MultiStage Exit Analysis… more…

In a past post I discussed the various profit exits and how they impact overall results.  We also use a 200 day simple moving average as an exit, which I wanted to look at this time.  As with the 5% profit exit, there is no magic in the specific MA200 number.  In fact, a good robust trading system should still work with slight variations to parameters like this.  Below is a table showing some basic results for a 200 day SMA, as well as a 100 and 50 day stop.

MA Exit	200	100	50
ROI	265%	237%	205%
Max Drawdown	30.71%	33.32%	35.32%
Sharpe	1.92	1.90	1.97
UPI	45.36	40.09	41.65
Worst Month	-18.6%	-16.7%	-12.5%
2nd Worst Mo.	-15.7%	-15.0%	-7.6%
3rd Worst Mo.	-9.0%	-13.4%	-5.6%

As you can see, there are clear trade-offs with these different parameters.  One is not necessarily better than another, as it depends on an individuals performance requirements or metrics.  For example, if pure ROI is the most important thing then the MA200 has performed the best historically.  But if the worst case losses in a given month are important (a way of measuring drawdown) then the MA50 has performed much better.  These sorts of trade-offs are typical in trading systems. 

Good Trading…

Correction to January Results!!!

I posted the January results earlier today, and discovered that I made a mistake… oops!  The modifications I made to the trading system weren’t put into the daily scan cycle until January 3, but January 2 was the first trading day of the year. 

Put simply, trades from the 2nd were based on the previous version of the model, and I don’t think any were generated.  This might all sound confusing, so let me just net it out for you.  The results were less than what I provided in my earlier post.  Here are the stats based on starting the updated system on the 3rd.

Net profit for the month	9.67%
Total number of trades	34
Average return per trade	1.71%
Win ratio	76.47%
Exposure	24.37%

I apologize for the earlier post, and should have caught this earlier.  9.67% is still a great return for the month, but a far cry from 14%.

Good Trading…

January Trading System Results

I hope everyone had a great trading month!  January was really a breakout month for the MultiStage Trading System.  The two newest modifications have worked out quite well. 

First, we are seeing a lot more trades.  To a certain extent, trading is a numbers game.  If we can identify trades with an “edge”, then more trades is better. And that’s what we are now seeing.

Second, using the 200SMA as a soft stop has also help control some runaway trades. Out of the 41 trades it was only triggered a very few times, but it contained a couple runaway losers, thereby reducing drawdowns.

It’s still very early with the modifications, but so far they seem to be working.  As you can see, 41 trades is a nice amount of exposure, and therefore it really improved the overall model results.  Not everyone will see 14% returns for the month, but I know of some that got very close.  I’m interested in hearing from any of you that care to share your real results. Below are a few of the key statistics:

 

Net profit for the month	14.70%
Total number of trades	41
Average return per trade	2.11%
Win ratio	78.05%
Exposure	20.27%
Total time invested	Less than 10 minutes a day!

Now might be a good time to comment on why our real trading results don’t match the model exactly.  I did an article a while back that is still accurate.  The one category I didn’t mention was “execution”.  Sometimes there are simply execution differences with brokers that cause us to get in and out of trades at different prices.  Aside from that, as the article says, Commissions, Sequencing, Liquidity, and Mistakes are the other biggest culprits.  That said, it’s been my experience that you can get pretty close.

Good Trading…

Exits for the MultiStage Trading System revisited

For subscribers and followers of the MultiStage Trading System (currently version 9 on CalculatedReturns.com), you will remember that one of our three exit types is a profit stop at 5%.  It’s worth noting that 5% is no magic number.  Take a look at the following short study:

As you can see, there are trade offs to moving this exit, and “better” is a function of what you are trying to accomplish.  If getting the highest percentage of winners is important a 3% stop has historically worked out “better”.  If Sharpe ratios are important to you, then higher exits work out better. 

I personally look closely at the Ulcer Performance Index.  This is a number which rewards bigger returns and penalizes drawdowns.  For this number a higher exit, like 6% or 7%, is better.  And for those of you bent on absolute optimization runs, the very best was 7% for short positions, and 6% for long positions.  I suspect that’s a little curve-fit, however, as there really is no “magic number”.

Good Trading…

November Trading System Results

I hope everyone had a great Thanksgiving holiday!  The end of another year is rapidly approaching.

