Australian (ASX) Stock Market Forum

Dump it Here

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Let's for a second concentrate on the Risk-Reward Ratio
When we start evaluating a strategy we are really seeking the answer to one simple question & that is "how do we measure" the success of a strategy?

As traders, we are all seeking consistent returns
I’m not going to talk about those just starting out, who typically trade on news & gut feeling as "during this stage", they don't know any better. The major hurdle when starting out is "what to buy" without any consideration for selling. I've been there & I guess most others have as well.

Some trade on fundamentals, some trade on technicals
I trade using 100% Technical Analysis as it’s the only way I seem to be able to make money. But I do believe if you are comfortable trading one method over the other & it gives you an edge, it's the right method for you.

Skate.
 
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No matter what gives you an edge risk management has to be in the mix
Adding prudent money management when you are trading with an edge, is imperative for long-term success. Capital preservation is ultimately your primary goal when it comes to investing your hard-earned cash.

Understanding the significance of the risk-reward ratio
Trend Trading has a low success rate. Personally, I think it should be higher, much higher, but what I think when it comes to trading is irrelevant. My trading success rate is no better than a coin toss, sometimes, well most of the time, it's even lower. Having a low success rate of winners between 40% to 45%, means only 40 to 45 out of 100 trades end up in profit. This is why the “Risk Reward Ratio” is such an important metric.

When I first started "trend trading"
I thought the results were "pathetic" but with the passing of time, my trading account doesn't agree, at all.

Skate.
 
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The Risk-Reward Ratio
Simply stated, this is the ratio of potential risk & potential reward of the trading strategy. You can take it from me, the "higher" is better.

The Profit Factor
The profit factor is a popular performance metric & is simply the ratio of the profit of winning trades divided by the loss in losing trades. As with the R&R ratio "higher" is also the better.

The Risk-Reward Ratio & The Profit Factor
By increasing both these two ratios, I'm confident strategy improvements will flow.


R&R.jpg

Skate.
 
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To achieve meaningful results, "make the backtest count". There are always some do's & don't when it comes to interpreting the results that I wish to touch on. Don't fool yourself by backtesting using compounding. It may look good on paper but "reality" goes out the window using this method.

Let's make a backtest accurate, constant, believable & achievable.
We do this by making sure that you use fixed-position sizing for the calculations when backtesting to eliminate the effect of compounding. By eliminating the compounding effect, the results will be more believable & in my opinion achievable.

The posted equity growth of the standard WTT
The reported results from 2012, didn't look too shabby until I noticed the "Compounded Open Equity" disclaimer.

REPORTED .jpg

Non-compounding results of my version of the "Original WTT Strategy"
The backtest period is from 1/7/2012 to the end of trade yesterday (29/7/2022). It's very obvious that this strategy performed badly during the COVID crash & didn't perform all that well in 2021. The current results for this calendar year are also lackluster, (2022). But to be fair that's trend trading for you.

Without compounding
Using a fixed dollar amount for position sizing (20 X 5k positions) the results I achieve aren't too shabby being 13.92%. Admittedly it's a long way from 20.5% but overall "not too bad".

Realistic Statistics.jpg

Would someone kindly post their results?
For those who have the WTT turnkey strategy, I would be interested to know the "real" non-compounded returns rather than the "hypothetical" non-compounded returns that I have posted just for comparison. The backtest period I've used is from 1/7/2012 to 29/7/2022.

Skate.
 
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@Skate I don't actually agree that you can compare the annual return the way you have done here. I am sure I have mentioned this before. If you are using a fixed position size I also assume you are using fixed number of positions. So what happens is the equity grows but your exposure gets less and less over the years. The exposure figure shows this effect also.
For the fixed position size run, at the end of your test the equity is 370k but you will only invest 100k.
To see what I mean do a run say for the years 2020 and 2021 as single year runs. The annual return will show as a lot larger because you are fully investing.
I understand that compounding is unrealistic, but the longer term fixed sizes are as well.
 
