Posted by Mark on October 31, 2014 at 06:33 | Last modified: April 28, 2015 12:50
Today I continue with presentation of an e-mail correspondence I had with a coach for a nationally-recognized options education company from a few years ago.
I wrote:
> You mentioned 2% rather than 1% so I’d rewrite that paragraph something like
> this: five 20% ROI trades would be required to make 1% on your total account.
> To make 10% you would need 25 trades. To make “far more” you would need 37-50
> trades. This assumes all trades win, however. Some trades will hit secondary
> exits and some trades will lose: some significant amounts. Remember too that
> if you budget for adjustments then your initial risk will be less than 2% so
> many of your winners will actually make less than 0.4% of your total net
> worth. Furthermore, in order to average “far more than 10% per year,” this
> needs to be achieved year after year.
>
> Does that sound realistic?
>
> When I think about books I’ve read on stock portfolios, I know some people
> talk about holding 30-100 stocks for diversification but others think that’s
> bunk. William O’Neil, if I recall correctly, recommends 5-10 stocks.
>
> I think a key question has to address what we’re allocating. Does that mean
> 5-10 stocks divided evenly into one’s total net worth? Should one’s total net
> worth be invested in stocks? There’s the rule of thumb “take 100 minus your
> age” to calculate what percentage of your net worth should be invested in
> stocks. The older you get, the more diluted your portfolio becomes.
>
> This plays into my question about your stated “much more than 10%.” How
> are you going to get much more than 10% if your portfolio is getting
> more diluted over time? If you’re 50% invested in stocks then you need
> to make at least 28% per year on stocks to get 14% on the total account.
> If the rest is cash/bonds making 4% then you’re up to 16% on the total
> account. While 16% is “far more than 10% per year,” only Warren
> Buffett [supposedly] makes 28% per year on stocks.
I will continue with her response in the next post.
Categories: optionScam.com | | Permalink
Posted by Mark on October 28, 2014 at 07:31 | Last modified: April 28, 2015 12:50
A couple years ago I had an e-mail correspondence with a trader (now coach for a nationally recognized options education company) about annualized returns. I want to present that here.
Most of the discussion is contained within the thread so I will add little else. The one thing I will suggest is to pay close attention to the way I analyzed her argument. When it comes to trading, lots of things sound good with regard to profits. Because they sound good, we tend to give them a pass. If we stop and really nail down what these statements mean or imply, though, then the wall becomes a sieve. For this reason, I have categorized this under optionScam.com.
I wrote:
> I object to your claim that “most of the good traders here make far more than 10%
> per year” because this cannot be verified. Furthermore, I would argue that the only
> true performance number that matters is what you make as a percentage of your
> total net worth and that is a number few people who even broadcast performance
> statistics seem to be telling.
>
> What would it take for a trader to make 10% per year? According to many purported
> risk-management specialists, no more than 1% should be risked on any trade. This
> means five 20% trades are required to return 1% on the total account. To make 10%
> on the total account I need to have 50 trades. To make “far more” than 10% I need
> 75-100 trades? Remember too, some trades will lose [lots]. Remember too that if
> I keep cash on the sidelines for adjustments, my initial risk will be less than 1%
> and many of my winners will therefore make less than 0.2% of my total net worth.
> Also realize this needs to be repeated every year in order to average “far more than
> 10% per year.”
She responded by saying up to 2% (not 1%) of the account can be risked on any given trade.
I will continue with my response to that in the next post.
Categories: optionScam.com | | Permalink
Posted by Mark on October 23, 2014 at 04:53 | Last modified: April 27, 2015 10:38
I will complete (for now) this blog mini-series by detailing a few additional backtesting pitfalls likely to misrepresent potential trading system candidates according to Kevin Davey.
The third backtesting pitfall involves limit orders that fill when price is touched rather than penetrated. Davey writes:
> One of the tricks unscrupulous system vendors play is to assume that all limit
> orders are filled as soon as the price is touched. You can recognize this… If the
> method shows trades… bought at the exact low of a bar, and/or sold at the exact
> high…you can bet this game is being played… Of course, the reality is that it is
> hard to buy the low and sell the high. My experience is that… you can probably
> do this 5-20% of the time. The other 80-95%… price has to trade through your
> price to get you a fill at the limit price… This can be an issue… If your back-test
> engine assumes… limit orders are filled when touched, the results will be…
> optimistic. If the back-test engine assumes price must be penetrated to get a
> fill, then the back-test results will… be… pessimistic. I always go with the
> pessimistic approach. My actual results can then only be better
> than the back test [emphasis mine].