November started our by teasing us a little with some increasing volatility, but things rapidly settled down after the elections and the VIX fell back into the mid-teens.  If you follow the MultiStage Trading System, you know that this makes for some boring trading and very little activity.  Consquently, the majority of our trades (in fact, all but one) were initiated before mid-month. 

As boring as the second half of the month was, we still were able to get exposure up to 19% given the action in the first two weeks.  This enabled the system to turn in a respectable result.  Below are a few of the key statistics:

Net profit for the month	4.83%
Total number of trades	23
Average return per trade	1.47%
Win ratio	65.22%
Exposure	19.44%
Total time invested	Less than 10 minutes a day!

Beginning immediately (first trading day of December… the 3rd) we have modified the system to a new version.  The selection criteria has been improved a bit, but the most important part of the approach is a new exit based on the 200-day simple moving average.  If you don’t follow this new exit your results will not match the back-tested results of the system, although they should be very close to the version 8 results. You can read more about that in the recent posts from last week.

Good Trading…

More MSv9 Trading System Data

In my last post I shared the launch of a significant update to the MultiStage Trading System.  The back-tested results from that post were actually my out-of-sample test, which was from 2012.  Results from the prior 11 years were even more impressive.

	Version 8	Version 9
Max Drawdown%	36.82%	22.81%
Sharpe Ratio	2.95	3.30
Ulcer Perf. Index	66.13	103.97
Worst Month	-16.7%	-11.0%
Annual Return %	297.57%	315.51%

As mentioned last time, risk management is the primary benefit of the update, but overall reward is not penalized for the extra measure of caution.

Good Trading…

MultiStage Trading System Version 9 Coming Soon!

It’s time for an upgrade!  I’ve alluded a few times in this blog, and the SnapTrader blog, that I am working on improving the MultiStage Trading System.  That’s an ongoing effort and will likely continue.  The latest revision (version 9) is a substantial upgrade.  It incorporates some new criteria for the development of signals, as well as a slight change to the exit rules.
Before I go into the changes, let me first share some of the results.  There are a few reasons why I like this version better.  First and foremost is risk management.  Version 9 incorporates a simple dynamic stop that protects us from the extreme downside.  I haven’t been shy about my concern with stops.  For the most part stops have always hurt us, both in returns risk management… until now.
The results show the benefit of the new system by trimming drawdowns, and improving risk/reward measures immensely.  For example, for the 2012 trading year compare the numbers below:

	Version 8	Version 9
Max Drawdown (trade)	35.14%	28.21%
Sharpe Ratio	2.19	2.62
Ulcer Perf. Index	27.67	32.97

It’s pretty clear that we’ve improved the risk management, but what about performance.  I’ve added another row to the table with the total return for this year, through 11/26.

	Version 8	Version 9
Max Drawdown (trade)	35.14%	28.21%
Sharpe Ratio	2.19	2.62
Ulcer Perf. Index	27.67	32.97
Net Profit%	59.51%	58.74%

Now, please don’t get silly and expect you can duplicate these returns.  There are many reasons why it’s virtually impossible to match them exactly, but I’m sure it’s easy to see why I much prefer this latest version to the trading system. There is very little difference in return, yet measurable risk improvements.
The signals for this new version will go live on 12/1/2012.

New Exit

All of these improvements come with a price.  It’s not required, but without using this new exit back-tested results are much closer to the version 8 results.  It’s a simple exit, but does require a daily look.  Here is the rule:
If the stock’s closing price is below the 200 day simple moving average, enter an order to exit on the open for the next day.
That’s it. It’s simple, but it does require you to assess this each day.  I find that the easiest way is to just click through my positions with the 200-day MA line on the chart.  If you have been following the system you will know that there are rarely more than a few positions, so this isn’t really a big time sink.  And again, it’s not required, but without it the improved results don’t test out.
Good Trading…

October Trading System Results

Happy Halloween! It’s time for an October wrap-up the day after the biggest candy eating day of the year. 

Both statistical and implied volatility remained low, as it has been in the past few months. In fact, as I reported last month, volatility is about as low as it’s been in the past five years. This isn’t a bad thing, and in fact has been mostly good for that long buy-and-hold part of your portfolio, but it’s not the greatest for our trading system.

The MS8 system thrives on volatility, so when its slow, we don’t necessarily lose money, but it’s also not very active.  October had a nice little bump in volatility starting around the 19th, and in fact about 2/3 of our trades took place just after this.  Aside from that it was still pretty quiet.

