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Rudolf,
I'll try to answer them individually below. I hope this makes sense.
Guy
"Suppose you were an idiot... And suppose you were a member of Congress...
But I repeat myself."
-- Mark Twain
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of rudolf stricker
Sent: Wednesday, November 08, 2000 9:32 AM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Taking a little profit
Guy,
On Tue, 7 Nov 2000 11:15:38 -0800, you wrote:
>Our signals are not subjective, we are. :) Just kidding! We trade a
>purely mechanical system for our Intermediate Term Signals and for our
short
>term signals.
Did I suppose your signals to be subjective? This was not my
intention. Just _the combination_ of your STS and your ITS seemed a
little bit "subjective" to me ...
<< Our ITS is purely mechanical. However, we have developed more than one
variation over the last couple of years in working on this signal. Right
now, we have 4 components to our ITS signal, but we recently modified the
weight for the H700 component as it seems to be more in-tune with the market
at the present time. We constantly monitor all four components and maintain
an Excel spreadsheet for each of them and in various combinations. This is
an attempt on our part to apply more weight to the most accurate indicator.
This directly relates to our philosophy that markets are dynamic instead of
static. By this I mean, we have found over the last 50 years or so that
changing market dynamics means you need to constantly monitor your
indicators. We have signals from 40 to 50 years ago that don't work
anymore. We haven't changed any of our basic indicators. What we have done
is change moving average frequencies, indicator weights, etc. The
components of our indicators are still the same. >>
>This Intermediate Term Signal (ITS) is used to trades our equity accounts,
>primarily options. We currently have January 2001 80 Calls which we will
>sell whenever we get an ITS sell signal.
Imo, options should be traded with "high frequency" signals, i.e.
STSs, to profit from their rather high volatility. Otherwise, the time
dilution effects may "hide" too much of the directional effects.
<< We're just starting with options and still learning. Most of our equity
accounts are invested in stocks and not options. For example, my brother
bought some I2 calls @ $12 the other day, and at the end of that day was
down $900. Yesterday, they traded up to over $18 (I think) and he placed an
order to sell them midway in the range at $18. He didn't get off. He
closed out yesterday with a $2,500 profit on paper but today the bottom
dropped out and he's now down $3-4,000. We're just not set up to watch the
markets on a minute-by-minute basis. We place our trades either at night or
on the open following a signal.
I'm going to have to think about using our high-frequency signals with
options. We used to do that, but changed over to this ITS signal for the
following reasons. First, our short-term signal is only 75% correct and we
have absolutely no idea as to the duration of the trade. Our ITS signal has
been running almost 100% correct for the last two years. One of the
problems with this ITS signal is that it does experience significant
drawdowns. By using options, our thought was to try to eliminate the impact
of these drawdowns. Trading actual futures can get a little expensive with
these drawdowns. I hope this makes some sense. >>
>We also use this ITS in combination with our short-term signal used to
trade
>S&P futures. Here we used it to develope our trading rules. What I mean
by
>this is that when we have a longer term buy signal in effect, we bias our
>short-term trading rules to make it a little easier to go long and more
>difficult to go short. Whenever selling against the trend, we try to make
>it a little harder and when trading in the direction of the trend, easier.
>Since we're contrarians, our signals are pretty good at identifying
>inflection points. Anyway. we have found this technique improves our
>short-term trading system by a substantial margin.
That sounds to me very much like the suggestions I made in my last
posting, concerning "rules" to combine ITSs and STSs in an objective
way into one system. - BTW: Do you "optimize" (i.e. out-of-sample
back-testing) the _combined_ system? I found this to be important to
get the best results.
<< We have tried to combined these two systems without much luck. They each
march to the tune of a different drummer. They are both profitable signals
but don't appear to complement each other. We have decided to keep our
signals separate and trade them separately for this reason. We trade
futures based on our Short Term Signal and trade our equity accounts with
our ITS.
We don't really do optimization in the MS sense mainly because we weren't
able to get our ITS running in MS, and it would be too difficult to do by
hand. We do back-test our signals for at least 5 years (using an Excel
spreadsheet but doing the evaluations by hand) and when we develop a new
indicator, weighting factor or signal, we paper trade it for anywhere from 6
months to 2 years. We did use MS and its optimizer for testing some RSI and
BB stuff that we tried to combine with our STS (which does runs in MS).
We've never used any of those results for trading. I guess you can say we
are anti-optimization. By that I mean we do this sort of testing by hand.
This probably stems from the fact that we started way before there were
computers or even calculators, unless you call those old electromechanical
monsters made by Freiden calculators in the late 40s and early 50s. In
terms of optimization, I've never really trusted any system where the rules
were backed into. I guess we're just old (fashioned). :) We've been
automated and running on computers since 1960-61 but only for actual trading
purposes and some back testing. Again, when we back test, we transpose the
answers to an Excel spreadsheet and then develop our trading rules manually.
>>
>Right now, we are trading on the cautious side because of the election and
>other uncertainities and have decided to not trade against the "trend" (our
>ITS direction).
So you make a kind of "subjective use" of your ITSs? - Couldn`t this
undermine your TA-based approach, because it would be necessary to
include this "subjective use" into your "system optimization"
procedure to stay on solid "TA ground"?
<< I have to agree with you here. We usually never make subjective trades
with our STS and when we got our sell signal for yesterday morning, decided
to just go to cash. Using 20-20 hindsight, we should have gone short. :)
Because of the election and our different signals, we decided to play it
safe. We normally don't do this, but have done it for our last six trades.
On those three sell signals, if we had traded them, we would have made a lot
more money (2 winners out of 3 on the sell side, while all three buy signals
were profitable). We will probably quit playing these games and go back to
trading our STS on its own.
> Our ITS signal is currently running 100% correct for the
>last 2 years (we changed some weights in the past year) while our
short-term
>signal runs 75% correct (for the past 15 years).
I wonder, how do you measure "xxx or yyy% correct". - Can you give
some hints?
<< In determining percentage correct, we usually run our calculations on a
calendar basis. Granted that skews the results for the first part of a
year, so in that case we usually just keep running the prior year into the
current year. This gives us our success rates for anywhere from 4 to 18
months. Now, we determine our profitable percentages as follows (all done
in Excel since we manually enter each days O, H, L, C, our indicators and
actual trades into a spreadsheet):
We count the total number of trades for the time period in question. We
also count the number of trades where the results were profitable (>0) and
count the number of trades where we lost money (<0). Since we are using
actual fills, we ignore slippage and commissions (preferring to subtract
these later). To determine our profitable percentage we divide the count of
the number of profitable trades by the total number of trades. That gives
us our profitable percentage. We then total all of the profitable results
and the negative results. This gives us gross profit (in points), which we
multiply by the point value. We calculate the total loss the same way.
Subtracting the total losses from the total profits provides us with our net
profit (before commissions). We then take the total number of trades and
multiply by $20 (which is actually higher than our actual cost) and subtract
this from the gross profits to determine our net profits. We do it this way
since our commissions are less than a half point, so to keep it simple, we
just subtract it as a lump sum at the end.
We also keep tract of our average profit per winning trade as well as our
average losses per losing trade just to get a feel for what's going on.
Since we're using an Excel spreadsheet, these calculations are automatic
whenever we enter a trade.
I hope this explains how we come up with our numbers. Our short-term signal
usually averages around 26 trades a year with an average of 75% profitable
trades for the last 15 years. Our longer-term signal (ITS) had 57 trades
between 5/98 and 9/00 with a 92.98% profitability.
Anyway, I hope this explains some of what we do in a little more detail. >>
mfg rudolf stricker
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