Reducing Entry Signals

[Nick Radge]

I was trading my first MR system on the day of the flash crash. I was trading at 50% LVR but had no API at that time. I’m unsure what the days result was, but for the month I was -5.71% and for the year I finished +11.08% *8 months) vs the S&P +5.98%.

My answer to these queries is that you should trade with what you’re comfortable with.

If you’re constantly thinking of what will happen, if you’re losing sleep, or if you balk every time a large wave of volatility hits the markets, then you’re trading too high.

Wealth comes from long term compounding – not hitting it out of the park. As a reminder go back and take a look at the long term results fro Dunn or Abraham…slow and steady.

[ScottMcNab]

Len Zir wrote:

Scott,
I agree with you. I am trading my MOC with 4:1 leverage and sometimes I think I am hiding my head in the sand when it comes to thinking about potential catastrophic losses.

For the aussies on the forum I guess…..been thinking more about moc systems…have I really been comparing apples with apples ?….they can achieve nice CAGR compared with other strategies but can only be traded outside of a smsf ¹ …..the after tax returns are pretty similar to those of the monthly (or even quarterly) rotational system with no leverage which seem to be able to be traded in a smsf ¹ …makes me wonder if the 4x leverage is worth the risk….

real benefit of short term mrv would appear not to be cagr so much as diversification for the 2008 type years …..but this based on the assumption that the mrv type system will continue to perform well in the next market event in a way not correlated with momo or TF systems

…the other benefit I guess is it helps give me my trading fix each day..

be interested to hear how other Australian mentorees are thinking about this…also be interested to hear how it works in other parts of the world…(on the basis we all ok with this being some general thoughts thrown across the bbq table by non-professionals on a sunday afternoon )

1: I am not an accountant/financial adviser and anyone who even thinks about making a decision regarding tax based on my thoughts has rocks in their head etc etc

[LEONARDZIR]

Scott,
My MOC systems seems to add balance and diversity to my trading portfolio which is only US. Small sample size but last week the US market had a few down days and my momentum systems went down and on every down day my MOC went up with a nice 2% profit for the week. I am not yet completely comfortable with 4:1 leverage but will stay there for now.

[Nick Radge]

Quote:

can only be traded outside of a smsf

I trade mine through my family trust…

[LEONARDZIR]

Just finished listening to part 3 of Caesar Alvarez’s presentation on mean reversion trading on Better System Trader where he answered listener questions. Somebody by the name of “Rob” (?this forum’s Rob?) asked what he thought of trading an MOC system with 4:1 leverage. His answer was that it was “suicidal” and guaranteed to wipe out your account. He cited what would have happened to an MOC system during the flash crash and the 1987 crash.
Of some interest my MOC system actually made money the day of the flash crash. Nevetheless interesting perspective on leverage. It doesn’t sound like he uses leverage on his mean reversion systems based on the CAGR’s quoted on his site.

[Nick Radge]

Not sure its a ripe comparison. The 2010 event closed massively off its lows whereas 1987 closed on its lows.

I have taken a look at 2010 with my system and assumed I rec’d the worst 40 trades on the day, so worst case scenario. Accordingly the account dropped -4.4%.

Hardly a wipe out.

Again the only way to answer such a question is to test it.

His comment is no more than an educated guess, albeit incorrect.

[LEONARDZIR]

Nick
Did you ever look at your system during the 87 crash?
Len

[Nick Radge]

-44% on the day of the crash. Interestingly enough there were only 32 trades – most likely because many stocks had dropped heavily the day before.

The day prior was -17% assuming all worst positions were taken.

[ScottMcNab]

Did anyone understand Cesar’s response to the question regarding the use of ranking when using buy limit entry orders ?

[LEONARDZIR]

Scott,
It sounded like if he had more signals then positions he ranked in some cases by historical volatility. So if he had a max of 20 positions and had 40 signals for example he would rank all 40 and only put orders in on the top 20 ranked by volatility. At least that was my understanding.

[LEONARDZIR]

Nick,
I suppose I have to ask if the results of your MOC system during the 87 crash make you rethink 4:1 leverage?

[Nick Radge]

Only 8% of my current capital is allocated to that system. So a 44% decline, as painful as it will be, represents a 3.5% portfolio loss.

Obviously other portfolios will be impacted as well.

This question keeps popping up and the answer is always the same: if you’re uncomfortable, then don’t do it.

Getting confirmation from someone else is not the answer. YOU need to decide on what is suitable for YOUR risk appetite.

[LEONARDZIR]

Nick,
Makes sense.

[ScottMcNab]

Len Zir wrote:

Scott,
It sounded like if he had more signals then positions he ranked in some cases by historical volatility. So if he had a max of 20 positions and had 40 signals for example he would rank all 40 and only put orders in on the top 20 ranked by volatility. At least that was my understanding.

Yep….is he using this ranking on the assumption that high historical volatility means they will therefore show the highest volatility on the entry day and therefore be the first to hit the buy limit after the open ?

[JulianCohen]

What I heard, and I’m happy to be corrected, is that he trawls through the backtest and manually checks each trade to see if it was hit in the order he expected. If that’s tru then he is either not doing many trades (which is the case if his RSI is set to under 5), or he’s testing over a shrt period such as a year. Either way it is a truck load of work. So much easier to check to selection bias the way we do it.

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