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…

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…

Keeping a Trade Journal

One of the habits I’ve developed over time is keeping a precise record of every trade.  I have logged every trade I’ve taken for many years now, and that record has proven invaluable.  There are lots of reasons to create and keep a trade log.  To name just a few:

• It creates discipline:  Great traders have great discipline.  Trading is a mechanic and the trader most often gets in the way when they have poor discipline and fail the execution.
• It creates routine:  Part of my daily routine is updating the trade log.  It keeps my head in the game and ensures that I execute all of the details of my trading plan.
• It reminds me of the big picture:  Sometimes I have a few losing trades in a row and I think, “Why am I doing this again?”  If I survey my trade log over the past year and see the overall gains it reminds me that a few days of losers is just part of the big picture.  Overall my trading rules win, and my trade log shows it.

And now for the Grand-daddy of reasons to keep a trade log:

• It helps me evaluate my plan AND my execution: 

If I start losing, there are only two reason.  Either I failed the plan, or the plan failed me.  The only way to tell which is the case is to evaluate your trade log against the plan. At the end of each month I run a report showing all of the monthly trades (the same ones we publish on CalculatedReturns.com).  Then I compare those trades with my trade log.  Did I take every trade?  Did I enter at the right prices?  Did I exit at the right prices?  Did I correctly set my position sizes.  If I did all of those things correctly I should have replicated the results of my trading system.  Over the long haul the trading system works, but it’s up to me to execute.

I’ve made a sample of my trade log available to Members and posted it here.  You can take it and use it as is, or you can modify it in anyway you’ve seen fit. By the way, even though I've posted this in Excel I don't use it that way or with any other offline spreadsheet, which you could certainly do.  Instead, I keep it on Google Docs (I’m a big fan) so it’s available to me anywhere.  You can also use Docs offline, so you can get to it when you’re not connected.  Finally, here's a short video that will explain how I use it.

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…

Where does the market go from here?

If I were a serious technical analyst this chart might look really interesting… or scary.  The ES (SP500 Futures) has clearly moved into a new trading range, with increased volume supporting it. We are tapping on the pink line of resistance, but the volume has become unimpressive as price has moved up.

Interestingly, if you look at the longer term view, we are now trading in the range where we spent most of 2010.  Should we break below the grey box… look out below!  It’s a long way down.

This morning I entered the market with only short positions, and quite a few at that.  It wasn’t because of this picture, but this sure makes be feel better… and today was a pretty good day.

Good Trading…

Incredible Day Trading System Results!!!

Over the past few weeks I’ve been playing around with the robotic trading system from Think Or Swim called Prodigio.  It’s actually a very cool system and promises to bring just about anyone into the inner circle of system trading.  It allows trading systems to be developed without any scripting or coding and then allows those same systems to be deployed on the Think Or Swim platform, making them fully automated… yes, it’s that cool.

It took me a little while to get familiar, but once I did I decided to tackle a trading system on a different time frame than my normal swing trading style.  High frequency day trading seemed logical, and it wasn’t too long before I had something that looked interesting… or so I thought.  The platform allows you to develop your system and then backtest it, even on intraday data. 

And now the results of the backtest…

What you see below is the equity curve for a simple mean-reversion system which trades on 5-minute bars.  It’s not a lot different than what I do on daily bars, but it’s done much more quickly.  Consequently, profits are smaller on each trade, but I can get MANY more trades.

As usual, this doesn’t account for commissions or slippage, yet at first glance looked really promising.  Just as I was about to start browsing www.YachtWorld.com, I saw something fishy.

And now the other shoe drops…

Take a quick look at these statistics and see if you spot anything that doesn’t look right.  Get it?  Right, 11,264 profit dollars for more than 12,000 trades.  Average profit is less than $1 per trade.  And remember I didn’t include commissions or slippage.  At this point, that feeling of deep disappointment, and “I just wasted a lot of time”, came over me.  Doh! 

I entered 0.005 per share of commission (my rate), and ran the backtest… LOSER!  I tried a few fixes, but at this point I just don’t see how a retail trader can scalp stocks and make it work.  Anyone have any ideas?