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I am sure I have mentioned this before. using fixed number of positions. So what happens is the equity grows but your exposure gets less and less over the years. The exposure figure shows this effect also. For the fixed position size run, at the end of your test the equity is 370k but you will only invest 100k.

@investtrader you have mentioned this before. During the strategy development phase, backtesting allows you to compare & contrast the metric with the changes made.

I don't trade using the backtest portfolio
In saying this some do, but it doesn't allow me to pyramid to overcome the exact scenario you have explained. I trade using the Exploration Analysis function that allows me to code in those calculations. Also, I can make the report as pretty or as detailed as I like.

How do I rebalance?
In a nutshell, rebalancing is a simple way to adjust the size of my next bet. Position-sizing (the bet size) uses my trading Bank balance feed to calculate the size of the next bet or series of bets. It's simply a way of putting every dollar to work by reinvestment the profits.

Skate
 
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How I actually trade
I use my "Trading Bank Balance/Outstanding Positions" = new "Position Size" the new bet size. This will now be the new bet for each & every pending trade. The new "Position Size" also calculates the number of shares to buy in the pre-auction. It couldn't be simpler.

Parameters (example)
The CBA Trading Bank Balance is $10k & I need one position

Starting BANK BAL.jpg


The Exploration Analysis
Using the parameters from the above produces the analysis below. All I have to do is follow along. Buy the number of shares @ the "buy offer" to be placed in the "pre-auction". The columns are in the same order as the CommBank order form. The colour coding denotes a buy or a sell. The exit colour denotes what generated the exit. In this case, it is a stale exit.


Starting BANK BAL 10K Buy offer.jpg

Skate.
 
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How do I allocate profits?
By pyramiding my position sizing. The great part about this method it also calculates & adjusts the position size even when losses are incurred. The example below is simple & can be calculated in your head, ($30k/2 positions = $15k position size). But calculating the number of shares to buy in the pre-action isn't so easy.

Parameters (example)
The CBA Trading Bank Balance is $30k & I need "two positions"

30K BANK BAL 2 positions.jpg


The Exploration Analysis
Using the parameters from the above produces the analysis below. All I have to do is follow along. Buy the number of shares @ the "buy offer" to be placed in the "pre-auction". The cost column denotes the "maximum investment cost" buying the number of shares at the "buy offer".


Starting BANK BAL 15K Buy offer.jpg

Trading my way
There is no thinking on my part, I just follow the signals. Being lazy comes easy to me & I believe I'm the master of this craft.

Skate.
 
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In Summary
@investtrader, I trust my explanation goes somewhat in explaining the way I use the Ambroker Backtest feature as well as the Exploration Analysis modes. There is a way I backtest when I'm in the strategy development phase, then there is another backtest procedure I use for strategy evaluation.

Then there is the way I actually trade
When I want to know what to buy or sell on Monday, I push one button & Amibroker does the rest. In the previous post, the uploaded capture displays everything I need to place my trades in the pre-auction.

But that's not all
Other than generating the signals there is much more the Exploration can do & it handles it with ease. I coded all the reports generated by the Exploration mode for me to understand everything at a glance. The way I have coded the Exploration Analysis mode, not only does it add value to my trading but I can use it in so many different ways.

The Exploration analysis mode
This mode can be as simple or as detailed as required. I have 5 separate Exploration modes that handle all my requirements.

Explore.jpg


I like charts that talk to me
I must admit I like them pretty. They all have to have a two-stage header with all the details of the share on display. The stock ASX code & name is a must. The other information is vital so I don't have to move away from the chart.

Chart.jpg

Skate.
 
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XAO up and up. Most index filters switching on now?
probably mine on this morning but bitten hard by the fall of one of last week entry so not so rosy.
If not for system i would be running for the bomb shelter and liquidate all my profit toward cash...
 
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probably mine on this morning but bitten hard by the fall of one of last week entry so not so rosy.
If not for system i would be running for the bomb shelter and liquidate all my profit toward cash...

True systematic traders have managed to nullify most of their cognative biases.

Helps not watching the news - the advice from the talking heads (with perfect hindsight) will not make you money.
 
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True systematic traders have managed to nullify most of their cognative biases.

