US Trend following system portfolio (Hypothetical)

[jjbinks]

Hi All,

I have decided to get on the systematic trading bandwagon but to do something different I thought it would be nice to try trade a system using US stocks.

Basic system parameters will be
-Starting capital $50,000 USD
-Daily system
-No more than 2 trades per day
-Will trade any stock included in S&P 1500 as long as trading volume meets set criteria.

The system is the 20% flipper described in Unholy Grails by Nick Radge.
Data will be from Norgate.
System coded in Amibroker.

I aim to start trading this system in a few weeks but would appreciate any feed back re practicalities.

At this stage I am not keen to trade international stocks IRL due lack of knowledge re tax. (I need to read up on this/ talk to accountant) and currency risk. Curious to hear what others experiences and thoughts are on these two points.

Back test results (From 1 April 2017- 1 April 2019)
CAGR - 14.05%
Winning Trades 47%
Max DD - 11.4%
Sharp Ratio - 0.36

Equity curves



Cheers
J

 

[kid hustlr]

Hi,

Looks like fun.

Can you confirm the code for the flipper (I think it's a % swing from lows or something?)

Why this strategy?

 

[jjbinks]

Hi Kid,

20% flipper
buy when up 20% from last low
sell when down 20% from last high

Why this strategy?
I like the simplicity of the concept behind this strategy and would love to prove that it works!
(To actually code the strategy was not that straight forward for me. I do worry that they may be some issues with my code so am keen to see how real results compare with back tester results. )

There are other strategies from unholy grails which also outperform index with lower draw down.

Cheers
J

 

[peter2]

@jjbinks Good to see someone tackle the US markets.

You shouldn't have large DDs with only two open positions, unless you invest 50% in both. A little bit of commonsense management of the downside exposure will keep you safe. You know your exit will be -20% on every stock. Make that 20% a comfortable % of your account. Start a new position every time one open position is at entry +20% (break-even).

TAX US: You'll need to complete the US W-8BEN (individuals) or W-8BEN-E (trusts, companies) before buying US equities. This will instruct the US broker to not withdraw tax on any profits. All trading profits and losses should be converted to AUD and included in your yearly AUST tax submission.

 

[jjbinks]

@jjbinks Good to see someone tackle the US markets.

You shouldn't have large DDs with only two open positions, unless you invest 50% in both. A little bit of commonsense management of the downside exposure will keep you safe. You know your exit will be -20% on every stock. Make that 20% a comfortable % of your account. Start a new position every time one open position is at entry +20% (break-even).

TAX US: You'll need to complete the US W-8BEN (individuals) or W-8BEN-E (trusts, companies) before buying US equities. This will instruct the US broker to not withdraw tax on any profits. All trading profits and losses should be converted to AUD and included in your yearly AUST tax submission.

Thanks p2

I think I was bit inaccurate in my description. Plan is for 20 positions 5% each (so each position theoretically only risking 2% of portfolio).
What I meant was that the maximum amount of new positions (Buys) would be 2 per day.
Thanks for information about W-8BEN.

 

[aus_trader]

Thanks for information about W-8BEN.

Yes, Uncle BEN needs to collect tax first, or is it Uncle Sam ? Then you'll have to declare those profits/losses to Uncle Oz (ATO).

As peter2 said, great to see someone showing the Yankees how to do it ! I considered having a US portfolio as well at times but just too busy to juggle so many balls at once

 

[peter2]

@jjbinks I'm keen to see you start when ready.
I've taken the time to reread the section on the 20% Flipper in Unholy Grails. I've even created a chart template, loaded the SP1500 and created a scan to find the triggered entries. I'm in the front row with a bag of chocolate honeycombs, ready to follow along.

If you want any suggestions, please ask. There's so much we could discuss, but this is your thread and I'm going to stay quiet until asked.

