/downside (downside is limited to 100% x leverage so still high).

This is stress free trading. I'm indifferent to market direction. All rebalancing is simply a calculation based on Black Scholes Model.

jog on
duc

Response to option trading
It sounds like @ducati916 has a solid understanding of the various factors that can impact the performance of options trades, such as the duration, whether the option is in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM), and the implied volatility (IV) or historical volatility (HV) of the underlying asset. These are all important factors to consider when setting up options trades.

Clear understanding
It's also good to have a clear understanding of the potential risks and rewards of each trade, as well as a plan in place for rebalancing your portfolio. By using the Black-Scholes model or other pricing models, you can help ensure that your trades are structured in a way that minimizes potential losses and maximizes potential profits.

It could all go pear shape
However, it's important to remember that even with a well-structured trade, there is always the potential for unexpected market events or changes in the underlying asset's price or volatility that could impact the performance of your trade. It's important to continuously monitor your trades and be prepared to make adjustments as needed to manage risk and optimize your portfolio.

Skate.

 

[Skate]

Good afternoon Skate
Yes that is true.

There are some trading constructs that opt out of drawdown methodologies. Best explained in this manner:
An economic cycle:
recovery and subsequent expansion;
the peak ...
contraction and subsequent recession ...;
and trough.

Peak to peak!!!
Some fast traders tend to stick with the top two, certainly never the 4th. That would be an abstract failure. rcw1 will not entertain the 3rd one either. That too is a trader's failure and skill tester, a long hard road towards perfection ha ha ha ha ha.


Kind regards
rcw1

Response to economic cycles
@rcw1, It's important to understand the economic cycle and how it can impact the performance of your trades. The recovery and expansion phases of the cycle can be favorable times to trade, while the contraction and recession phases may be more challenging. However, it's important to remember that the economic cycle is not the only factor that can impact the performance of your trades. Market conditions, the performance of individual assets, and other factors can also play a role.

Manage Risk
It's important to continuously monitor the market and your trades and make adjustments as needed to manage risk and optimize your portfolio. This may involve adjusting your risk management strategy, adjusting your positions, or taking other actions as needed. By being proactive and adapting to changing market conditions, you can increase your chances of success as a trader.

Skate.

 

[Skate]

One of my favourite thought bubbles. There will be periods when a discretionary input beats the mechanical system. Unfortunately there'll also be periods when the discretionary input provides worse results that the mech system. Over the longer term frequent discretionary involvement will lessen the mechanical edge. Disc involvement generally lessens drawdowns but it also reduces overall profit in most cases.

If the disc involvement is mainly emotional then it's going to make things much worse than the mech system. DDs will be larger and profits will be smaller. The aim then is to make the disc involvement more rule based (mechanical).

An example of this would be discretionary selling after news of an accounting irregularity rather than waiting for the EOW signal. This news is likely to cause further selling and a quick exit may save money over the mechanical EOW signal. So long as the discretionary involvement is rule based it can be tested to ensure it adds to the edge of a mechanical system.

Response to mechanical trading system and making discretionary decisions
@peter2, it's important to consider the potential trade-offs between using a mechanical trading system and making discretionary decisions. While a mechanical system can be effective in executing a predetermined set of rules consistently, it may not be able to adapt to changing market conditions as quickly as a trader using discretionary decision-making, such as yourself. On the other hand, discretionary decision-making can allow for greater flexibility and adaptability, but it also has the potential to introduce bias or emotion into the decision-making process, which can negatively impact performance.

Combine the best of both
One way to potentially combine the benefits of both approaches is to use a mechanical system as a foundation but to also make discretionary decisions based on specific rules or criteria that have been tested and shown to be effective. By doing this, you can potentially take advantage of the consistent execution and risk management provided by a mechanical system, while also being able to adapt to changing market conditions and make decisions based on specific, rule-based criteria. It's important to continuously monitor and test your discretionary decision-making rules to ensure that they are adding value to your overall trading strategy.

Skate.

 

[Skate]

I'm another RealTest convert.

Great software which continues to get better with every update plus VERY helpful and friendly support.

I converting my AB AFL code to RT scripts and for a while kept them in sync to make sure they gave the same results but eventually gave up. My confidence in RT grew but I also started making changes which I found difficult to copy in AB.