Good Trading…

Trading System Performance in September

September is upon us, and for many investors that means, “Put on your flack jacket!'”  September has been the most consistently poor performing months of all time.  I’m not here to write specifically about that, but I can point you to a number of great posts that have already done so:

Woodshedder’s blog on iBankCoin

Michael Stokes’ MarketSci blog

Rob Hanna at Quantifiable Edges

All of these guys have provided great data and evidence about the past stinky results of September, but I wanted to provide a view of what the past results of the MultiStage Trading System has done:

As you can see, the September MS results are nothing to write home about.  Some years September is worse, sometimes better than average; and overall, it’s about a typical month.  Naturally I don’t have any idea about what this year will produce, but in the past the increased volatility (as noted by Rob Hanna) has made up for the declining market.

Good Trading…

Black Swans are More Common

In these crazy market conditions traders often consider how rare events like those in the past few weeks are.  There has been a ton of stuff published about how unique the current gyrations and extremes have been, and many by some of my favorite writers and bloggers.

I thought it was interesting to note, however, the data gleaned by Bloomberg indicating that these rare events are becoming not so rare. This chart tells the story:

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.

SPX Falls Below 200-day MA…

After a couple of attempts at the 200-day moving average (in June), this time the SPX made a bold statement.  Today’s massive close down clearly broke through this common point of support, as well as taking out the recent lows from June.  Not to mention, that’s a heckuva big red bar. 

From a pure probability perspective, so many red bars together – seven in a row - would call for a bounce in the short term.  I would guess we will see it tomorrow or the next day.  But beyond that, “Look out below”!

The markets seem to finally be responding to our country’s dismal economic conditions.  With the debt ceiling crisis side-stepped we might expect a rally.  This massive sell-off in the face of that news tells me that investors are aware of the ugly big picture.  Hold on to your britches.

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…

The Big Short…

I don’t care how long you’ve been around watching the markets, this is getting unusual.

The long green bars – five in a row – are a strange and welcome sight.  Definitely not something you see everyday.  Why so welcome?  Let me answer that question with a question (I know, I’m clever like that).  Do you really think we’ll see six in a row?  Seven?  How often does that happen?

There’s lots of research being done by a lot of smart people in QuantWorld that says we are due for a pullback.  Woodshedder, Rob at Quantifiable Edges, and Chris at My Simple Quant, to name just a few, have all published studies indicating we might expect a little downdraft. 

I don’t do a lot of one-off studies, simply because I don’t have time.  But I will say that my regular systems have me “shorter than a mouse hole”, as they say.  I’ve been accumulating shorts and will likely have more on Monday if that market trends up at all.  My only regret is that I don’t have enough invested and have too much in cash. 

This is NOT a recommendation of course… just an observation.

Good Trading…

Drawdowns in Context

The MultiStage Trading System that informs my trading is currently in a state of drawdown. When this happens I always have to ask whether this is temporary, or if the system is failing. In order to do that I monitor several metrics to see if this drawdown looks like others that have occurred in the past, or if it is abnormal to some degree.

The other day Woodshedder posted a great note on one of the ways he monitors the health of his “Power Dip” system. I like the way he presented it, so I’ve replicated it here for the MultiStage system. It’s a fairly simple measure, looking at the 20-trade moving average of the system over time. I have been tracking this metric for a long time, as you can see on the far right column of the Daily Trade Log, but the chart makes it a little more clear.

In this case I tested for about 12 years. As you can see, the 20-trade moving average fluctuates between 0 and +5.0% most of the time; but the extremes have reached –6.0% and +10% a few times. The current level is at about –3%, which is stretched, but well within extremes set during previous years.

I also track a longer term view, which shows the moving average of the past 50 trades. In this case the extremes are from about –2% to about +7%, with the current level (average of the last 50 trades) being about +1%.

One final note… The average return per trade over this period (when backtested) is about 3%. That is what makes the average return of –3% rather alarming, so putting this in context helps me rest a little easier.

Good Trading…

A Word On Diversification...

Occasionally, when discussing the MultiStage Trading System, people ask about diversification. Do I diversify trades by industry? By sector? How about by market cap? Is there anyway in which I segment and diversify among markets?

First, let me say that the current system I trade is an equity trading system. To some degree it is possible to diversify among equity industries or sectors, but many equities move together, especially during the big swings of the market. For example, there were not many unscathed stocks during 2007-2008, regardless of industry.

