Thursday, August 06, 2009

Qs Lazy B Revisted

This is a followup to Tuesday's post and the use of linear regression lines and slopes to help time market momentum.
TopTick had noted in the comments that it looked like both of the faster slopes had to cross the slower slope concurrently and questioned the validity of such an approach.
Above is the TS chart of the 6 trades showing exactly how the entries and exits transpired.
Even though the inputs for the long and short sides were somewhat different, the trades essentially resolved into a switch and reverse context.
Keep in mind that this study was only intended as a tangent to Michael's investigations and reflects just another attempt on my part to develop a basket of systems (begun back in May of 2008) to forecast market momentum and direction in an effort to protect my longer term capital positions.
While some may find fault with the execution on the system, the trades (and minimal drawdown) speak for themselves.
After Tuesday's post I reran the system with pyramiding turned on (shown below), which effectively increased the total number of trades to 18 and increased net return almost 300%.
I also made the system a pure switch and reverse and adjusted the inputs to 10,12 and 44. It turns out that the system performs almost as well with only the 10 and 44 inputs so I have to question the need for the confirming second fast slope crossover and will explore that further as time permits.
The big negative with the pyramid approach is that by scaling in to the trades you're ultimately committed to a 500 share position at various points, thereby increasing your overall risk exposure substantially. The plus side is that much of that extra capital is not exposed for the same period as in the original study.
This then becomes a matter of comfort level with the reliability of the system and the willingness to capitalize it. From my own risk management perspective I would focus on the original system and use others such as the 3 Finger Lead and Reverse systems for trend confirmation before adding capital to the original position.
The 3 Finger systems have proven robust in both up and down trending markets and those that lurk around the Market Rewind chat room where I hang out a few days a week, know that the intraday signals of the 3 Fingers have proven to be consistently reliable forecasters of the Qs short term direction.

1 comment:

Tom said...

After eyeballing a 3 ma system, I expected two shorter periods crossing a longer one for entry, and the shortest crossing back on the mid length to produce good results, but in testing I found the 'harder to exit' positions held up best - the mid and longer periods were most relevant. I'd guess your shorter period is usually on the right side of the mark if the mid length is, making it unnecessary (just a guess). There are a ton of ways to increase returns, but reducing drawdown is the most valuable thing, good to see your preference is along those lines. Got to test me some linregslope action, thanks for the ide-ers..