Wednesday, January 20, 2010

Fractal Strategy Matrix

Before proceeding with the Project Z posts I'm taking a quick look at the Schwab Strategy Matrix on the SSPro platform. Several in the Schwab active trader group have asked for my spin on this platform feature and over the past week I've been testing it out. Other platforms have dashboards with similar features and the Schwab version leaves a few things to be desired before deploying it as a reliable daytrading tool. What is it good for is tracking a macro view of market momentum. The matrix provides a fractal snapshot of any stock or ETF based on a menu of user selected systems and system settings. Unfortunately, the list of systems available for inclusion in the matrix is rather constrained and focuses mostly on MA oscillators in various forms. The addition of a parabolic SAR and linear regression line/channel would be a good first step in improving the stable of testable systems, and other users probably have their own favorite systems they would like to see added.

The backtesting link is a bit of a problem also as there is no optimization algorithm, so it's strictly trial and error, which can be frustrating. I've solved that problem by replicating the systems in TradeStation, running the optimization function, and then entering those results into the Matrix. Those who have spent much time testing fractal models know that it's difficult to find a system that works effectively in multiple time frames as each time increment has different volatility (ATR) and drawdown metrics. Nevertheless, there's still some value in using the Matrix if only to warn you what NOT to do, as in . . don't fight the crowd. For swing traders, just using the 60 minute and daily bars can provide some useful guidance on short term trend.

One additional bogey using this and other dashboard approaches to trading is that in order to be effective each model should be "tuned" to the beta of the underlying stock or ETF. From an operational standpoint this beta differential translates into the need for several dashboards or Matrices that can be linked with the appropriate underlying equity. For users like myself who trade a very small basket of stocks and ETFs this isn't a big deal. For daytraders scanning the markets for momo candidates and the hot stock of the moment the use of the Matrix incurs a bit more uncertainty and should be used accordingly.

If you want to see how a fractal trading platform looks and acts check out and look at the Quant Trader. This is a stand alone program and is not free, but offers some impressive features. I have no tie to this outfit.

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