Sorry, there is one thing I'd like to say at this point. As this is a hypothetical exercise, I suggest you push your personal boundaries during this exercise. If you're risk adverse (too conservative) push it, start a few more trades. If you've lacked commitment before, then state that you'll post every week/month for one year. We're here to support you.

 

[jjbinks]

@peter2 I will probably start in the next 1-2 weeks. Will back test a few more ideas. (I have invested in more data recently so will back test a few more ideas)
Thanks for your support!

Things going through my mind at the moment
1. RE: 2 trade rule
-->The 2 new trades per day was a rule I used for a 10 stock porfolio.
-->It actually is not so much about being risk averse but trying to pick the best when you have multiple opportunities
-->If there are a lot of signals being generated in a time period I thought it would be better to chose the best 2 stocks per day over 5 days rather than 10 stocks in one day.
--> As you may expect because of the 2 trade rule I use a ranking system to identify the best 2 trades.
-->I will backtest this rule again with different numbers of trades/day

2. Choosing stock environment to trade
--> I decided to go with S&P 1500 because I though it provides enough exposure to smaller stocks which are more likely to have big rises which I think makes a big contribution to porfolios like this
--> On the flip side S&P 500 would possibly be lower risk.

3. Risk aversion and Market filter
-->I am not particularly risk averse. Happy to push boundaries (whether re number of trades/ capital etc.)
-->20% flipper with market filter is relatively risk averse system. When market trends lower you get out of the market very quickly!

4. Currency risk management
-->This is currently my biggest concern about eventually taking this to real life if it worked.
-->In my portfolio I will be tracking value in $US but really what matters for me is final profit/loss in $AUD
-->Should I be reading about hedging etc.

Last but not least would love suggestions from you and others. (Esp over the next 1-2 weeks)

 

[aus_trader]

1. RE: 2 trade rule
-->The 2 new trades per day was a rule I used for a 10 stock porfolio.
-->It actually is not so much about being risk averse but trying to pick the best when you have multiple opportunities

Good idea I think. It's best to scale into the rising market. If you put all 10 positions on in one go, it could be on the last day of a market high. So by putting one or two positions in a day you'll limit your exposure in a market downturn. So in this case you'll put your first position on that last exhaustion bullish bar, but then you'll stop buying as the market has huge down days on the next number of days limiting your portfolio exposure to just 1 position or as you said 5%.

4. Currency risk management
-->This is currently my biggest concern about eventually taking this to real life if it worked.
-->In my portfolio I will be tracking value in $US but really what matters for me is final profit/loss in $AUD
-->Should I be reading about hedging etc.

Fortunately there is less movement in the AUD/USD. It's been hovering in the low to mid 70c area for a long time. It was a different story to the Aussie mining boom/bust days when it used to have massive volatility ranging from 50c to $1 (parity with US$).

 

[aus_trader]

Just to show AUD/USD historical price movement over the last 20 years, I attached a chart:



So over the last 4 to 5 years (2015 to 2019) prices are in a range between 70c to 80c.

 

[peter2]

Your selection of a stock universe may be important. Lower priced stocks do move in greater % swings and they're less correlated to the main market index. Prices of lower priced stocks will mostly move due to company specific news rather than market sentiment. I would consider including all lower priced stocks in the Russell 3000 index with sufficient volume as candidates. They're also good takeover fodder as well.

I wouldn't worry about currency risk too much. It doesn't take very much margin to hedge $50K with 500:1 leverage (US limit 100:1). You might select a level eg 0.75 to buy some AUDUSD.

edit: As this is an exercise why not include a AUDUSD position at the start. You'll gain experience seeing the fluctuations as you go.

 

[aus_trader]

I wouldn't worry about currency risk too much. It doesn't take very much margin to hedge $50K with 500:1 leverage (US limit 100:1). You might select a level eg 0.75 to buy some AUDUSD.

I reckon so too Peter, I think the days of treating Aussie/Canadian dollar as commodity currencies and thrashing them around all over the place are over. I think AUD/USD will be fairly stable going forward unless something major happens like a war breaking out in the US or heaven forbit in our own country !

