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Mr Skate very true and wise words. But sometimes the opposite respons is received by those who are so self righteous that only their thoughts and beliefs are all that is worthy,
 
Skate said:
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Skate.
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The premise or at least one of them was that mechanical trading removes excessive emotions from trading. At a current 9% drawdown do you still believe that mechanical trading fulfils this criteria?

The system is only at 5 weeks duration. A very short test period. Accepted.

The numbers currently are nowhere near the backtested numbers. Winning trade % is sitting at 13%. Backtesting had you somewhere close to 50% (from memory). Two questions: (a) at your level of experience is this a concern and (b) if I were a novice how do you think this would be interpreted?

How long, if these sorts of numbers continued, would you hold on before questioning whether the system was broken?

Returning to the simple strategy of only being long above the 10day SMA



Your market is in the chop zone at the very best. In the start of a bear at the very worst.

You have employed any number of bells and whistles as entry signals. Given that individual stocks fundamentals only account for about 20% of their performance, that the market accounts for 50% and their sector another 30% of performance, then your current numbers, ie. 13% are about right. Is it time to include market conditions overall as an entry criteria with heavier weighting and reducing individual stock weighting?

All of your systems to date that I have seen disclosed are bull market systems. They are non-diversified. Whatever market we have currently, it is categorically not a bull market.

The profit/loss squiggles on your 2 current systems look slightly different, but they are both essentially in the same boat: ie. long only. Hence in this market the net outcome is the same.

At a bare minimum to diversify you need a short system. That is if you want to trade a bear market. While it is not impossible to trade a long only system in stocks in a bear market...it is very hard.

There are now any number of inverse (bear) ETFs to choose from. Can you not build a short system?

Then a simple scoring method can be employed to rebalance weekly, which seems to be your chosen time period, between long and short exposure.

In a bull market, your long systems do very well, which has already been documented. Time to build a bear system and truly introduce some diversification and balance to your trading strategy.

This is my very simple scoring system:




Is it perfect?

No.

But it is a starting point for long/short exposure. I basically rebalance my long/short exposure through the various timeframes accordingly.

As can be seen for the US, the outlook is mildly bearish on a weekly, heavily bearish on a monthly outlook.



jog on
duc
 

@ducati916, thank you for sharing your thoughts on the two "Trend Trading Strategies" under "paper trading" and for your general feedback on my trading style. I appreciate your concerns about the performance of trend trading in the current market conditions, particularly given the significant correction in the All Ordinaries (XAO) since the beginning of September 2023, which has created challenges for trend trading strategies to perform optimally.

Trend trading is a strategy that involves identifying and following market trends. However, it can be challenging to execute trend trading strategies effectively in a downward trend, especially when the market is characterised by high volatility, as it can be difficult to identify reliable trends to trade.

In a nutshell
This is the very reason why "Trend Trading" strategies are struggling over this short period.



However, it's important to note that market conditions are constantly changing, and trend trading can still be an effective strategy when the market turns around. It's crucial to stay adaptable and adjust trading strategies according to market conditions.

Remember, trading requires patience and adaptability. I'll answer your questions in detail in the next series of posts, as they are important and deserve a thorough response.

Skate.
 
ducati916 said:
The premise or at least one of them was that mechanical trading removes excessive emotions from trading. At a current 9% drawdown do you still believe that mechanical trading fulfils this criteria?
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@ducati916, I appreciate your contributions to this thread, and I'll do my best to provide helpful responses.

1. Mechanical trading and emotions
Yes, mechanical trading systems can help remove emotions from trading, but they are not foolproof. Even with a mechanical system, it's natural to feel emotions when the market is experiencing high volatility or when trades aren't going as planned. However, a well-designed mechanical system can help minimise emotional decision-making by providing clear entry and exit rules.

With the "Dual Breakout Strategy" current with a 9% drawdown, it's understandable to question whether mechanical trading still fulfils the criteria of removing excessive emotions from trading. While a mechanical system can help reduce emotions, it's important to remember that no system is completely immune to emotional influences. It's crucial to stay vigilant and monitor your emotions, even when using a mechanical system.

Skate.
 

@ducati916, your concerns are well-founded, and your questions are valid. Your observations give me an opportunity to address the lack of early performance and provide some context.

2. Performance concerns:
a) At my level of experience, I would say that a 5-week duration is a relatively short test period, and it's not uncommon for performance to vary to that of backtest results, especially during the early stages of "paper trading". However, I'm actively assessing the system's performance, and I'm committed to making the necessary refinements to enhance its effectiveness. It's essential to remember these strategies were developed using incorrect Norgate data not fit for purpose.

b) If I were a novice, I would interpret the current performance as a sign that the system might need further refinement or that market conditions are not favourable for the strategy. It's essential to remember that no trading system is perfect, and there will always be periods of underperformance. As a trader, it's important to stay adaptable and consider adjusting the system or incorporating other approaches that may better suit the current market environment.