Our overall exposure was about as low as I have seen, at just 9.35% (meaning that’s how much time we had cash in the market). Below are a few of the key statistics:

Net profit for the month	5.87%
Total number of trades	14
Average return per trade	2.54%
Win ratio	71.43%
Exposure	9.35%
Total time invested	Less than 10 minutes a day!

Low volatility means fewer trades.  The average return per trade and win ration was just about typical for the system, so we just needed some more trips to the plate. As I said last month, we could really use some volatility! All in all, it’s hard to complain about a 5% month, however, and if I can do it with only 9% exposure it’s even better.

Good Trading…

September Trading System Results

Volatility continues to be soft, as in recent months.  In fact, volatility is about as low as it’s been in the past five years.  As you can see by the picture below, there are only a couple of spots that have rivaled this one.

Implied volatility isn’t making the future look bright either.  The VIX is also at it’s lowest point in the past 5 years or so:

Why all this talk about volatility? As you may remember from past articles, my own trading model, the MS8 Trading System, depends on, and even thrives on, volatility. All this “calmness” spelled a stinky month for the model.

Our overall exposure was lower than usual, at just 11.46% (meaning that’s how much time we had cash in the market).  Below are a few of the key statistics:

Net profit for the month	-1.73%
Total number of trades	14
Average return per trade	-.74%
Win ratio	57.14%
Exposure	11.46%
Total time invested	Less than 10 minutes a day!

At the end of the day, the small number of trades and low winning percentage tells the story.  With such a small amount of trades, the law of averages can’t work in our favor.  It only takes a bad trade or two to mess up the month, and that’s exactly what we had.  Hey guys, we could really use some volatility!

Good Trading…

August Trading System Results

August volatility settled down quite a bit, so overall results were somewhat typical.  The VIX high-point was the beginning of the month, and it just hovered in the teens from there.

An interesting side-note is that volume in August was down significantly.  The trading volume on most major indices was down 10-15% from last month, and was the lowest we have seen in several years.  Is it the calm before the storm?

Regarding my own trading model, August turned into a nice month for the MS8 Trading System. Our overall exposure was lower than usual, at just 7.55% (meaning that’s how much time we had cash in the market), and we ended the month with no open positions.  Below are a few of the key statistics:

Net profit for the month	6.61
Total number of trades	13
Average return per trade	3.31
Win ratio	84.62
Exposure	7.55
Total time invested	Less than 10 minutes a day!

Most notable was the high win rate. Out of a total 13 trades, 11 (84.62%) of them were profitable. This is much better than our average win rate, so we’ll take it when we can get it.

Good Trading…

NUS trade results…

For www.CalculatedReturns.com subscribers, NUS reached our limit price yesterday and was executed.  I just noticed that today it reached the limit price and we exited according to plan.

Good Trading…

Out-of-sample Testing for the MultiStage Trading System

In the last post I talked about out-of-sample back-testing during trading system development.  As a follow-up I wanted to describe the different out-of-sample (OOS) tests I’ve used while developing the MultiStage Trading System.

I described basic OOS tests in my last post, which might consist of simply dividing test data into different date ranges.  In order to think about applying this to MSv8 (and other versions) it’s important to remember that this trading system has evolved over several years.  I’m currently on version 9, although v.8 is the current published version.

When I first started prototyping this idea I used a subset of the data I had, both by time, and by symbols.  Specifically, I started testing on the NAS100.  This symbol set seemed to reflect the volatility of the market better than the SP500, and it’s small size made it very quick to do optimizations. As far as time segmentation goes, much of the early development was done in 2007, and for a long time I used up to 2002 as my in-sample data. 

The early tests were straightforward out-of-sample tests.  I tested using data from 2003 to 2007, and used all of the symbols in the data base.  At that time I had only about 6000, but it’s since expanded to about 9000.  There was a little debugging to be done after this, so you have to be very careful not to change the way you are filtering data to remain bias-free.

Keeping in mind that OOS testing is really any testing that isn’t done on the original data set, that wasn’t the end of my OOS tests.  I wanted to trade real money, of course, but real money is, well… real money.  I’ve been developing trading systems for many years, and for many years prior to 2007, but I’m not about to part with my hard-earned money without some very cautious observation.  Consequently, my first use of the the MultiStage Trading System (version 1) was simply paper trading.  I traded in a sample account for a couple of months.  Then I started with VERY small position sizes.  In some cases just a few hundred dollars. 