 

[jjbinks]

@peter2
I have been contemplating your advise to take risks/ get out side my "comfort zone".

I have had a look at broadening options to include small caps and these are some backtest results for few different possible stock lists to choose from.
Testing period is from 2013-2019
These results are without using a market filter.
(Market filter on the whole seems to reduce growth and make draw down worse during this testing period)


Testing further years shows variable results for each index.

The NASDAQ has the most robust results when testing from 2007 on wards.
If I were to trade this system in real life now I would trade the NASDAQ as the results are most robust by a clear margin.
Also the results are not robust or as good when using index with high amount of small caps (e.g. Russell 3000)

Also weekly results seem comparable to daily.
I prefer daily trading for the "control" it gives but given back test results will opt to go weekly.


Update Trade Plans for now
Have 2 weekly systems $50,000 USD each.
1 system will be using NASDAQ index and 1 system (either Russel 1000 or S&P 1500 -->Does anyone have any strong reasons for which one to choose)
Maximum 10 trades per week/per system (i.e. 10 new trades/week total)
Position size will be 5% of capital. I.e. starting positions will be $2500.
No hedging for now as seems a bit complicated for this exercise.

Scripts are ready for trading.
Need to decide on the second index. (Will go with Russ 1000 unless people have strong preference for S&P 1500 or reasons to reconsider other index)
Will post some example trades over the next few days.
Should be good to start this in 1 week!

As always welcome any questions, feedback and suggestions!

 

[peter2]

Well done on doing the research. The decisions on the stock universe to use are easily made with that data.

The results for the R2000 and R3000 seem awry.

 

[aus_trader]

If I were to trade this system in real life now I would trade the NASDAQ as the results are most robust by a clear margin.

NASDAQ which includes the tech giants like Apple and Google has had a really strong run compared to the other markets considered. So the results are in line with what has happened over that period.

 

[jjbinks]

Just an update.
I have delayed starting as I have picked up some issues with my flipper code. (Main issue relates to accuracy of back testing)
I think the code works in principle and probably could be used to start trading.

I am going to continue working on the code and delay starting for another week.
If not I may consider a simple strategy such bollinger break out.

 

[aus_trader]

Just an update.
I have delayed starting as I have picked up some issues with my flipper code. (Main issue relates to accuracy of back testing)
I think the code works in principle and probably could be used to start trading.

I am going to continue working on the code and delay starting for another week.
If not I may consider a simple strategy such bollinger break out.

Take time to refine your strategy jjbinks, it's a lot easier to get it fine tuned at the start as you have less emotions attached to live positions.

 

[peter2]

I'm pleased that you've noticed an error as I thought there was something wrong looking at the back test result summaries.

I spent some time looking at the flipper signals on smaller priced charts. While smaller price stocks move a lot in % terms and provide great winners, a 20% move both up and down is very common in the smaller priced stocks. A normal daily ATR can be 20%. This creates lots and lots of losing trades. A market filter will not filter out enough losing trades. I would suggest incorporating a volatility limit and definitely a minimum volume or value traded filter to reduce the number of losers.

Yes, definitely take your time and only start when you're 100% comfortable.

 

[peter2]

The juices are flowing... One thing that I've always disliked about rotational momentum systems is that the entries are most often too late (IMO). What about combining a flipper type entry with a rotational momentum exit methodology. We fill our portfolio with flipper entries, then periodically (each month) we calculate and rank the rate of change (ROC) of each open position. The open position with the slowest ROC or all positions lower than a cutoff value are immediately sold and replaced with new flipper entries. We repeat this every month.

The flipper entry will get us into a trend early and the rotational ranking will exit all the slugs (the losers and those going sideways.

This idea is a random thought for any of the Amibroker uses who can code it. I'd be interested in the results.

 

[peter2]

Scratch my last post. I've got my work to focus on (US stocks short term) and JJbinks has his.
One random idea can see me fall down the rabbit hole.