The final pitfall Davey describes involves strategies that exit on same bar as entry or have tight stops or profit targets such that a profit and loss exit could occur on the same bar:
> My experience is that it is easy to trick a strategy engine… when entry and
> exits occur on the same bar. This is due to the assumptions the strategy
> engine must make regarding price travel. Usually, the results will be overly
> optimistic when compared to real live trading.
A first goal should be to backtest in a way that closely models live trading.
A second goal should be to trade like I backtest.
If these are done then I have a better chance of developing a trading strategy that will work just as well in real time.
Categories: optionScam.com, System Development | | Permalink
Posted by Mark on October 20, 2014 at 05:40 | Last modified: April 27, 2015 10:19
In my last installment of this blog mini-series, I discussed… well honestly, I don’t know. That was well over two years ago! I am happy to have found this link, though, because now I have some items to add to it.
I just finished reading Building Winning Algorithmic Trading Systems by Kevin Davey (2014). For anyone looking to get into algorithmic trading system development, I would definitely recommend this book. I’ve read a few books on the subject and this gave me a few new ideas that I had not read before.
According to Davey, incubation is the phrase of trading system development where I should wait and watch system performance before I start trading with live money.
One reason Davey doesn’t feel the need to incubate with any real money (even in small size) is because he is careful to avoid certain backtesting pitfalls he feels would falsely exaggerate live-trading performance. The first such pitfall to avoid involves buy (sell) orders that fill at the low (high) of a bar. This rarely occurs in real life, Davey says. Unscrupulous system vendors and naive developers produce strategies that frequently include this.
Davey also makes a point to avoid exotic technical analysis templates like Renko, Kase, and Point-and-Figure charts. “The way these are built from history,” he writes, backtesting fills often cannot be believed.”
Either of these pitfalls could make a trading system perform better in development then they are likely to trade in real time. They are therefore good vehicles for misrepresentation and that is why I have categorized this under optionScam.com.
I will conclude with the next post.
Categories: optionScam.com, System Development | | Permalink
Posted by Mark on October 17, 2014 at 06:23 | Last modified: April 25, 2015 15:14
I have found trading system development to be so individual that I can hardly find anyone interested enough to work with me to do it.
This also makes me realize how limited your takeaway can be as my reader of some of my posts.
Even if I develop and write about systems that I deem worthy, many potential factors may prevent you from trading them–not the least of which is the fact that you would be foolish to trade what I claim to be profitable without replicating the work as part of your own due diligence. My process can be studied and used as a starting point after which to pattern your own work: this is what books have done for me. Only you can take yourself the rest of the way.
It was not my intent to make any grandiose claims with this blog series other than to summarize my experience to date. I originally learned about systematic trading and backtesting as compared to discretionary trading. I then learned about trading systems vs. strategies and trading system development. I purchased what I believed to be the most comprehensive and inexpensive software package and then started to read books. It was at this point that I found different books to have limited overlap. Once I set out on my own system development journey, I edged closer to the holes in understanding that I grapple with today.
I think science can help me understand how the patterns I see in backtesting results correlate with live trading performance. This science will be inherently personal, however: only applicable to my trading concepts and to my trading preferences.
Categories: System Development | | Permalink
Posted by Mark on October 14, 2014 at 07:00 | Last modified: April 23, 2015 11:36
Understanding trading system development as a wholly individual pursuit makes me better understand why my past attempts to organize a system development group failed.
My universe of potential prospects started with the limited number of people worldwide who trade. Out of that, I was looking for people with a significant amount of time to devote to system development, which perhaps necessitates people without other full-time jobs. Out of that I was looking for people in/near the city I live in.
Those meeting these criteria were about to be further stratified by what means I was going to use to find them. I tried Meetup.com, which produced three people. Where else? Craigslist? Twitter? Facebook? Maybe some were locatable through each with the others reachable through other avenues unknown to me.
The remaining handful were ill-suited to work with me because I demanded a degree of open-mindedness, willingness to suspend judgment, and substantial freedom from commercial influence (e.g. trader education companies, affiliate programs, etc.). I also insisted they use my preferred software package since I had already spent 18 months arduously trying to learn it.