Both paper trading, and these small “test” positions could both be viewed as further OOS testing.  But there’s more: This system has evolved over time.  Somewhere around mid-2008 v5 and then v6 were born.  In each case, I took the new versions and compared them with the old data.  Then I tested them on the OOS data, which was new since the publishing of the prior system.  Also, in each case I went back to the paper-trading model, and then the small position sizes before jumping in with both feet.  In 2009 v7 was developed, and in 2011 I began using v8.  In each case I followed this pattern.

At this point, there has been several forward-looking years of real-time, real-money trading activity, which pretty much puts to rest any concern of data-snooping or curve fitting.  The main point to see is that there are several different safeguards you can take during system development to be sure you are being objective with the data.

Good Trading…

Evaluating Trading System Performance – Part 1

If you Google “Trading System”, or “Trading Signals” you will find an enormous number of websites with services allowing you to subscribe to the signals produced by their trading system.  I’m not opposed to that, of course, as it’s exactly what we do at CalculatedReturns.  And in fact, there are some of these services that are actually reputable and worthwhile.  A few (ahem…), even produce excellent real world returns. I have a pet peeve, however, around how some “less scrupulous” sites choose to demonstrate their performance.

Over the next several posts, I intend to expose the “sum of the trades” approach to performance results.  It just ain’t right! I promise not to be too harsh, as it’s not my objective to be defensive, or sling mud.  My real goal is just to educate those who might not be looking, about how to evaluate system performance for themselves.  Consequently, the names have been changed to protect the innocent.

Stay tuned for Part 2, and the “Sum of the trades SMACKDOWN”!

Good Trading…

May 2012 Trading Results Wrap-up

As I write this, the market has just finished it’s biggest downturn in recent weeks.  Many investors are wondering where things will go, and the global economy, eclipsed by recent events in Greece and the broader Eurozone, is throwing up question marks right and left.  Investors don’t like question marks.

Regarding my own model, May was another average-ish month for the MS8 Trading System… in fact slightly below average.  Our overall exposure was just over 15% (meaning that’s how much time we were invested), and we ended the month mainly in cash.  That being said, a profit is a profit and this is still an excellent one.  Below are a few of the key statistics:

Net profit for the month	4.72%
Total number of trades	22
Average return per trade	1.45%
Win ratio	72.73%
Exposure	15.70%
Total time invested	Less than 10 minutes a day!

There was one massively stinky trade in BVSN, which lost nearly 35% of it’s value.  Those are painful, but a trading system is a strategy that relies on the averages working out over the long haul.  Even with that ugly trade we still pulled out a nice profit. 

Below is a picture of the profit distribution of the individual trades.  This is a pretty typical distribution… well… except for that ugly one on the left.

Good Trading…

Drawdown Doldrums

In a comment on an earlier post, Otto asked if I have experienced the kind of drawdowns I am seeing now in the past.  He specifically asks about backtesting, but I can offer up a similar experience both in backtesting and in real life (yes, that’s with real money). 

The time is October of 2008, and I, along the the rest of the investment community, thought the world was coming to an end.  While the SPX dropped from well over 1500 to a low around 670 during a broader time frame, my big drawdown happened during a short span starting at the tail end of September, 2008 and ending in early October (the Lehman days).  During that time, composed of about 10 trading days ending about 10/10, the SPX lost about 1/4 of it’s value, dropping from 1207 to about 885.

Simultaneously, my portfolio, and you can see here the backtested results, lost about 30% of it’s value from the recent high.  The recent decline has a rather strong correlation to the moves of 2008.  I have suffered a drawdown of about the same size, and the market has dropped just a little less than the 2008 decline, albeit much faster. 

There have been other drawdowns of substance, but this is the only other one I’ve experienced of this magnitude.  The real question before us is what happens next.  Of course I have no idea, but you can see in the picture above that equity recovery came rather fast.  Now, be assured that REAL equity recovery never comes quite as fast as back-tests, and it didn’t for me in 2008, but it did come and I ended the year with a decent gain. 

