Dump it Here

[Skate]

Another year is done & dusted
Another year has come & gone. Now we have a chance to look back on all that has happened & consider what we want to do in the year ahead. It's a good opportunity to set goals, make plans & think about what we want to achieve going forward. It's always helpful to take a moment to reflect & think about the future. May 2023 be everything you desire.



Skate.

 

[DaveTrade]

(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.

@peter2 's words have eventually permeated my thick skull and touched the peanut size organ that resides inside. What was I thinking, this is supposed to be a conservative system so it needs to have a conservative bone structure. I will still have my smaller sports car account that I've been training myself with but this vehicle should be designed for the longer more comfortable ride.

 

[cynic]

@peter2 's words have eventually permeated my thick skull and touched the peanut size organ that resides inside. What was I thinking, this is supposed to be a conservative system so it needs to have a conservative bone structure. I will still have my smaller sports car account that I've been training myself with but this vehicle should be designed for the longer more comfortable ride.

Your receptivity to constructive criticism, particularly regarding risk, is commendable.

An important thing to note, is, that, options allow, the possibility of temporarily acquiring a greater amount of exposure to price movements in the underlying, than might otherwise be gained, from directly trading the underlying instrument.

Such leverage typically amplifies both, potential risk, and reward.

And, as has already been noted, the extrinsic value, of options brings additional risks i.e. fluctuations in implied volatility, time decay etcetera.

Some months ago, I happened to deploy an options strategy that required me to cross an approximately 10% spread in order to ensure the opening of the initial positions!

The reason I was willing to accept, such a hefty initial drawdown, was primarily based, upon my confidence in the prospects for that particular strategy.

The upshot of what I am attempting to convey here, is, that, whilst it is wise to, as far as practicable, minimise one's initial forays, particularly whilst still attempting proof of concept, it is also important, not to become so risk averse, as to exclude, what might otherwise be, viable strategies.

 

[DaveTrade]

The upshot of what I am attempting to convey here, is, that, whilst it is wise to, as far as practicable, minimise one's initial forays, particularly whilst still attempting proof of concept, it is also important, not to become so risk averse, as to exclude, what might otherwise be, viable strategies.

@cynic I hear what you're saying, thanks for the feedback. Any individual strategy is fine as long as it's risk/reward is in balance and is in harmony with the system where it is used. It may seem like I'm giving too much relevance to one thing, ie. drawdown, but I am aware that a balance has to achieved in any system. I always welcome reminders about things that I already know, every time I hear one it just reinforces it's relevance for me.

 

[DaveTrade]

Backtesting is a test of the past
The future will always hold surprises that tend to play out differently. The Backtest below is one of my trading strategies. I've renamed it to "Skate's 200k Strategy" for clarity. The backtest period is from the 1st of January 2022. This strategy is robust having a decent return with a low drawdown. At times with system trading, "good enough is good enough". I'm just saying don't overstretch & don't shoot for the moon.

P.H.D.
With Persistence, Hard work & Determination most things are possible.

View attachment 150979


Portfolio Equity
Realistically, how many traders "could" sit out of the markets for "extended periods" waiting for the next move up?

View attachment 150980

Skate.

It's obvious that I'm still at the concept stage of my planned weekly system and I'm at a point where I feel that I should set or at least first draft the goals of the system. @Skate 's example above is impressive in many ways and for now I'm looking at the relationship of 'Net Profit %' and 'Max System % Drawdown', this is 25.51/7.33 = 3.48 which would be a dream come true if I could achieve this. One of my goals for the system is to return a profit each and every year, easy to say but how hard is to do, is this even possible. Another goal is to have the annual net system profit to exceed the annual max system drawdown, @Skate has exceeded it by three and half times in the above example (wow that's good). @Skate or any other experienced system traders, is it possible for this figure to remain positive on an annual basis?

 

[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.

Second draft of a plan to manage system risk

This second draft of the plan recognises the conservative nature of my planned system. The system’s annual profit target is 6-10% and I want my annual drawdown to be less than this.