The best purchase I've made in ages.

Software platforms
It's good for others to understand "RealTest" is a software platform that allows traders to test and optimize trading strategies using historical market data just as Amibroker does. Both have useful tools for developing and fine-tuning trading strategies, as well as for evaluating the potential performance of different approaches.

It's all about making informed decisions
@BoNeZ it's good to hear that you have had a positive experience using RealTest and that the software continues to improve with updates. It's also good to see that you were able to develop a level of confidence in the software, which can be important for traders who are looking to optimize their strategies and make informed decisions about their trades.

Strategy Development
It's important to remember that no software can guarantee success in the markets and that it's always important to do your own research and analysis when making trading decisions. However, tools like RealTest & Amibroker can be a useful addition to a trader's toolkit and can help traders develop and test strategies in a risk-free environment.

Skate.

 

[Skate]

curve fitting

What is "Curve fitting"?
For those who don't know "Curve fitting" is a common issue that can arise when developing trading systems. It refers to the process of creating a system that is optimized for a specific set of data, but that may not perform well when applied to other data sets or in real-world conditions.

In-sample & Out-of-Sample
One way that curve fitting can occur is when a system is optimized using a specific set of data, such as a particular time period or market environment, and then applied to different data or conditions. This can lead to the system underperforming or producing results that are not representative of the real-world performance of the strategy.

To avoid curve fitting
It's important to use a robust and representative sample of data when developing and testing a trading system. This can help ensure that the system is generalizable and can perform well under a range of market conditions. It's also important to continuously monitor and test the system to ensure that it is performing as expected and to make any necessary adjustments as needed.

Skate.

 

[qldfrog]

I have previously posted in this thread about a weekly system that I want to start trading in the future. The type of system that I want is relative conservative with the focus on minimizing the drawdown of the system. With this in mind I've drafted the potential money management for this system and I'd like feedback from all who wish to give it, don't hold back, give me the good and the bad. I thought that I may as well take advantage of being a member of this forum and draw on the experience and the diversity of the viewpoints of it's members. The way I see it is that any other opinions on this can only help me end up with a better money management system.

First draft of a plan to manage system risk

Maximum 10% of a/c allocated to each trade; e.g. a/c $100,000 would be $10,000 per trade. Therefore the number of options purchased for each trade will be equal to ‘$10,000’ divided by the ‘Option Premium’

Potential maximum number of trades would be 100000/10000 = 10. If this is halved to a maximum of 5 trades then the maximum amount of the a/c in the market at one time would be 50%. A 50% reduction in a/c risk.

If the initial stop-loss for each trade is 25% of the premium then amount at risk on each trade would be 10000/4 = $2,500. This would mean that 2500 x 5 = $12,500 would be the max risk on all 5 trades. This means that 12500x100/100000 = 12.5% of the total a/c would be at risk at any one time. This would be the percentage a/c loss if all 5 trades in the market were stopped out for a maximum loss at the same time.

You are aware of the costs of purchasing options to protect yourself, and the need to cycle these as they approach expiry;
To be honest, using option to protect my portfolio has cost me heaps and I gave up: between the fees from my broker, the decay, the low liquidity it has been a one way to burn money for me.
just be aware

 

[Skate]

You are aware of the costs of purchasing options to protect yourself, and the need to cycle these as they approach expiry;
To be honest, using option to protect my portfolio has cost me heaps and I gave up: between the fees from my broker, the decay, the low liquidity it has been a one way to burn money for me.
just be aware

I'm with you @qldfrog, trading options is harder than it appears. I believe trading options belong in the specialized trading category that takes ages to master.

Skate.

 

[Skate]

Strategy development is serious work
Curve Fitting is a common mistake & taking steps to avoid common coding mistakes can improve your chances of success as a trader. When starting out every one is over-eager to start trading forgetting to keep track of their trades and performance. It's important to keep records of your trades so you can learn from your successes and mistakes.

A trading plan trumps a trading strategy
It's important to have a clear trading plan to manage risk as this will keep you in the game. Sticking to a trading plan helps you stay disciplined and make informed decisions, rather than relying on emotions or reacting impulsively to market movements.

