My trading summary last financial year - makes for an ugly read

[sammy84]

Peter,

A lot helpful comments/suggestions.

I tend to agree with what you have to say about using only one strategy. When times are good it is easy to spread myself across a few different strategies as I'm making money and I trick myself into believing this is a result of my various strategies. Agree also that when the market is like this it is tempting to find other trading strategies. Nevertheless, my three different strategies adhere to the KISS principle so it shouldn't be overly hard to keep using all. Whether using different systems hurts my focus is another story and worth thinking about.

I'm a big fan of your scoring technique for review. I will be sure to adopt something similar. Keeping data on my own trading management actions (as opposed to generic data like position size etc) would be a very useful tool to analyse my performance and identify what works and doesn't.

 

[peter2]

I'm in favour of using multiple strategies as this can reduce DD. However a discretionary trader is more susceptible to psychological biases (eg. recency bias) and favour one strategy over another at any time. This inconsistency is costly as we ignore the entries in the strategy that has just produced a few losing results. It's harder to trade each strategy independently and therefore consistently when there is too much discretion in the trading business.

This is even harder if you trade in both directions. For example do you place an order to buy the BO of a new high, or place an order to short the reversal as an indicator is overbought ?(*). Detailed records will show you where your best edges are and in what market conditions. Knowing these details helps your confidence and discipline.

* I would place orders for both strategies as I don't know what is going to happen next. Discretionary traders sabotage their trading more often than they think.

Yes, keep it simple, but stick to the rules.

 

[Mark17]

Kudos to you for full disclosure during a difficult trading time. I hope things get better!

One comment I have is in response to your question about whether the system still has Edge. You mentioned that it is a discretionary system and that you can't really apply objective rules to backtest it.

With discretionary systems, I think one can always debate whether Edge is even possible. Who can really separate discretionary traders who are lucky over the long-term from those who lose? Those who lose often walk quietly into the darkness leaving no trace for others to see. Who knows exactly what the rules are for others to test and replicate to confirm? It comes down to a game of having to verify brokerage statements (rarely provided) to know who is telling the truth.

My recommendation would be to consider overhauling your system and making it algorithmic. Run it through a system development process where all relevant statistical considerations are made (especially with attention paid to steering clear of the curve-fit).

 

[Trembling Hand]

With discretionary systems, I think one can always debate whether Edge is even possible. Who can really separate discretionary traders who are lucky over the long-term from those who lose?

You serious?

 

[tech/a]

With discretionary systems, I think one can always debate whether Edge is even possible. Who can really separate discretionary traders who are lucky over the long-term from those who lose? Those who lose often walk quietly into the darkness leaving no trace for others to see. Who knows exactly what the rules are for others to test and replicate to confirm? It comes down to a game of having to verify brokerage statements (rarely provided) to know who is telling the truth.

Only debated by those who cannot trade----in my not so humble experience.
Discretionary or systematically.

A successful systematic trader knows there is no debate.
Just is there is no debate that the majority of traders fail.

 

[Mark17]

Only debated by those who cannot trade----in my not so humble experience.
Discretionary or systematically.

A successful systematic trader knows there is no debate.
Just is there is no debate that the majority of traders fail.

A successful systematic trading system can be modeled and backtested using software for all to see and evaluate. That's why I singled out discretionary.

 

[CanOz]

A successful systematic trading system can be modeled and backtested using software for all to see and evaluate. That's why I singled out discretionary.

Sure, but at what cost?

Take a typical descretionary method for trading intraday index futures.

You look for interest at a level, a predetermined level that would typically bring in participants. Once you see the order book and order flow start to change, you join in. There is a huge subjective element here that may only be quantified by allot of expensive coding. Even then, is it more adaptive than the power of human intuition?

I trade systematically, but I have traded descretionary as well with the DOM, the T & S, and a way to define good solid levels. I cannot backtest it because I cannot quantify it on my budget.

CanOz

 

[Trembling Hand]

A successful systematic trading system can be modeled and backtested using software for all to see and evaluate.

And then break down the moment you turn it on. Which they have a happy knack of doing. Still cannot see your point that luck is the key to discretionary long term success.

 

[tech/a]

All discretionary traders know if they are profitable
Or not. Over time they will have the exact same
Stats as a systematic tested system. They can
Be derived from actual results.