Maximum 2% of a/c allocated to each trade; e.g. a/c $100,000 would be $2,000 per trade. Therefore the number of options purchased for each trade will be equal to ‘$2,000’ divided by the ‘Option Premium’

Potential maximum number of trades would be 100000/2000 = 50 if the entire a/c was exposed to the market. If the proportion of the a/c exposed to the market was reduced to a maximum of 4 trades then the maximum amount of the a/c in the market at one time would be 8%, so the maximum a/c risk is 8%.

If the initial stop-loss for each trade is 50% of the premium then amount at risk on each trade would be 2000/2 = $1,000. This would mean that 1000 x 4 = $4,000 would be the max risk on all 4 trades. This means that 4000x100/100000 = 4% of the total a/c would be at risk at any one time. This would be the a/c loss if all 4 trades in the market were stopped out for a 50% loss at the same time.

In summary;

Trade risk: 1% (stop-loss) Max trade risk: 2% (total premium)

A/C risk: 4% (stop-loss) Max A/C risk: 8% (total premium)


The word ‘risk’ as used above can be replaced with the phrase ‘exposure to drawdown’, so initially I would have up to 4% exposure to drawdown with up to four trades but if stop-loss levels were raised due to favourable movement of positions then more trades could be added as long as the 4% exposure to drawdown amount was not exceeded.

 

[peter2]

@DaveTrade It's important to manage risk but we shouldn't let the potential risk strangle the potential profit. The 2nd draft seems to me to strangle your system.

The system produces a set of results each year. Your back tests would have indicated the potential "normal" draw down, a possible max DD and the potential profit. If the DD is too high then reducing the outlay of all trades will reduce the potential DD and the potential profit. This will leave a portion of the starting capital unused. Your 2nd draft leaves a lot of unused capital.

If you want a DD < 10% then the system must be capable of producing low DDs. Does yours do this?

2nd draft outlays $2K/trade. Previously you mentioned that each trade has a stop loss of 25%. 25% of 2K is only 500.
You're only risking 0.5% /trade. I suggest you reconsider the outlay and start at $4K which would risk 1% each trade.

The word ‘risk’ as used above can be replaced with the phrase ‘exposure to drawdown’, so initially I would have up to 4% exposure to drawdown with up to four trades but if stop-loss levels were raised due to favourable movement of positions then more trades could be added as long as the 4% exposure to drawdown amount was not exceeded.

With options, the downside exposure is 100% of the premium paid. Hopefully your trade management will prevent this from happening more than once a year and your average loss will be much <25%.

Yes, I like that you're thinking about adding trades (positions) as the risk in the open trades reduces. However if you're trading a weekly system your trades may not have the time to grow bigger and more profitable. (Idea: Maybe some of the unused capital can be used in monthly trades if your system can be adapted to the monthly time frame.) It's very satisfying holding a portfolio of winning positions.

 

[DaveTrade]

@peter2 thank you for your feedback, not everyone is willing to give it. I'll run through the your comments and add some of my own to better describe what I'm trying to do with this system.

This second draft of the plan recognises the conservative nature of my planned system. The system’s annual profit target is 6-10% and I want my annual drawdown to be less than this.

@DaveTrade It's important to manage risk but we shouldn't let the potential risk strangle the potential profit. The 2nd draft seems to me to strangle your system.

The goal of the system is to make a minimum 6% net profit annually on a consistent basis, this is the minimum amount that I need to make on this money in order to have enough to fund retirement for my wife and I. I feel that I will be able to exceed this amount of profit but the system should be designed to handle the worst case situation. If I can build a system that can consistently produce profit every year with minimal drawdown then that would be the hard part done, it would then be easy to let the system out a bit to produce more profit knowing that I had a reliable and consistent fallback.

The system produces a set of results each year. Your back tests would have indicated the potential "normal" draw down, a possible max DD and the potential profit.

I haven’t done back tests for this, I can’t really do them using options. I’m planning on using a slight modification of a type of trade that I’ve been trading on a daily time frame chart. I will be doing some manual back testing using the underlying price data and some forward live market testing to get a feel for the option stop-loss setting.