But wait: THERE’S MORE!
Other excluding factors were also lying in wait: requisite amount of money to trade, brokerage platform, desired markets to trade, desired time frames to trade, attitudes toward fundamentals or other potential means to generate trading candidates, etc.
The generality/specificity monster was rearing its ugly face again because ultimately, I found nobody to work with!
I will conclude this discussion in the next post.
Categories: System Development | | Permalink
Posted by Mark on October 9, 2014 at 07:23 | Last modified: April 23, 2015 11:14
I ended the last post discussing books as a starting point to learn about trading system development. Different authors use different software packages so immediately what I read has been passed through a specificity filter.
As available information shrunk in the law example I gave, after making a book choice the usable information narrows further due to personal trading factors. If my brokerage differs from the author’s then the same technology may not be available to me. I may also prefer to watch the market differently than the author (i.e. different time frame) or enter orders differently. Perhaps I use contingent orders with a larger offset or no offset at all just waiting for the fill. What if I don’t get filled? These are unables that can affect system results. How do I factor in slippage to the backtesting? Does the author?
Perhaps worst of all for establishment of a system development discipline is the observation that everything discussed in the last paragraph is not even addressed in many writings. Now, I can only gain partial education from books with the rest destined to be completely individual based on my eventual experience. This means system development will be different for everybody. Furthermore, how can I even attain that “eventual experience” before having a complete understanding of system development? Certainly not through backtesting or paper trading, which some experienced traders believe are nothing like live trading.
The upshot of all this is that I will have to do some gambling to truly learn about system development. If it’s not based on a complete understanding then I am trading to learn from my performance. I may or may not have an edge and if I don’t then I am gambling. Who wants to gamble when they can participate in other forms of discretionary trading that can allegedly be taught?
“Forget system development,” the intelligentsia might say, “because I want to hold onto my money.”
Categories: System Development | | Permalink
Posted by Mark on October 6, 2014 at 10:14 | Last modified: April 23, 2015 10:40
Are you familiar with the “Dummies” series of books? I would love to see such a book on trading system development but the truth is that I don’t know if such a book could even be written. That is, System Development for Dummies can’t truly be written because what it is and how to do it vary too much from one person to the next.
I have already addressed subjectivity in system development in some earlier blog posts. Howard Bandy’s books define and discuss the objective function. It struck me that “subjective function” might be a better name after realizing the irony that where system development and backtesting sound like scientific endeavors, since the measure of success varies from one person to the next perhaps there’s nothing objective about them at all.
Some of this subjectivity boils down to a distinction between generality and specificity of knowledge. I can find many general articles on-line about law and the legal profession. If I am trying to find out about something related strictly to Family Law, for example, then the articles will be fewer in number. If I am trying to assess how good one particular lawyer is then I may never find anything outside of that lawyer’s website where the testimonials will certainly be from friends, not foes. Bottom line: the more specific the knowledge, the harder it may be to find it.
Education about system development starts with what I can read in books. Authors of different books use different software packages, though. Use of one software package limits what I can glean from an author who uses another because anything about the programming language, backtesting capabilities, and even system development definitions may be different.
I will continue this discussion in the next post.
Categories: System Development | | Permalink
Posted by Mark on October 3, 2014 at 11:56 | Last modified: April 22, 2015 12:40
Today I conclude a trader monologue heard a few years ago.
“I meet a lot of professional traders: futures, commodities, forex, large private investors, RIAs, market makers, pit traders, black-box programmers, etc. I always ask if they use Elliott Wave. I have always gotten the same basic response: ‘we look at them because other people look at them. Sometimes we look for levels of support and resistance at those levels, but we don’t trade off of them.’
I know there are people who claim success using Elliott Wave but sometimes things work for different reasons.
Jeff Augen did a dirty little trick once. He took random data (using lognormal scale) and presented the data to technicians. They worked their magic and drew their conclusions. He later told them it was all random. Reading that was a seminal moment for me. It really changed my perspective on technical analysis. Augen essentially believes it’s all hocus-pocus. I don’t go that far but I do believe it gets a lot more credit than it deserves.
So… what do I think? I put Elliott Wave much closer to astrology in terms of being able to predict future market movement.
By the way, I am Sagittarius with moon in Taurus and Venus was not in retrograde, which totally explains everything you need to know about me.”
Categories: optionScam.com | | Permalink