Friday, August 29, 2008

3 Lows, 2 Highs

This REALLY concludes my study of 3 Day Lows. This version is unfinished business from Clueless's earlier incubator of the system. The system still buys the lowest close of 3 days, but then exits on 2 higher closes. As expected this is an active system and kicks out almost 1 trade per week over the 280 week test period.
And the results are comparable to out other 3 Day Low models, if you're not intimidated by the frequency of the trades.
Just to tweak things a little bit I added a $65/100 share stop loss. While this increases overall return by over $1000 while reducing avg losing trade $ and max intraday drawdown, it also increases the max consecutive losers to 4, and increases the total number of trades by 50, a substantial number.
Strictly from a practical trading perspective, I'd be inclined to favor the model without the stop.
TS2000i code is below.
Inputs: Len1(3), Len2(2);
If Close = LowestFC(close, Len1)
Then Buy This Bar at Close;
If Close = HighestFC(close,Len2)
Then Exitlong This Bar at Close;
I left the variable Input model intact. If you optimize the system with settings of 2-10 on each Input you might find some (pleasantly) surprising results.

10 comments:

GS751 said...

Nice Work

Trek said...

hi,
great blog, I was wondering what kind of performance can you expect daytrading the QQQQ or IWM as far as an annual rate of return goes if you don't mind me asking?

bzbtrader said...

Trek,
Well (and I'm not trying to be a wise-ass), the short answer is . . . that depends. Depends on whether you're trading the ETFs or the options, depends on your risk management plan, depends on what your income goals are and depends on how you daytrade.
I typically expect 1% return on equity trades and 10% for option trades. This is a general rule and varies from day to day and volatility skew to volatility skew. If you trade 4 times a day, based on system "x" and have a income goal of $500/day and expect to be successful in 75% of your trades, you need to make $ 200/ trade and limit your loss to 100/trade. As far as an annual rate of return for my entire account . . I'm happy with 20%. That may not sound like much but I've got a big pile of cash in CDs and munis and seldom have more than $50K at risk at any one time, and usually considerably less than that as I try to scrap a 20-30% return out of my daily option trades.
Since trading is my sole source of income, I'm more concerned with risk management than aggressively making money. Your goals my be entirely different. I'm also 63 and have dependents to consider so I'm careful how I deploy my resources. I may scale in or scale out of positions, depending on market dynamics, but, as readers who have been with me for a while know, I'm typically one of the first guys out the exit when the market turns. I've left a slug of dough on the table over the years by doing so, but I sleep well at night and am still at it after 23 years.
Hope that helps.

Cucca said...

Hahahaha, what a great comment BzzBubb, EXPECTATIONS!! It's worth a post in and of itself. I've always said, some where in my posts, that I'm extremely happy with 20% a year, it cracks me up to see what you said. Naturally, it all depends on your account size, and your "expenses", if you only have 100K, and need to make 100K to live off a year, you are probably in a world of hurt, but of course, that's just my opinion. I don't know where that 20% came from, it probably just seems like a realistic expectation, with out getting totally stressed out, or more probably, burnt out.
From what I'm seeing on most of the "systems", if you take the "extremes", like over the 90 mark on the Popper system to short, and then buy it back at a higher number, like you could almost make it when it hits 80 down to like 60, your success rate greatly increase's, but of course, the trade total's are cut way down, as well as your total returns. But, that brings up, if you have a high rate of success, should you increase your "risk", hahaha, interesting stuff, I'm working on it, what it has done, is just about eliminate the Q's, they don't test out worth a crap on the systems I'm testing. I've found some things on Wealth Lab that seem interesting for the Q's, I just need to figure out how to translate them to TS.
What's also interesting to me, is how it seems that these particular systems break down, IE, the infamous "draw downs", occurr when the market starts to "trend". The key seems to be, when does the market start to "trend".

bzbtrader said...

Cucca,
Point taken regarding trading range vs. trending markets . . . which is why I've pursued this basket of systems concept. Rob Hanna has a similar approach with his Aggregator model, but being the stubborn cuss that I am, I insist on working out the problem for myself. The 3 fingers system is a great tell for trending markets and my current efforts include merging 3 fingers with Grand Slam, with a couple new wrinkles.
I agree on trading the fringes of these systems to gain a edge. Something as simple as a 1 day delay in the entry (Next Bar), can increase returns significantly. This does not typically work with the exits.
I also agree 100% on your Qs comment. Technically, they don't track anywhere as cleanly as IWM.
What they do is hit the intraday pivots with a high degree of reliability, so my trades in the Qs are limited to gap fades, pivot breakouts/breakdowns and swing trade premium decay based on a 2 standard deviation envelop.
The later is a work in progress that I plan to explore over the next couple weeks with a system I call Gravy Train.

bill said...

Hi,

excellent post.
Can you shed some light on trading this method on option. considering time decay, would it not be more interesting to only trade system which has a quicker exit than 9 day exit.
In case of option trading 9 days would be a long period.

Do you have automated trading setup or do you plan to do it.

Any research how options would have performed in this trading simulations.

thanks
Bill

bzbtrader said...

Bill,
I do trade options based on momentum signals of the various sytems that I profile, and I've discussed how I trade options in many comments over the past weeks. 9 days is a long time to be in an option position, unless your intent is to capture premium decay.
I don't currently autotrade, but one of my goals is to eventually tune a system appropriate for auto trading to free up my time for golf.

bill said...

thanks Bz.

Looking at your different test i would say best one's to trade options would be RSI which almost gives instant(read 1 bar winning trades) gratifications. So you are in range bound market than you can hope to make quick money stasticaly trading options(less premium decay).

I want to do some testing what would you recomend. I have stock fetcher for testing but it can only go back 4 months. any other sofyware other than tradestations.

bzbtrader said...

Bill,
Your testing should be premised on your trading plan. . .trying to minimize drawdown and generate a consistent slope of your equity curve. I'm not familiar with stockfetcher, so I can't comment about it. I assume you're NOT a daytrader, based on your comments.
IMHO, TS is the gold standard for backtesting, so if you goal is to develop trading systems and possibly autotrade them, TS is probably where you're going to end up. That's not an endorsement for TS. I use 2000i with a separate data feed because of some bad experiences with TS customer support. I'll probably give in and open and 8.3 account sooner or later just for the improved testing capabilities.

Cucca said...

Hmmmmmmmmm, GRAVY, I like the sound of that, hahaha!