If the initial stop-loss for each trade is 50% of the premium then amount at risk on each trade would be 2000/2 = $1,000. This would mean that 1000 x 4 = $4,000 would be the max risk on all 4 trades. This means that 4000x100/100000 = 4% of the total a/c would be at risk at any one time. This would be the a/c loss if all 4 trades in the market were stopped out for a 50% loss at the same time.

In summary;

Trade risk: 1% (stop-loss) Max trade risk: 2% (total premium)

A/C risk: 4% (stop-loss) Max A/C risk: 8% (total premium)

2nd draft outlays $2K/trade. Previously you mentioned that each trade has a stop loss of 25%. 25% of 2K is only 500.
You're only risking 0.5% /trade. I suggest you reconsider the outlay and start at $4K which would risk 1% each trade.

It looks like you may have gotten confused between the 1st and 2nd drafts here. In the 1st draft I mentioned that I’ve been trading daily charts using a 25% options stop-loss, I’ve increased it to 50% in the this 2nd draft to allow for the weekly time frame of the system. This initial stop-loss may change with feedback from forward testing.

Yes, I like that you're thinking about adding trades (positions) as the risk in the open trades reduces. However if you're trading a weekly system your trades may not have the time to grow bigger and more profitable. (Idea: Maybe some of the unused capital can be used in monthly trades if your system can be adapted to the monthly time frame.) It's very satisfying holding a portfolio of winning positions.

Not too sure about the monthly time frame, but I always keep an open mind. I’m planning to vary the trade exits to suit the current market conditions, so the system will take advantage when markets are trending. Also I plan to use options to lock in system profit went the system profit reaches a predefined level.

 

[ducati916]

@peter2 thank you for your feedback, not everyone is willing to give it. I'll run through the your comments and add some of my own to better describe what I'm trying to do with this system.




The goal of the system is to make a minimum 6% net profit annually on a consistent basis, this is the minimum amount that I need to make on this money in order to have enough to fund retirement for my wife and I. I feel that I will be able to exceed this amount of profit but the system should be designed to handle the worst case situation. If I can build a system that can consistently produce profit every year with minimal drawdown then that would be the hard part done, it would then be easy to let the system out a bit to produce more profit knowing that I had a reliable and consistent fallback.



I haven’t done back tests for this, I can’t really do them using options. I’m planning on using a slight modification of a type of trade that I’ve been trading on a daily time frame chart. I will be doing some manual back testing using the underlying price data and some forward live market testing to get a feel for the option stop-loss setting.





It looks like you may have gotten confused between the 1st and 2nd drafts here. In the 1st draft I mentioned that I’ve been trading daily charts using a 25% options stop-loss, I’ve increased it to 50% in the this 2nd draft to allow for the weekly time frame of the system. This initial stop-loss may change with feedback from forward testing.



Not too sure about the monthly time frame, but I always keep an open mind. I’m planning to vary the trade exits to suit the current market conditions, so the system will take advantage when markets are trending. Also I plan to use options to lock in system profit went the system profit reaches a predefined level.

So an important area that you haven't mentioned is the expectancy of your winners.

If it is say 50%, then in 150 trades there is a 31% chance that you will experience 7 straight losses. How does that play into your risk plan?

jog on
duc

 

[DaveTrade]

So an important area that you haven't mentioned is the expectancy of your winners.

If it is say 50%, then in 150 trades there is a 31% chance that you will experience 7 straight losses. How does that play into your risk plan?

jog on
duc

Thanks @ducati916 that's important for me to monitor, I will include this into my trade documentation. I will get some idea from my live forward testing (can't do back testing with options), but this will be much shorter that any normal back test. The fact that I won't be able to do comprehensive back testing makes it even more important to monitor the system very closely when I start trading it.
Consecutive losses would be the nemesis of the type of system that I'm trying to build, your post has highlighted this in my thoughts. I need to review all aspects of the system with this in mind. I know that I can't control the market conditions that the system may encounter but I can determine what the system will do when it encounters them.