Success can be labeled whatever you like
Luck,genius,fluke,experience.
It's either there or it's not!

 

[adt100]

I would re look at and reconsider a filter element.

Totally understand that almost any filter will have a detrimental effect on long term profit however I believe that the benefits outweigh the negatives.

I use a range of filters including index filters to tell me what to trade and when. This can then mean you focus on the best index and stocks within it that suit your systems (discretionary or systmatic). If you just want to trade the ASX fine but cash is a perfectly acceptable position while the odds are not in your favour. Simple trendfollowing systems win rates will swing between 25-65% depending on market conditions. In poor market conditions the low win rates mean only a small amount is added to the bottom line but average DD is increased dramatically. Note hold time for my systems is days to 2 weeks approx.

Downside is you are late to market moves as TH points out the indices are a lagging indicator. Upside is only a relatively small loss of profits for a large cut in drawdown and you dont have to spend 80% of your life feeling like a loser!!

Add the fact that there is nearly always some market showing the right characteristics.

Looking at your approach two of the three are clearly trend following or momentum. So only trade them when the odds are in your favour. Takes discipline if you have a 'need' to trade, I suggest a proper hobby!

The way I look at it is if 80% of my profits come from 20% of my trades (not far off for trend followers) and 80% of these trades occur 20% of the time (in a trending market) then I am happy to lose 20% of my profits to lose 80% of my effort and minimise my drawdown in each market. Stay in cash or look elsewhere for opportunity. Your time will come again but you will need to make it there!

Lastly my filters on each market work just below 50% of the time. But when they are right avaerage win is approx 45% and when they are wrong I lose approx 9% of overall portfolio equity. I am invested overall approx 60% of the time accross 3 different markets the rest in cash.

 

[Trembling Hand]

The way I look at it is if 80% of my profits come from 20% of my trades (not far off for trend followers) and 80% of these trades occur 20% of the time (in a trending market) then I am happy to lose 20% of my profits to lose 80% of my effort and minimise my drawdown in each market.

That hurts my brain but is a good one.

 

[cynic]

I would re look at and reconsider a filter element...


...Lastly my filters on each market work just below 50% of the time...

Am I to understand that your filter is actually no better than the mere toss of a coin (i.e. if heads then trade, else tails then no trade) ?

 

[Mark17]

All discretionary traders know if they are profitable
Or not. Over time they will have the exact same
Stats as a systematic tested system. They can
Be derived from actual results.

Success can be labeled whatever you like
Luck,genius,fluke,experience.
It's either there or it's not!

I don't disagree with the first paragraph.

With regard to the second, consider two things. First, stats suggest 80-95%
of these traders fail in their first (or second) year. Most of these are probably
discretionary traders.

Second, don't ignore the fact that much about the trading industry is a huge
psychological game aimed to make money either through trading or by selling
trading strategies/systems/education/services that may or may not pay out in
the end.

In the USA it is usually said that people are innocent until proven guilty. As
scam-laden as the financial industry is, though, one would be a fool not to
consider prospects guilty until proven innocent. While each trader knows if
s/he has been successful according to his/her definition of the word (most
will go quietly into the night, as mentioned above), what can't be accepted
as truth is what others tell you about their trading success. See the
difference?

With regard to luck and success, I believe the two are intimately related
when it comes to trading. Trading may be a successful endeavor until (and
if) the dreaded year presents when one loses many times what s/he made
in each of the previous successful years. This is the point where many
traders realize they have been lucky, not good, because their risk management
plan was poor.

A good read on trader luck is _Fooled By Randomness_ by Nassim Taleb.

 

[Mark17]

Sure, but at what cost?

I agree CanOz... it can be expensive. I paid for software and I pay for a data subscription--not to mention over 16 months of a steep (for me) learning curve figuring out how to program and I'm still just getting started.

But why should making money from the luxury of your own home on your schedule ever be cheap or easy?

 

[tech/a]

Best trades I have made ( most profitable ) were systems trades ( are still shown on the net whilst live trading it)
Point is I was in the trades.
Same with my best discretionary trades.
Same with property purchases in 1995/6/8/2000
Point is I was in the market.