Helps not watching the news - the advice from the talking heads (with perfect hindsight) will not make you money.
That's why i am still following my systems..overall much better than me in determining when to get in or out.
FWIW , while my buy stops filter are now released , i remained relatively cash heavy system wise, and the systems playing the overall market volatility are still undecided: bear or bull.
Time will tell
 
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The markets giveth & the markets taketh away
When you design a trading strategy, there are usually one to two key components that the strategy depends on for profitability If you do not know what they are, then you do not really know your strategy. With any project, you must have a desire & commitment for the process to have any chance of success.

Discipline
Emotions are to be considered the bad guy when it comes to trading. This villain will hijack your thinking, hindering your trading. When your money is on the line this is when trading gets real serious. Tough times are often the time a strategy is quickly abandoned. Commitment & focus on the long term is more important than focussing on the short term price volatility.

Skate.
 
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The Strategy Development Process
If we are to have any success trading, I maintain you will need a well-planned mechanical system to keep those pesky emotions in check. A mechanical strategy is nothing more than an idea, mathematically coded.

Backtesting
This testing is just the initial step in a long process to determine if the idea is good, bad, or indifferent. Being able to examine the metrics of a strategy is far superior to relying on your emotions when entering a trade. Trading a mechanical system will provide a much more solid foundation for successful trading.

Skate.
 
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Mechanical trading will not overcome emotions
Oh, what a day makes. Rolling in dough yesterday only to wave goodbye to it today. No matter how you trade there will always be an emotional side. However, after a period of trading, you will be able to gain confidence, the main ingredient needed in this game. Accepting price fluctuations & losing money is a natural part of this game & will go a long way in checking those emotions. There is nothing worse than doing the wrong thing at the wrong time. I know it's hard to keep following signals, but doing so has its merits in the long term.

Mate, you have to have the cash
Those new to system trading, normally fail to have a degree of cash behind them starting out. Without an excess of cash, it will bring even the most committed to their knees. I’m just saying, you need a decent bankroll to endure the inevitable system drawdowns. It is not unreasonable to expect a perfectly robust trading methodology to exceed its maximum historical drawdown percentage by a factor of two. More often than not, this will happen sometime in the future & when you least expect it.

Skate.
 
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Timing Implementation
Timing is probably one of the most important factors when it comes to trading a mechanical system or re-entering after a short break. It is critical that the performance of the tested strategy accurately portrays backtesting as reasonably possible & if it doesn't it's your job to find out why.

It serves no purpose
To historically test a mechanical system & then not execute the strategy signals according to the same rigid standards when trading it live. Don’t concentrate on your emotions when placing a trade just execute the signals with precision. You can take it from me, traders who focus on executing the signals in a nonbiased way will be able to handle what the markets give.

Skate.
 
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Presently tracking the SPX on the daily chart. Price was just shy of the Projection Range. No sell signal presented yet, I suspect we might get one last move up before it is. Time will tell, but even if price enters projection range that is not justification to sell without confirmation first. If so is this the end of the rally? Not sure but it will present a good sell move down in any case.
 

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There is always an alternative to the original
Covers of original songs are mostly disappointing as it's never the sound your mind is expecting.

Roy Clark - Folsom Prison Blues
This guy in his day was big because his performance always came with a "twist". Admittedly it's hard to think you could listen to one of Johnny Cash's songs sung by someone else & enjoy it. (forgive the quality)



Roy Clark & Buck Trent - Dueling Banjos
The first time I heard Dueling Banjos was from the movie Deliverance. I'll never forget that sight & sound. Well, once again Roy Clark is "twisting it up". I found it enjoyable to watch. (forgive the quality)



But sometimes "twisting it up" can have surprising consequences
It's the same when any of us try to improve on a solid trading system, sometimes the results are not what you were expecting. There are times when there are improvements but most times there aren't.

Skate.
 
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Amira Willighagen - 2014
This genre is not for everyone but the sound is so angelic. It's hard to believe Amira who was 10 at the time, she has never had singing lessons, learning the song from listening to YouTube. Simply remarkable & soothing.



Skate.
 
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