Thank you for bringing this to my attention.

 

[frugal.rock]

I know that I can't control the market conditions that the system may encounter

Consecutive losses would be the nemesis of the type of system that I'm trying to build,

How would the system handle the scenario mentioned if it occurred very early on or even the first lot of trades ?
Need to survive.
Monte Carlo effect and Murphy's Law often go hand in hand.
(in life has plagued me relentlessly....)

 

[DaveTrade]

How would the system handle the scenario mentioned if it occurred very early on or even the first lot of trades ?
Need to survive.
Monte Carlo effect and Murphy's Law often go hand in hand.
(in life has plagued me relentlessly....)

This would the worst possible thing that could happen, thanks for pointing it out. I say that sincerely @frugal.rock , it's also something that I need to be ready for, and ready for the reaction from my wife.
'How would the system handle that', well when doing my review I'll adjust each aspect of the system to be most conservative from trade selection through to trade exit.
It may be possible to rate the trade selection part so the system takes only the most conservative rated trades when it's in drawdown.

Thanks for the feedback, every comment that I get makes me think more about what I can do with this system.

 

[frugal.rock]

@Skate has been remarkably absent since last year... ?
Coooeeee

 

[farmerge]

@Skate has been remarkably absent since last year... ?
Coooeeee

Perhaps taking annual leave to lesser known parts of the great beyond

 

[debtfree]

So an important area that you haven't mentioned is the expectancy of your winners.

If it is say 50%, then in 150 trades there is a 31% chance that you will experience 7 straight losses. How does that play into your risk plan?

jog on
duc

Hi @ducati916, the formula I have in my cells below shows what you say is correct but how do you work out the % chance of it happening for each scenario?

 

[ducati916]

This would the worst possible thing that could happen, thanks for pointing it out. I say that sincerely @frugal.rock , it's also something that I need to be ready for, and ready for the reaction from my wife.
'How would the system handle that', well when doing my review I'll adjust each aspect of the system to be most conservative from trade selection through to trade exit.
It may be possible to rate the trade selection part so the system takes only the most conservative rated trades when it's in drawdown.

Thanks for the feedback, every comment that I get makes me think more about what I can do with this system.

A little neurological biochemistry for you to consider.

jog on
duc

 

[Nick Radge]

The formula is for losing streaks is:

LS = Ln(N) / Ln(1-Win%)

Where,
LS = Losing Streak
Ln = Natural Logarithm
N = Number of Trades
Win% = Win Rate

 

[debtfree]

The formula is for losing streaks is:

LS = Ln(N) / Ln(1-Win%)

Where,
LS = Losing Streak
Ln = Natural Logarithm
N = Number of Trades
Win% = Win Rate

Nick, I did originally get the the formula out of your book 'Adaptive Analysis for Australian Stocks' Page 42, so once again thanks for that.

What caught my eye in @ducati916's post was the 31% chance of it happening, it was a genuine question on how to come to that conclusion, not for one minute doubting him.
Is there a formula I can insert in the next column that works out the % chance of that Probable Streak happening?



Thanks for your time Nick, appreciate it.

 

[ArtMaster]

Very quiet in here lately - markets are seemingly warming up of late. Skate, I may be wrong but I believe your index filter on the weekly may also have turned green for the first time in a while? though I may be wrong.

I have been re-reading unholy grails on a short break though obviously a little dated now in terms of the results at least. Does anyone still follow any of these? Am going to try and learn a bit of amibroker this year with some luck. I know the flipper and 52 week or 100 day high (slips my memory atm) were 2 of the best balanced in terms of results v drawdown.

 

[Newt]

Skate's probably off on hols for a whilte ArtMaster. Everyone needs some downtime

Good to see some green shoots in the market. Tricky times, but yes, most market filters probably indicating buy signals from recent activity (weekly timeframe).

Nick Radge has been known to pop in from time to time here - I'm not sure that they actively trade/follow those strategies any more, but would be interesting to hear from anyone that does actively trade variations on the Unholy Grail themes.