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Hi Jerry/others
Since your reference is to stocks/indices and I have some experience here,
some observations:
>most of my ideas make consistent profits in bull and bear markets with
>very little peak to valley equity drawdown WITHOUT commissions, but as
>soon as commissions are applied, the equity gets eaten to death in the
>sideways markets.
It may therefore help if
a/ Your systems take you out of the market as a sideways market develops.
b/ Trading frequency is reduced, in that you take a trade only if 2 or 3 or
more signals with the same directional bias occur on the same security - as
a Darwinian "elimination of the weakest signal" approach.
c/ Profit per trade is increased as a criterion for trade selection.
If your commissions (on stocks, say $60 RT at Schwab and around $40 RT at
e-trade) are causing your profit to decline, there isn't enough juice in the
patterns the system is choosing. Thus eliminate signals that yield anything
less than a potential 6 - 10 dollar move in the stock. If this is difficult
to forecast, use trend following to reduce your trading frequency. I know
both situations are possible to execute.
d/ Alternatively, choice of instrument should be changed from stocks to
options, which enable you to use leverage (figure $100 RT commission - but
higher ROI per point move in the underlying stocks).
>1) Do Mechanical Systems work for a small account ie.$12000?
> Some of my systems work great if i were trading big money with low
> commissions.
Yes. The type that work best involve the elements laid out above. Choice is
yours - trend following or volatility breakout or the use of options.
>2) Does anyone here trade pure Mechanical, or do most mix Mechanical
> with other techniques? It seems alot of traders use elliot/fib which
> are excellent techniques but impossible to mechanize, am i wasting
> my time/ missing half of the profit if i try to go pure mechanical?
No - I believe there were a few posts re an evaluation of pure mechanical
system performance on this list. I believe the author was John Cappello.
Purely mechanical systems work, but you still have to take the go-no go
decision yourself. You probably will have greater confidence if it was a
system you built and tested and learnt from to improve its performance.
Elliott/Fib are subjective and need the expertise of the subject watching
those patterns evolve or those ratios develop as support/resistance.
Intuitively they should not be mechanised.
>3) How much history do i need to test properly, 25? 50? 100 years?
For stocks: End of day: 10 years or more gives you sufficient testing to
eliminate the weaker systems. Then the remainder needs to be tested on data
going back as much as you can lay your hands on - to evaluate performance
during the 60's, 70's and the 20's-30's - which were "different" markets.
For indices: Ideally test the Dow from 1914 onwards, which has all sorts of
events logged. The Dow calculation changed in 1914 so data prior to that may
not be any use.
>5) I've developed a system that works very well with one of the DOW30
> stocks with consistent equity growth over 15 years including the
> recent downturn. The system does not work on the other stocks.
> Is it reasonable to have different systems for different stocks
> or will this system eventually fail? Should a good system work
> across all markets?
Perfectly reasonable. Each stock has its own behavioual impulses - eg A
system that picks a a copper mining company's stock in the late 1990s cannot
be used to compare against a system that picks DELL in the late 1990s.
Underlying factors are different, and the market knows that - thus the
market prices the movement of these securities differently in terms of ATR,
volatility, and lengths or lack thereof of trends - all of which have direct
impact on your trade's volatility.
To force a system onto predicting a stock's price behaviour would be like
trying to force a square peg through a round hole.
Ultimately, any system's goal is to maximize the profit from that underlying
stock - so whichever system harnesses that energy the best for each stock
should be implemented - as much as your account can handle without diluting
the profit impact of the capital used. For a $12k account without the use of
options, I don't think you can be in more than 2 or 3 securities at any
single time - even if you used margin.
>6) this is kind of a weird question, if a system could be made
> consistently profitable by lowering it's commission costs(stocks),
> could a similar result be attained by using the system to trade
> ITM options?
Only as long as they had a long time to expire and/or there was not much
time premium built into it. One does find some, but one needs to look for
such options.
Regards
Gitanshu
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