Travis’ Journal

[TimothyStrickland]

Thanks for the informative read Travis, read through the entire journal, Nick suggested it. I am building my first system and it will be a momentum based system and I came away with some tips from your journal!

I have a lot of good ideas with multiple systems and aggressive, conservative systems but I gotta build my first one to start. Will be based similar to Nick’s US Aggressive strategy.

[twood4]

Tim,

Glad you got some good ideas. I learned some great lessons going through the mentor course. My main takeaway was that there is no holy grail, but I love the idea of a couple of robust trading systems that you have the confidence in to stick with long term. Best of luck building your systems and feel free to reach out with any questions.

[twood4]

August 2018 Performance:

NDX Aggressive: +7.5%
NDX Standard: +6.9%
S&P 500 Momo: +3.3%

[TimothyStrickland]

Impressive!

[twood4]

September 2018 Performance:

NDX Aggressive: +.8%
NDX Standard: +.6%
S&P 500 Momo: -1.5%

[twood4]

October 2018 Performance:

NDX Aggressive: -25.2%
NDX Standard: -11.4%
S&P 500 Momo: -14.9%

Obviously, a brutal month for momentum systems. While all my systems took quite a hit, I actually feel pretty good about where I sit right now. The beauty of having a tested system was being able to look at previous draw downs. When I ran my numbers for this month, the first thing that popped in my mind was August 1998. My systems all took big hits that month (I believe it was a Russian debt default that caused that one) and went to cash shortly thereafter. After a brief stay in cash, the market went into the blow-off phase of the dot com bubble and theses systems would have captured most of those gains. Perhaps we rocket to new highs in the near future or maybe this turns into a nasty bear….I’m OK with either scenario (and anything in between). Hope everyone else is hanging in there!

[TimothyStrickland]

Travis,

Was going back through your performance stats. I’m curious how you got such a low drawdown over the 1995-recent backtesting period?

My drawdowns were quite a bit higher.

[twood4]

Tim,

I’m not sure what is causing the difference. I would say the one thing I noticed in testing most systems is that the largest drawdowns usually occurred in 2000 around the burst of the tech bubble. Everything had gone straight up so fast that all positions were far away from any exit points (regardless of what kind of exit mechanism you were using). To me this is a bit misleading because of the tremendous performance prior to the drawdown. I’ll happily take a 30% drawdown if my portfolio doubles in the previous 12 months…in fact this is close to what just happened to my NDX Aggressive system. A drawdown after a great run of performance is a classic trend following exit after winning. To me the more difficult scenario is a drawdown taking place after a period of poor performance…..that would be much harder emotionally to me.

I can tell you that my system uses almost identical rules as Clenow uses in Stocks on the Move. My primary change was to use a longer term lookback. One interesting thing I just learned about my system that differs from Clenow is on the exit. In his book, I believe he would exit stocks only if it was under it’s 100 SMA and out of the top 20% ranking (even if SPX was under 200 SMA). My system automatically exits all positions when SPX < 200 SMA end of month. I didn't catch this difference before, but noticed it when I exited positions at the end of October. Not a huge deal, but a lesson learned on something I missed during development. Hope that helps. Travis

[twood4]

With no action in my systems, I forgot to get on and post my monthly update. I’m flat in all systems for November and December.

I’m not sure what everyone else does when in “cash”, but I put all my account into the SHY etf which is basically 1-3 year durations US government treasuries. As a bonus, my accounts are with Fidelity so there aren’t any commissions on buying the ETF. It’s up about .4% since I went cash in November, however looking at historical performance it can really provide some gains in a longer bear market. During most bear markets in US stocks, treasuries do very well. In 2000-2002 and 2008, it would have provided some nice gains while sitting in “cash”. From memory, I believe they were up close to 7-8%/yr in recent bear markets. To me this is a very low risk way of getting some yield while maintaining safety. Curious if anyone else has thoughts on this?