Remember that trading requires patience, adaptability, and a willingness to learn. While the current performance may not match the backtested numbers, it's important to understand that live trading conditions can differ from backtesting environments. My goal is to continually improve the system and make it more effective over time.

Skate.
 
ducati916 said:
How long, if these sorts of numbers continued, would you hold on before questioning whether the system was broken?
Click to expand...

3. Holding onto a system
If the system continues to underperform, it's crucial to reassess and question whether the system is broken. However, it's important to have a clear understanding of the market conditions and whether they are suitable for the strategy. In the current market, with a mildly bearish weekly outlook and a heavily bearish monthly outlook, it might be wise to consider adjusting the system (but not at this stage) or incorporating other approaches that better suit the current market environment.

At this stage, I'd like to offer some general remarks
It's crucial and important to have a flexible mindset when it comes to trading systems. No trading system is perfect, and market conditions can change rapidly. A system that performed well in the past may not work effectively in the present, so it's important to stay flexible and open to making adjustments. When faced with a system that's underperforming, it's essential to consider various factors, such as market conditions, risk management strategies, and most importantly, the psychological factors that could impact the system's execution. By taking a comprehensive approach and addressing these factors, you can adapt and improve your trading system over time. Remember, trading is a continuous learning process, and staying flexible and open to change is essential for long-term success.

Skate.
 
ducati916 said:
Is it time to include market conditions overall as an entry criteria with heavier weighting and reducing individual stock weighting?
Click to expand...

4. Including market conditions
Yes, incorporating market conditions as an entry criterion with a heavier weighting could be a good idea. This approach would help the system adapt to changing market conditions and potentially improve overall performance. By giving more weight to market conditions, the system can better account for factors such as market trends, volatility, and other factors that can impact performance.

However, it's essential to note that incorporating market conditions as an entry criterion requires careful consideration and analysis. It's important to identify the right market indicators to use and determine the appropriate weighting for each indicator. This may involve testing different indicators and weighting approaches to find the optimal combination that works best.

Skate.
 
ducati916 said:
At a bare minimum to diversify you need a short system. That is if you want to trade a bear market. While it is not impossible to trade a long only system in stocks in a bear market...it is very hard.
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5. Diversification
Absolutely, diversification is crucial for a healthy trading strategy. Considering the current market conditions, it might be beneficial to explore the development of a system to incorporate inverse (bear) ETFs to balance the exposure. A simple scoring method can also be used to rebalance weekly between long and short exposure, ensuring that the strategy adapts to changing market conditions. While I understand the importance of diversification, I must admit that I'm not yet comfortable with developing and trading such a system. At this stage, I'm still focused on learning and refining my trading skills, and I believe that diversification strategies are an advanced topic that requires further study and practice. However, I'm open to exploring this concept further and learning from others who have experience with diversification strategies.

Skate.
 
ducati916 said:
The profit/loss squiggles on your 2 current systems look slightly different, but they are both essentially in the same boat: ie. long only. Hence in this market the net outcome is the same.
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6. Profit/loss squiggles
The profit/loss squiggles for the two current systems under "paper trading" do look similar, but they are not identical. However, in the current market, both systems are facing challenges. It's clear that both systems are long-biased, and in a bear market, this can lead to underperformance. While both systems have had their strengths in the past, it's essential to consider giving them both a bit of leeway to ensure long-term success.

It's important to recognise that the current market conditions are not ideal for either system, but it presents an opportunity for me to assess the performance of each system under varying market conditions. By considering different approaches and evaluating their performance, I'm confident that I can develop a robust trading system that can effectively adapt to challenging market conditions, ultimately leading to long-term success.

Skate.
 
ducati916 said:
In a bull market, your long systems do very well, which has already been documented.
Click to expand...

8. Market Outlook
The current market outlook, both weekly and monthly, suggests caution. It's essential to consider this outlook when evaluating the performance of the trading system and deciding on any adjustments. The market's current dynamics may introduce volatility, and it's crucial to ensure that the strategy can adapt to these changes.

@ducati916 once again let me say that I appreciate your thoughtful comments and questions. I will continue to closely monitor performance and consider adjustments to ensure that the strategy remains adaptable and effective in various market conditions. I'm committed to regularly assessing the system's performance and making necessary adjustments to maintain their individual worth in diverse market environments.

peter2 said:
I'm not enjoying the drawdown, but confident in the positive outlook - Until then, stock prices will continue to drift lower and make us squirm.
Click to expand...