Trading requires discipline
Trading requires discipline to stick to your trading plan and not let emotions guide your decisions. It's more important not to get greedy and try to make a quick profit. Good trades take time to develop, so be patient and stick to your plan. It's also important to take profits when they are available and be willing to sell when the time is right.

Skate.

 

[Skate]

ASF is a good place to hang out
It's a pity that most of the old posters have moved on. The important thing is that they have left their footprint. Until you read some of those old posts you don't fully appreciate how little has changed. Basically what was useful back then is still current today. Yes, I'm first to admit, this forum has a wonderful community feel about it.

Skate.

 

[ducati916]

I have previously posted in this thread about a weekly system that I want to start trading in the future. The type of system that I want is relative conservative with the focus on minimizing the drawdown of the system. With this in mind I've drafted the potential money management for this system and I'd like feedback from all who wish to give it, don't hold back, give me the good and the bad. I thought that I may as well take advantage of being a member of this forum and draw on the experience and the diversity of the viewpoints of it's members. The way I see it is that any other opinions on this can only help me end up with a better money management system.

First draft of a plan to manage system risk

Maximum 10% of a/c allocated to each trade; e.g. a/c $100,000 would be $10,000 per trade. Therefore the number of options purchased for each trade will be equal to ‘$10,000’ divided by the ‘Option Premium’

Potential maximum number of trades would be 100000/10000 = 10. If this is halved to a maximum of 5 trades then the maximum amount of the a/c in the market at one time would be 50%. A 50% reduction in a/c risk.

If the initial stop-loss for each trade is 25% of the premium then amount at risk on each trade would be 10000/4 = $2,500. This would mean that 2500 x 5 = $12,500 would be the max risk on all 5 trades. This means that 12500x100/100000 = 12.5% of the total a/c would be at risk at any one time. This would be the percentage a/c loss if all 5 trades in the market were stopped out for a maximum loss at the same time.

Without knowing more detail any advice could be somewhat inaccurate. However there are some very broad generic risks that you would need to manage.

(a) Volatility risk: as in IV crush. Think of it this way: the underlying does not change in price but for whatever reason, people are buying the option. The Option is a derivative (price) of the underlying but, the price of the Option still rises. This is the IV. When/if the underlying does move higher, the Option resets as against the underlying. This can however be LESS than the earlier price. This is the air coming out of the inflated Option price: the IV. What we have now is the HV as measured by the move in the underlying.

(b) theta risk: this depends on the duration (expiry date) of the Option purchased (sold) and the acceleration of theta decay into the last 30 days of life. Generally speaking, you do not want to hold a bought Option (unless it has moved DITM) to expiry. theta decay really accelerates into this time period, enough potentially to trigger a stop loss sale as indicated in your MM plan.

(c) gamma/delta risk changes quite dramatically as Options move in/out of the money. This can work for you if you are buying Options. So obviously, this should be a consideration when setting up your positions.





You are bullish on silver with a 17 March 2023 expiry: current price is $22 +/-

What is the better play: ITM, ATM or OTM? (I have no idea currently I just picked a random ticker). This feeds directly into your options for setting up a trade, particularly in your stop losses for closing a position.

jog on
duc

 

[Skate]

Christmas
I asked what my wife would like for Christmas.

“A divorce”

I had to tell her that “I wasn’t planning on spending that much”

Skate.

You can't win with some women
After Christmas when I didn't give my wife a divorce she packed my bags & told me to leave.
As I was heading out the door, she said "I hope you die a long, slow, painful death"
I said, "so now you want me to stay?"

Skate.

 

[DaveTrade]

You are aware of the costs of purchasing options to protect yourself, and the need to cycle these as they approach expiry;
To be honest, using option to protect my portfolio has cost me heaps and I gave up: between the fees from my broker, the decay, the low liquidity it has been a one way to burn money for me.
just be aware

@qldfrog thank you for responding, I appreciate all responses. In my case for this system I'll be using option trades as the only type of trade to be used within the system, for protection I'll be using stop-loss option orders to exit a trade. These are the same as a standard stop-loss order, it's just an order to exit at a certain price.