[JulianCohen]

I have tested this on my systems Travis. In 2008 when my rotation system went into cash it added 3% CAGR for the year, as opposed to 0% for the system. Other than that the net results over 2000-2018 was really inconsequential. Not enough effect to make me institute it as a practice.

In effect you end up trading the SHY as it too can go into drawdown.

[Nick Radge]

Quote:

I have tested this on my systems Travis. In 2008 when my rotation system went into cash it added 3% CAGR for the year, as opposed to 0% for the system.

The system backtest without an interest rat variable (best practice) will simply underestimate the total return.

For example, interest for my main ASX trend strategy equates to about 3% of the total return.

[RobGiles]

Nick Radge wrote:

Quote:

I have tested this on my systems Travis. In 2008 when my rotation system went into cash it added 3% CAGR for the year, as opposed to 0% for the system.

The system backtest without an interest rat variable (best practice) will simply underestimate the total return.

For example, interest for my main ASX trend strategy equates to about 3% of the total return.

Where are you putting your cash that’s allocated to the growth portfolio in times like these Nick? You can’t go to term deposits as we may be buying in the short term if the market rallies.

[twood4]

Julian, I agree you are taking slightly more risk than staying in cash, but another factor is inflation. Very possible to show no nominal losses while losing purchasing power. To me, the small risk is worth it. During 2001-2002, my systems would have been in cash almost the entire time. SHY wasn’t available during that time, but 2-year US treasuries would have returned around 8%/yr. Inflation was around 2%, so that’s about a 6%/yr real return during a bear market.

In 2008-2009, I would have been in cash from 1/1/08 until 6/30/09. SHY would have returned 6.4% over that time with dividends included. FYI, I’m using data from portfoliovisualizer.com for these numbers. Meb Faber has written about this and has even shown comparisons of using IEF (7-10 year duration US Treasuries) instead of cash. This provides a bit of performance bump, but also includes more volatility. I’m pretty happy with SHY as a good compromise.

Another thought I’ve seen written about is the safety factor of holding US Treasuries. If there is a systemic financial crisis, I would rather have my cash in the most liquid asset available vs. on deposit with my brokerage. Thanks for everyone’s input

[JulianCohen]

I have been thinking about this for a few hours and decided the best thing to do is to retest it.

I have attached the code I used here in case anyone wants to use it to test their systems. This works on rotational systems, as that is what I am testing here. Basically you need to copy the contents of the watchlist that you normally test on, in this case S&P 500 Current and past into a new watchlist. Then add “SHY” to that watchlist and use that watchlist to test on.

The code just uses SHY at 100% when otherwise you would be in cash. Then you can drill down and see what actually would have happened under these circumstances. You can replace SHY with TLT, or IEF or even GLD if you like to compare buying other ETFs to cash.

I’m sure you guys can work out what bits of the code need to go into your own systems to make it work.

Code:

SetBacktestMode(backtestRotational);
EOM = Month() != Ref(Month(),-1);
score = Ref(Rank,-1) ;//score is the rotational criteria
score = IIf(LE,score,0);

CurrentSymbol = Name();
BondSymbol = “SHY”;
score = IIf(CurrentSymbol == BondSymbol, IIf(!IndexUp, 999, 0), score);

PositionScore = IIf(Year()>=1985 AND EOM,score,scoreNoRotate);
//———————————————————————————

Riskfactor = Param(“Risk Factor”,0.5,0.005,1,0.005);

StockPosSize = Riskfactor*(ATR(20),-1);
BondPosSize = 100;
PosSize = IIf(CurrentSymbol == BondSymbol, BondPosSize, StockPosSize);
SetPositionSize(PosSize, spsPercentOfEquity);

[Nick Radge]

Quote:

Where are you putting your cash that’s allocated to the growth portfolio in times like these Nick? You can’t go to term deposits as we may be buying in the short term if the market rallies.

That exact account is connected to a higher interest savings account. Unlike IB, the money moves automatically between the trading account and the interest account. The interest account, albeit generic, will be investing in short term cash products.

IB will also pay cash on cash amounts. Agreed, not much, but as they require funds to remain in place there is not many other options.

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