Friday, May 23, 2008

Friday updates - short side component

For today's update of the IBD20 we'll look at the short side component of our little RSI study. The RSI value of the trading system is slowed from 3 to 4 based on backtesting studies that reflect a more robust performance with RSI4. Since many of the IBD20 components have suffered in the recent decline, the advantage of including a short side factor is clearly evident by comparing the Buy and Hold P&L versus the Trade Profit $.
As we work towards compilation of our trading system model, we have now added a stop loss on the long side and a short side component.
Now there are several tactics that need to be examined before we can deploy these various trading conditions to help maximize returns and minimize drawdown.
Remember, my goal is to utilize this system for daytrading on 5 and 10 minute bars. Other traders may be focused on different time frames for any variety of reasons. . .but this is where I feel comfortable. The testing framework explored in these posts may or may not fit those longer time frames and results may vary significantly, so be advised.
One approach is to simply deploy the system with a long and short side component with fixed or trailing stops.
Another approach is to assess the market trend based on a longer time frame and then ratio trade size to follow the trend. That is, long trades in an uptrend, short trades in a downtrend. One of my early mentors was Alexander Elder (Trading for a Living, Come Into My Trading Room, Entries and Exits) and he frequently suggested using a 1:6 ratio of time to bias trading direction in order to catch the trend. Based on that concept the trend position of the 60 minute bars will bias the type and size of our trades on the 10 minute bars. Following this bias should help reduce drawdown.
I'll explore this concept further in next week's updates.
I've added the short side to the XLE component update study as well and, as expected the Buy and Hold versus Trade Profit shows why the shorts can make a big difference. Of interest is the outstanding performance of RIG XLE DVN and OXY on the short side. These were top performers on the long side yesterday and today's results support my working theory that certain stocks will outperform others in both up and down markets.
Remember, my goal is to identify stocks/ETFs that best comply with my technical signals and trading system parameters. My goal is consistency of returns, not necessarily size of returns. I really don't care if the stock is going up or going down. . .they all do eventually. The goal of the trading system is to extract a low risk revenue stream from a stable of stocks/ETFs that can be ranked according to their performance reliability.


Jeff said...

What is your RSI(2) setup for daytrading? I've been doing preliminary testing with 1 minute bars, and I have found there is probably some edge there.


bzbtrader said...

My recent posts (last 2 weeks)explore a system I'm developing for 5&10 minute bars using RSI3,95,15 (in conjunction with other signal conditions). I find the 3 works better for NYSE and big caps, while the 2 works better for high beta NDX components. I do use the RSI2 to trade the Qs, but always in conjunction with parabolics, pivots and 10/20MAs. I never trade frames shorter than 2minute bars and a typical trade enters on a 5 minute signal and exits on a 2 minute signal since I prefer not to hold trades more than 120 minutes unless the 10/20 MAs are wide apart or expanding. I also use the TICK and NYAD to confirm entries and exits. The How I Trade panel on the right of the blog shows some of my favorite setups in detail. I never had any long term success using 1 minute bars, simply due to the inherent noise factor and my low risk tolerance, but wish you my best in your efforts to develop such a trading system. I've found IWM to be an excellent testing ETF for RSI systems, as it produces over 80% reliability on daily signals using the 2. I haven't tested shorter time frames yet, but you might give it a look.