I'll leave the last word to @peter2, who aptly put it, "I'm not enjoying the drawdown, but I'm confident in the positive outlook." and "Until then, stock prices will continue to drift lower and make us squirm".

However, I'm optimistic that with a robust strategy and continuous refinement, both strategies will be well-equipped to navigate these challenges and achieve success in the long run. Peter's statement highlights the importance of maintaining a long-term perspective, even during periods of uncertainty. It's essential to stay focused on the bigger picture and not get discouraged by short-term fluctuations. By continuously evaluating and adapting both strategies, I'm sure I can maximise the potential for success in various market conditions.

Skate.
 
now between September 2019 and April 2020 i used a reverse index ( 'BEAR ' family ) strategy but my primary aim was to ensure capital reserves available in my trading platform accounts , rather than exclusively squirreled in a different financial institution ( i worried about transfer amounts being limited ) now March 2020 also provided me with some crystallized profits when liquidating those 'BEAR ' ETFs to free up reserves for some bargain-hunting , and it all worked better than planned .

HOWEVER i also noted an unexpectedly large bout of 'picking winners ' ( for bail-outs ' ) , not so bad in Australia but some , and wonder if the next BIG downturn will see a similar 'winner-picking ' scenario after all the US now has 'the magnificent seven ' virtually lifting all three major indexes ( i think the Russel 2000 is very important but the financial media tends to disagree )

now obviously Australia will protect the BIG 4 come hell or high-water but what about the rest of the listed companies ( BHP should be able to look after itself )

will those 'short hedges ' be royally squeezed by hasty 'life-line' throwing ( so any gains will be small or really make you sweat before turning to honey )

i expect the next big downturn to be very educational ( and some pain included )
 
now my OTHER concern is , given March 2020 wasn't so long back , are the clever folks already de-leveraging as fast as they sensibly can ( not incurring major losses on the way) and the predicted ( by some ) plunge down the elevator shaft is only a tumble down a small staircase
 
Evening Mr Skate:

Yes, mechanical trading systems can help remove emotions from trading, but they are not foolproof. Even with a mechanical system, it's natural to feel emotions when the market is experiencing high volatility or when trades aren't going as planned. However, a well-designed mechanical system can help minimise emotional decision-making by providing clear entry and exit rules.


So discretionary trading methods also have clear entry and exit rules. The 'rules' are not the issue. The issue is the confidence that the trader has in those rules and his ability (willingness) to continue in executing them as planned.
Mechanical systems are predicated on the assumption that through backtesting the results, over time, will be profitable. A 9% drawdown from the get-go can play havoc with one's confidence n'est pas?


I'm actively assessing the system's performance, and I'm committed to making the necessary refinements to enhance its effectiveness. It's essential to remember these strategies were developed using incorrect Norgate data not fit for purpose.
Remember that trading requires patience, adaptability, and a willingness to learn. While the current performance may not match the backtested numbers, it's important to understand that live trading conditions can differ from backtesting environments. My goal is to continually improve the system and make it more effective over time.


So this is a paper trading exercise. A bit of an experiment. Fine I get that. If however this were an actual system, you could not just fiddle with the rules, that obviates the entire purpose of building a mechanical system in the first place.
The issue here is: the system goes into immediate drawdown. The trader must (should) stick to the rules. It continues into drawdown. What do you do wait for the system to hit maximum backtested drawdown numbers or pull the plug?
If you wait, then all the more reason in the initial design to incorporate a very low max. drawdown.


If the system continues to underperform, it's crucial to reassess and question whether the system is broken. However, it's important to have a clear understanding of the market conditions and whether they are suitable for the strategy. In the current market, with a mildly bearish weekly outlook and a heavily bearish monthly outlook, it might be wise to consider adjusting the system (but not at this stage) or incorporating other approaches that better suit the current market environment.


I think that this is an example of the discussion way back about the length of time used in the backtest. If your backtest is 50 years (1970's) through to today, you will have a system that has been exposed to bear markets (assuming a long stock system) and bull markets. The systems numbers should reflect on aggregate that combination.
Your backtest was 720 days or just under 2 years.




This is your market over 2 years. Actually, this looks ideal as a test. Pretty much sideways.

So I'm thinking, when the market is a bear, you lose, but limit the loss. When you win, you win big. In theory it should work. It may simply have been that you started the experiment at the most inopportune time.


Yes, incorporating market conditions as an entry criterion with a heavier weighting could be a good idea. This approach would help the system adapt to changing market conditions and potentially improve overall performance. By giving more weight to market conditions, the system can better account for factors such as market trends, volatility, and other factors that can impact performance.

I think that it would. If you stay out of bad markets for the system, its outperformance in good markets should remain. In aggregate you improve the systems performance.