I have tested this idea by running the MultiStage System against specific industries and sectors. Ultimately, there was no big difference among them. Some sectors (biotech, finance recently, technology) seemed to be more volatile, but generally the system worked well regardless of industry. Conclusion: today I don't segment trades based on industry.

Also during testing I looked at market cap. I have found that stocks are more "well behaved"... in other words more predictable, as they are from larger companies. The bigger and more liquid the company the more predictable the trading pattern. As a result, I have designed a position sizing algorithm that takes this tendency into account.

So... the short answer to the diversification question is... sort of. I will continue to look at ways to optimize the system regardless of segment, but generally it works well in any market.

Good trading...

SnapTrader Lives...

It's been several months since I've updated the blog, and in fact, even several months since I've posted on this site. I suppose I owe an explanation.

I started the blog in order to share some ideas about my trading, and to better crystallize my own strategies. After doing that for a long time, I felt that there wasn't much more to say. During the past few months while on hiatus, I spent a lot of time better defining by trading rules and strategies. I defined and backtested entries, exits, position sizing, money management, and all position management. In fact, I feel so confident in my trading approach today that I spend only a few minutes per day on the actual trades... now that's SnapTrading!

Finally, there are a couple more items to share with readers. First, while this might shock you, I am trading primarily stocks these days. I still do some options, but this is restricted to 10% or less of my account. Second, I am having all trades and results audited by Covestor. The chart to the right shows the Covestor monitored results. I figure if I want to build a track record, this is a small initial step. There is no fudging the numbers, as they are linked directly to my brokerage account. Also, there is a Covestor stamp at the top of the page as well, which as you can see, indicates my membership since Feb 2010.

Over the next few posts I will fill in some details about my trading approach, rules, and strategies.

Good Trading...

What's up with RVX?

As most of you know I watch the RVX closely. It tracks the implied volatility of RUT, which I trade a lot, so it pays to keep an eye on it.

What you are seeing here is a WEEKLY chart of the RVX, and you can see that over the past couple of months things have really flattened out. I don't know if that means we are just consolidating for another leg down, or if it means nothing at all, but I'm feeling a calendar coming on.

Calendars benefit from time decay, steady prices (assuming they're neutral). and rising implied volatility. If IV doesn't rise, it doesn't hurt us at all, so long as it doesn't completely crater. Given this base it seems like the right move. And it doesn't hurt that I'm coming off of a nicely profitable calendar trade from last month. In any case, stay tuned for an upcoming featured trade, and keep on eye on the RVX.

Good Trading...

I'd like something blended please...

I've mentioned a number of times that I am fond of very precise, quantifiable trading rules. In all of my directional trades I use exacting systems so I don't have to think too hard. They also keep my guided during tough trading times, when emotions run hot and discretionary trading gets quickly lost.

In my directional trades, which might be taken in shares or options, I use a combination of short and long systems, and use several systems. Hopefully, this will describe why that makes sense to me. The first table you see here is one of the strategies I use... it happens to be a short strategy. While its a pretty profitable strategy, you'll notice a fair amount of red in the table. There are quite a number of losing months, and many of the drawdowns are hefty... perhaps beyond palateable.

......

This second table shows what I call my "Blender". It takes several systems and blends the results into something which is far more consistent and far less volatile. In reality, I trade more than the four systems shown here (usually about seven), which causes things to be even flatter; but this should give you the idea. By trading a blend of systems that do well in different market conditions it's possible to produce reasonably steady results from your trading portfolio.

Good Trading

It's All Clear Now...

It's all so clear now... the market is never going down again! The insanity is just toooooo much. Many short term traders tend to be mean reversion traders, some consciously and some just because technical analysis tends to line up with mean reversion frequently. In any case, I am. What that means is simply that as the market gets more and more stretched in one direction or the other, I will place my directional trades with an expectation that the market will eventually revert to the mean.

That all makes this market absolutely crazy for me. If you haven't noticed, today marks the 11th day in a row that the Nasdaq, as measured by this picture of QQQQ, has seen a gain. I might be missing something, but in the 10 years of data that I have on the Q's I don't ever see that having happened. This is a once in 10 year occurrence.

Over the past several days I have gradually accumulated several short positions and am watching them get slowly obliterated. It's always interesting to see something that only happens once in a lifetime, but this is one I would rather have skipped.

Good Trading...