Luck?
Genius?
Sound judgement?

Well my view was they were all good judgment ---- placing myself in
Front of a potential train
And LUCK that they moved so far for so long.

So when I sold--- LUCK?

 

[adt100]

Am I to understand that your filter is actually no better than the mere toss of a coin (i.e. if heads then trade, else tails then no trade) ?

Not exactly. All my filters are 100% right at the time they give a signal. It is only the future that disproves them.

I am not sure what you are getting at. My filters are pretty sensitive and get me into cash or invested quickly and return back again as necessary. I don't consider below 50% to be a surprise....we are hardly in a stable market environment. I am quite happy with a 50% chance of making a 40% return on my account or losing 10%. Seems simple maths to me. Opportunity is the next equation.

Cynic I assume you are perfectly comfortable that win rate has only limited correlation to returns?

 

[sammy84]

Not exactly. All my filters are 100% right at the time they give a signal. It is only the future that disproves them.

I am not sure what you are getting at. My filters are pretty sensitive and get me into cash or invested quickly and return back again as necessary. I don't consider below 50% to be a surprise....we are hardly in a stable market environment. I am quite happy with a 50% chance of making a 40% return on my account or losing 10%. Seems simple maths to me. Opportunity is the next equation.

Cynic I assume you are perfectly comfortable that win rate has only limited correlation to returns?

Without giving too much away, I'm curious what sort of filters you use?

I would imagine if your filter is sensitive to switching to cash that it would do this quite often. Most filters I have seen thus far are based on MAs.

 

[Trembling Hand]

Without giving too much away, I'm curious what sort of filters you use?

I would imagine if your filter is sensitive to switching to cash that it would do this quite often. Most filters I have seen thus far are based on MAs.

You don't have to have MAs on index prices which in Oz are basically 8 stocks. A/D line for example.

 

[cynic]

Not exactly. All my filters are 100% right at the time they give a signal. It is only the future that disproves them.

I am not sure what you are getting at. My filters are pretty sensitive and get me into cash or invested quickly and return back again as necessary. I don't consider below 50% to be a surprise....we are hardly in a stable market environment. I am quite happy with a 50% chance of making a 40% return on my account or losing 10%. Seems simple maths to me. Opportunity is the next equation.

Cynic I assume you are perfectly comfortable that win rate has only limited correlation to returns?

Thanks adt100, that makes it much clearer.

When I read your earlier post I misunderstood it to be talking about the efficacy of the filter element (as distinct from the overall trading strategy/system into which it is incorporated). Based upon the content of your posts I think I can fairly safely assume that you've already identified/confirmed that your filter is making a positive contribution to the overall efficacy of your strategy/system. Given that the figures you're quoting amply surpass bank interest rates, they would undoubtedly be the envy of many aspiring traders. Well done!

As to what I was getting at (which I now recognise to be inapplicable to your trading scenario), some years ago a fellow trading enthusiast (whom regularly avails himself of the "wisdom" of stock market "gurus") once told me how one such trading "genius" extolled the virtues of disregarding indicators unless they were correct at least 40% of the time. I promptly advised my friend that said "guru" was unwittingly confessing his own ignorance and then went on to explain that when faced with binary conditions (i.e. up/down, kinetic/inert etc.) any indicator that is approximatley 50% correct confers no advantage above the flip of a well balanced penny! However, a binary indicator that is reliably over 60% incorrect might confer a useful edge if its output is inverted!

 

[Trembling Hand]

once told me how one such trading "genius" extolled the virtues of disregarding indicators unless they were correct at least 40% of the time. I promptly advised my friend that said "guru" was unwittingly confessing his own ignorance and then went on to explain that when faced with binary conditions (i.e. up/down, kinetic/inert etc.) any indicator that is approximatley 50% correct confers no advantage above the flip of a well balanced penny! However, a binary indicator that is reliably over 60% incorrect might confer a useful edge if its output is inverted!

Not sure of the exact details but a 40% win rate would be good enough for most systems. In fact pretty good. What I'm guessing at is the when a system wins 40 % of the time thats only part of the story.

Its not a binary outcome, up or down at all. Its win 2-10R or stop at BE or lose 1 R. The outcome is nowhere near binary. And cannot be inverted to get 60% win rate.