Tuesday, August 19, 2008

IWM basket update

I probably should have called yesterday's post the "rewards of risk", rather than the "price of risk", but as a guy who's always got one eye on the exit door in these volatile markets, the later seemed more appropriate.
It's been a while since I updated the fractal trading model using Elder's 1:6 time ratio, so this is a short term performance check. Recall that this is part of my BASKET OF SYSTEMS approach and this vignette examines 4 oscillators (RSI, Stochastics, StochasticsRSI and %R, long and short) tested on 500 bars on 10& 60 minute and daily bars.
Parameters of each system are defined in the name of the system, although (depending on your platform) the %R indicator is often formatted as a - value.
No stops are applied to the current test model but, as shown in previous posts, a simple 3% stop loss can drop the negative open P&L significantly.
My basic goal to achieve a higher return than buy and hold, and to protect those returns continues to hold with this update. The big gains are, as expected, with the daily bars but, when considered in relationship to risk reward /time, the 10 minute trading approach becomes more attractive. My MO continues to focus on daytrades (5 and 10 minute bars) while utilizing the larger fractal time frames to gauge the probability of short term momentum and to identify likely cycle pivots.
For newer viewers of the blog, the system testing posts over the past few months are part of a larger program to develop a trading model which includes both a basket of systems and a basket of time in order to manage risk.
One of the themes I've mentioned several times focuses on "what to trade". While many traders utilize a variety of scanning tools to define leaders & laggards in RS, momentum, volume, breakouts, etc., etc., my trading is almost exclusively limited to the Qs and IWM. While scanning can yield dramatic returns, my goal is simply to generate a relatively predictable (always a dangerous word when trading) revenue stream with muted risk . . . and the basket of systems and time is one way to accomplish that end.
Since I started running this month's system series on the IWM I've received numerous emails from traders telling me how impressed they are with the IWM's technical alignment properties. Join the club. And I have to be amused by my buddy the Clueless Q Trader, who's now morphed himself into the Clueless IWM Trader. Since my trading vehicle of choice is options, the relatively recent switch to penny spreads on most strikes, combined with a robust open interest 5 strikes in either direction of the ATMs provides some very attractive spread position opportunities in the IWM.
Worth a closer look IMHO.

1 comment:

Cucca said...

Morph Smorph, ya gotta do wad ya gotta do! The darn equity curves are so much better on the IWM than the Q's, even an unchangeable rock head like me has to start thinking about a little change now and then.