Monday, August 10, 2009

SPX Meets the Double 3s

This is a version of the original Qs Double 7s system. The big difference is that I've applied (and optimized) the inputs for the SPY to cover the time period explored in Friday's VIX % change study.
Michael (an analytical trader and blogger that I greatly respect) had been critical of that post, suggesting that asset correlation studies are inherently flawed and fraught with other difficulties. And I'm willing to admit that may be so . . . to a point.
First of all, trying to forecast anything the markets will do is an exercise that frequently requires the patience of Job, the wisodm of Solomon, and otherwise tests the limits of of one's sanity and capital account.
That being said, it's my intent to explore Michael's contentions in the near future.
Until then. . . .
The systems that I've posted on this blog are part of a research project begun back in May 2008. That project was intended to develop a basket of non-correlated systems that could be used to trade a small basket if stocks. I originally called the project KOP (Kit of Parts) and 2 deliverables from that research were the KOP10 for the IWM and the Qs KOP.
The idea was that by using non-correlated variables such as RSI2, the Detrend, standard deviations, MA crosses, linear regression, candlestick patterns, day of week, relative beta and a few others that a trading model could be produced that would work in both up and down trend markets and in both trading range and trending markets.
This was obviously an ambitious endeavor and I'm grateful for the input and suggestions that the on-going project refinement have elicited.
In the process of developing the KOP component systems I asked myself several questions:
What is the goal of the system?
It is designed as a stand alone system or part of a larger market timing package.
Does the system offer a unique timing perspective on the market?
Are the buy/sell signals in sync with other non-correlated timing models, or does the system offer opportunities to capture trades that might otherwise not be apparent.
Does the system offer unique risk exposure controls?
As I've mentioned many times on the blog, capital preservation is Job #1 in my book and the metrics that I consistently look for in evaluating system performance rank maximum drawdown and max. consecutive winners/losers more so that total net return.
Maybe not your ideal trading plan, but it works great for me. That's just my comfort level.
Does the system provide consistent trade confirmations of other non-correlated systems?
If it does deliver consistent confirmations then I feel a lot more comfortable risking my money using both it and the other related systems in the basket.
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There are lots of other questions that I ask myself in the process of system develop and testing, but these are a few of the biggies.
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Which brings us to today's post.
As with Friday's post, this is jumping off point, not a final destination, so bear with me over the next few days as we explore the potential profits and pitfalls of a simple system that sells a series of recent highs and buys a series of recent lows.
See the exact Tradestation code language by linking to the original Qs 7&7 system above.The optimized settings for the SPX over the specified time period are (3,3,9,10), meaning the system sells and buys 3 day highs and lows and holds 9-10 days. No stops and no other money management controls have been applied.
Were we to test other time frames, we might expect different optimized settings, both for entries and for exits and that one parameter we examine in future posts.
Connors original version of the system included a 200MA entry filter, which I have deleted in an attempt to increase trade frequency and total net return.
In future posts I'll look at several possible system refinements including:
Pyramiding the entries
Optimizing over a variety of time frames and what those differences might mean
The use of alternate exits (OR conditions)
and perhaps most importantly for me. . .
Ways to contract the drawdown

2 comments:

Sweet Tooth said...

BZB,

I enjoy reading the different systems created on various blogs and you seem to have many of value but sometimes I find them hard to follow.

I'd like to understand the rules for the 3 finger lead system (without the use of code) and how you use the VIX 1 min and 2 min bars to predict short term movement as you've commented recently.

Thanks

bzbtrader said...

SweetTooth,
The easy way to understand the VIX crosses is to look in the archives under VIXEN; http://bzbtrader.blogspot.com/search?q=vixen In addition, there are multiple posts in March when I first introduced the little VIXEN.
Regarding the 3FL. . once again, you can run a "3 finger lead" blog search and come up with a dozen or so posts that describe the variations I've explored. For a layman's explantion of the system logic go to: http://bzbtrader.blogspot.com/2008/12/do-opposite.html and read the comments, wherein the code is explained line by line.