Absolutely, diversification is crucial for a healthy trading strategy. Considering the current market conditions, it might be beneficial to explore the development of a system to incorporate inverse (bear) ETFs to balance the exposure. A simple scoring method can also be used to rebalance weekly between long and short exposure, ensuring that the strategy adapts to changing market conditions. While I understand the importance of diversification, I must admit that I'm not yet comfortable with developing and trading such a system. At this stage, I'm still focused on learning and refining my trading skills, and I believe that diversification strategies are an advanced topic that requires further study and practice. However, I'm open to exploring this concept further and learning from others who have experience with diversification strategies.

Read back over some of your own posts re. learning new skills, study, etc. LOL.

I'm sure there are many who trade the short side will chime in.

jog on
duc
 
ducati916 said:
I think that it would. If you stay out of bad markets for the system, its outperformance in good markets should remain. In aggregate you improve the systems performance.
Click to expand...
i am glad you guys can pick the market conditions ( semi-reliably )

i see all sorts of indicators but the market still looks mostly irrational to me ( even after listening to end of the day summaries )

maybe that is why i mostly stay reactionary ( but contrarian ) to market trends

one thing i suspect with computer aided trading ( bots ) is the automation reacts to news headlines first and the humans move in slower ( some after actually digesting the full news stimuli and maybe even crunching some numbers )

if my suspicions are correct that might play havoc on stop-losses ( especially close trailing ones )

one question though , in current times if not 'in a good market' where do you park your cash ( assuming you have a healthy war-chest ) ( i do not expect precise details , of course , just rough hints for the novices among us )
 


I'm 90% in physical gold and silver. 10% in the market. That does not include property. I only have the one that I live in. No mortgage.


jog on
duc
 
@ducati916 I agree that our long only portfolios could do with some "short" exposure. However the options to do that easily in Aust are limited by the immature regulators. It wasn't long ago that our "regulators" banned shorting completely. How ignorant and immature. Even now it's extremely difficult for a retail investor/trader to offset some of the downside exposure by having a few short positions. It's easier to revert to cash.

Our only option (in Aust) for simple shorting is to use CFD providers. OK for short duration trades but they do become expensive for medium term positions. A few CFD brokers seem to provide a reliable service but I've seen too many dodgy events to ever trust them with significant monies. Our ASX hasn't evolved to allowing shorts and I doubt they ever will.

It's so much easier to combine both long and short systems in the US markets. It's a traders' paradise.
 

Confidence
@ducati916, you raise a valid point. Confidence in the trading rules and the ability to stick to them is indeed crucial for both discretionary and mechanical trading methods. However, mechanical systems can provide an advantage in terms of emotional control, as they rely on predefined rules that are not influenced by emotions.

Drawdowns
Regarding the issue of drawdowns, it's true that a significant drawdown can affect a trader's confidence. However, it's worth noting that mechanical systems can also help manage risk and mitigate the impact of drawdowns. I maintain using a combination of exit strategies, and mechanical systems can limit the potential losses and help traders stay in the game even during periods of high volatility.

Ultimately
The choice between discretionary and mechanical trading methods depends on the individual trader's preferences, skills, and risk tolerance. Both methods have their strengths and weaknesses, and it's important to understand the pros and cons of each before deciding which approach is best for you.

Skate.
 

@ducati916, I appreciate your input and understand your reservations. However, I must clarify that the development of this trading strategy was intentionally built around a simple entry method using Norgate Data, which we both know has limitations. Despite this, I chose to proceed with the exercise, considering it a valuable learning experience. The goal was to make minor adjustments along the way, which is easier to do in a simulated environment. However, I acknowledge that adjusting a live trading system can be more challenging. Nevertheless, I'm committed to continually improving the system's performance and addressing any issues that arise.

I agree with you that sticking to the rules is crucial in trading, and I've been diligently following the system's rules without any discretion. However, it's equally important to recognise when adjustments are necessary. While mechanical systems can be useful, they're not infallible, and market conditions can evolve, demanding adaptability. My objective is to continually enhance the system's performance by making refinements and adjustments that address emerging challenges and improve its effectiveness over time.

Skate.
 

@ducati916, I appreciate your point about the backtest's duration and its impact on the system's performance and you are right as a longer backtest period would expose the system to various market conditions, including bear and bull markets. However, it's essential to note that the current market environment is constantly evolving, and what worked in the past might not necessarily work in the present.

While I understand the value of a longer backtest period, my "Silver Level Data subscription from Norgate" limits the historical data availability. In the case of my systems, the backtest period of 720 days was intentionally chosen to focus on the most recent market conditions, which have been markedly different from the past. By examining the system's performance during this time frame, I can assess its effectiveness in the current market environment.

Skate.
 
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