Will that happen this time.  Only time will tell.  Part of the reason it worked in 2008 was that volatility remained high.  If you’ve read any of my posts in the past you will know that my system does well during times of high volatility. At this point I still believe in my strategy and will continue to trade the best way I know how and with the approach that has worked for me in the past.

Good Trading…

July Wrap-up

Much to my delight, July saw the return of some decent volatility, particularly toward the end of the month.  You can see the VIX chart below (the index that tracks the implied volatility of the SP500), which tells the story quite nicely:

When trading with a strategy which thrives on volatility, this is a welcome site.  Consequently, the second half of July was quite active and enabled my Covestor.com portfolio to end the month +5.92%.  Increasing volatility results in more activity in my account.  If one has an edge in his trading strategy, then more trades = more profit.

Sadly, increasing volatility is frequently associated with bear markets, or strong down-trends.  This was no exception.  The last several days of July ushered in a rather strong correction, which continues into the first few days of August.

You can see that this chart of the SP500 is almost the inverse of the VIX chart.  That’s usually the way it goes.  It appears, that in spite of the debt ceiling debacle being set aside, that investors are starting to show their concern over the state of our economy.

To learn more about how volatility trading systems work in the context of corrections and bear markets, you might read my 6-part series called “Profiting in a Bear Market”.  It’s largely the story of how my MultiStage Trading System – a volatility based strategy – fared during past bear markets and in times of high volatility. 

Part One

Part Two

Part Three

Part Four

Part Five

Part Six

Good Trading.

Updated MSv8 Backtest Results:

Yesterday I published some ridiculous and bogus numbers from what I thought was a valid backtest.  I mentioned at the time that I still had some validation, and I probably should not have posted them until I had done some more homework, but… well… I did.

In any case, they are not accurate.  Once I perform backtests I then validate results by performing walk-forward trade-by-trade testing.  After that I then trade them live in small sizes.  In my walk-forward testing I discovered something called “look-ahead bias”.  It was only in one small parameter, but it was enough to radically skew the results.  Look-ahead bias simply means that you are using data from the future… that which can’t be known at the time of the trade. 

I was using a volatility factor that was reading the data on the day of the trade.  Since the trade is done at the open, I can’t know any of the data for that day until after the day is over, and therefore after the trade is already on.  This is an easy thing to discover during validation, and it is now corrected.

The corrected results are still quite good, but not quite as ridiculous as before.

As you can see, there is still a lot of green, which means relatively consistent profits.  I like that. 

Just to be clear, testing and validation is still not complete.  I just felt like I needed to say something since I published the wrong results prior.  More to come on this.

Good Trading…

MSv8 Backtest Results

A few days ago I mentioned that I was working on an update to the MultiStage Trading System that would provide more market exposure.  The current version is typically in the market only about 25% of the time, which means I spend a lot of time sitting on the sidelines when the market is moving.

This more recent enhancement provides looser tolerances under special circumstances and gives me far more market exposure… nearly 75%.  One of the fantastic developments, however, is that it also works in a very complimentary way to the old system. 

This is not unusual when you attack the criteria from a different perspective, but I have rarely seen it work out this nicely.

These are preliminary results and I still have a fair amount of validation to do, but I like it so far.  In the spirit of full disclosure, be aware that this contains no commissions or slippage.  Generally, I believe these numbers are unattainable for many reasons, but it’s the plethora of green that I’m enjoying at the moment. Consistency is one of the most sought after characteristics of any trading system, and this one delivers.

Good Trading…

Covering My Shorts…

No, this has nothing to do with my attire. 

The market made the expected downdraft and at this point I’ve covered just about all of my short positions. Since the Big Short post the S&P has pulled back about 20 points (about 1.5%), and taken most of the market with it.

As discussed in my last post, I only wish I had taken larger positions.  I had some nice short positions, but never got more than about 20% of my cash deployed.  Oh well, still a decent collection of profits for the amount at work… and in only two days.  I can’t complain.

Good Trading…

A Shocking Comeback…

After feeling completely defeated from the beating I took in May (Thank you PUDA), I was happily surprised to see that I was in the Covestor.com top spot for the month of June with only 4 days remaining.  It’s a tiny consolation after the downdraft, as I'm still not back from the drawdown.  We’re once again on the “gain train”.

There are 170 models, so it feels good to occupy the #1 position once in a while.  And although I didn’t highlight it, if you look closely you’ll see I’m also in the #5 spot.

Good Trading…