In the case of portfolio protection, there are a number of ways to do it and this is dependant on many factors including the markets that you are trading. You mentioned the cost involved and in certain market environments the potential cost to your portfolio if you don't do it may outway the cost. Something that I like is protecting profit, if your portfolio is up say 30% then buying a Put or two will lock in profit to your portfolio, let you sleep easy knowing that you can't lose, and if the market tanks you stand to gain even more profit than you had before.

 

[DaveTrade]

Without knowing more detail any advice could be somewhat inaccurate. However there are some very broad generic risks that you would need to manage.

(a) Volatility risk: as in IV crush. Think of it this way: the underlying does not change in price but for whatever reason, people are buying the option. The Option is a derivative (price) of the underlying but, the price of the Option still rises. This is the IV. When/if the underlying does move higher, the Option resets as against the underlying. This can however be LESS than the earlier price. This is the air coming out of the inflated Option price: the IV. What we have now is the HV as measured by the move in the underlying.

(b) theta risk: this depends on the duration (expiry date) of the Option purchased (sold) and the acceleration of theta decay into the last 30 days of life. Generally speaking, you do not want to hold a bought Option (unless it has moved DITM) to expiry. theta decay really accelerates into this time period, enough potentially to trigger a stop loss sale as indicated in your MM plan.

(c) gamma/delta risk changes quite dramatically as Options move in/out of the money. This can work for you if you are buying Options. So obviously, this should be a consideration when setting up your positions.

View attachment 151025

View attachment 151024

You are bullish on silver with a 17 March 2023 expiry: current price is $22 +/-

What is the better play: ITM, ATM or OTM? (I have no idea currently I just picked a random ticker). This feeds directly into your options for setting up a trade, particularly in your stop losses for closing a position.

jog on
duc

@ducati916 thank you for the time and effort you put into your responses. In my recent journey learning about options I have become aware of these things that you have mentioned. I've been taking option trades alone the way as I've been learning and early on I experienced the situation where the market went up and my Call option value went down, at time my mind's voice shouted 'what the fu*k', but I've come to understand options to a point now that I feel like I can really make them work for me.
I was hoping for feedback on the money management aspect of system trading, I know that options come with their own inherent risks and I fell that I have a handle on addressing these, in saying that I'm sure that I will stuff something up and learn another lesson. You post did directly reference my mm plan though,

theta decay really accelerates into this time period, enough potentially to trigger a stop loss sale as indicated in your MM plan.

and it's always worthwhile to describe the various risks involved in trading, new information for some and a useful reminder to others.

 

[peter2]

@DaveTrade Good luck with this activity, hope it goes well and keep us posted please.

(i) 12.5% risk is a lot unless you're prepared for it. I'd use this risk level in a smaller account but would be too much for me in a large one. I hope your worse case isn't losing 12.5% in one week.
(ii) Correlation between your underlying markets needs to be considered carefully to manage total risk.
(iii) Total directional risk needs to be considered. Are you going all one type of option or a mixture?
(iv) I'd be careful placing exit stops in the options market. They have a habit of being hit when liquidity thins suddenly.

 

[DaveTrade]

@DaveTrade Good luck with this activity, hope it goes well and keep us posted please.

(i) 12.5% risk is a lot unless you're prepared for it. I'd use this risk level in a smaller account but would be too much for me in a large one. I hope your worse case isn't losing 12.5% in one week.
(ii) Correlation between your underlying markets needs to be considered carefully to manage total risk.
(iii) Total directional risk needs to be considered. Are you going all one type of option or a mixture?
(iv) I'd be careful placing exit stops in the options market. They have a habit of being hit when liquidity thins suddenly.

@peter2 you have made all good points here, a helpful check list;
(i) It would be smarter to lower my risk further especially in the early stages of trading the system.
(ii) I have been thinking about this but I haven't worked it out yet.
(iii) I'm planning to trade long and short (Calls & Puts), maybe other configurations as well, not sure yet, I have learnt about some other trades that I like the idea of but haven't traded yet.
(iv) Liquidity is one element of my market selection process but I haven't made final decisions about keeping stop orders in the market or manually placing orders after a daily or weekly close. I haven't traded the weekly time frame yet only daily time frame trades, the 25% stop-loss that I mentioned comes from a certain type of short term option trade that I been using, this level has worked well for these trades.