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Great comments. Trailing stops needed for sure. However I suspect that
once most people have bought a stock they usually have only a few to watch.
Only rank newbies would see a drop, and then hope all the way to the trash
can that it will recover. People in this group would have at least moved
past this a bit and would watch the stick and if it fell back, probably to
beakeven, they would sell knowing from playing with indicators how sometimes
they don't work, and maybe this was one of those times.
Nevertheless, whether a mechanical rule is programmed most people should
have at least an idea in their head to pull the plug. If you haven't
....get one quick.
P
----- Original Message -----
From: <traders10@xxxx>
To: <amibroker@xxxxxxxxxxxxxxx>
Sent: Thursday, July 05, 2001 4:51 AM
Subject: [amibroker] Re: winning system ?
> --- In amibroker@xxxx, "David Holzgrefe" <dtholz@xxxx> wrote:
> > Maybe a few other could run it on there indexes to see if performs
> the same ?
> >
> > an give me some feed back as the results seem a little to good ..
> >
> >
> > Thanks David
> >
> > prevclose = ref( close, -1);
> > signl = iif( close > prevclose , 1, 0 );
> >
> > BUY = CROSS(bbandbot(close, 15, 2),close) AND RSI(14) < 35 AND
> signl = 1;
> >
> > SELL = CROSS(bbandtop(close, 15, 2),close) AND RSI(14) > 70;
>
> > an give me some feed back as the results seem a little to good ..
> >
> >
> > Thanks David
> >
> > prevclose = ref( close, -1);
> > signl = iif( close > prevclose , 1, 0 );
> >
> > BUY = CROSS(bbandbot(close, 15, 2),close) AND RSI(14) < 35 AND
> signl = 1;
> >
> > SELL = CROSS(bbandtop(close, 15, 2),close) AND RSI(14) > 70;
>
> The major problem with this simple system is the huge drawdowns
> between those "winning" trades. Look at the last few months for
> AAPL, Apple Computer.
> The system did its last buy in late May 2000 at ~45, the stock then
> went to 14 in Dec 2000 before rallying. No one should or could live
> with a drawdown like that....
>
> The problem is one that is commonly seen in a simple indicator based
> system. You get the initial trade entry and then the exit conditions
> are not satisfied for months or years. Meanwhile the price goes
> wrong and you are still in the stock. Sure it backtests "well" with
> nice profits and a hit rate in the 70-90% area, but it is a bad
> system.
>
> The thing that most back tests is not telling you is the maximum
> drawdown (maximum adverse excursion) during the trade. Usually you
> are provided data that lists the drawdown from the entry point.
> While this is a useful number in its own right it can mislead you
> drasticaly.
>
> In the AAPL example, price got up to the 63 and change area. If you
> had bought at the 45 price and exited at 55-60 you would have had a
> nice trade. However, once the price got to 63 it went to 14.
> Maximum drawdown for this trade was 63-14 = 49, really ugly....
>
> With this system there is no assurance the price will exceed the
> upper BB with an RSI above 70. Now that may be a good exit point but
> it may never be reached. So, the system needs to have other exits
> added to it until you are guaranteed there will be a timely exit that
> controls the max drawdown.
>
> As an aside, I have not looked at the work done recently by Dimitris
> but I suspect the same problems may be there as well. Several years
> ago I did a lot of work with divergences. They can provide really
> nice entries, but will miss some entries because there may not be a
> divergence. Even worse, they will miss exits because the divergence
> may not occur. So you have to also include fixed exit levels or
> trailing stops or some other exit that will signal for "every" exit
> required. Again I have not had time to look at his work but I would
> look for this possibility.
>
> Bottom line, back testing is a tricky business and one should always
> examine the signals applied to the chart to see if the signal "makes
> sense" by not missing entries or worse, missing exits. Take care of
> the big drawdowns and the system profits will usually be fine.
>
> If you have questions on this, feel free to ask....
> Trader
>
>
>
>
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>
>
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