Wednesday, February 04, 2009

The second mouse gets the cheese

This is a continuing study of my 3 finger reverse short only system (3FR), in this case using the IYT ishares Transports ETF (no 2x 0r 3x to my knowledge). Pyramiding is turned on, which results in multiple entries with a fixed bar cumulative exit based on the first entry. Turning on the pyramiding function also requires a considerably larger capital commitment that many traders may not be comfortable with. An obvious alternative tactic might be to just sell calls or buy puts since the average hold time is only 6 days. The bad news here is that the IYT options are very thinly traded and the spreads approach the comical at .15 to .35 for the ATMs. Turning off pyramiding results in only 8 trades for the same time period, with only 1 consecutive loser, a 75% success rate and approximately 1/2 the net gain with pyramiding. The basic system trades about every 6 weeks so lots of other opportunities to deploy your capital while waiting for the setups. Best used in conjunction with the 3 finger lead system (see BZB Dirty Dozen) for a full range of long & short setups.

Revised 3FR settings for the IYT are (50,16,10,6).
As with the earlier 3FR studies, the goal is to find sector (or ETF) leaders and use their price action to predict the reaction in a larger and slower ETF. The leaders (first mice) don't actually have to be components of the ETF (most often they are), but the trick is to find highly correlated but more volatile mice to lead the way into the trap and absorb the risk so that the probability path of the second mouse (diluted volatility ETF) is much higher and less prone to the uncertainty of surprise.

TS is not generating the correct net gains, which I'm trying to resolve. Clearly no one would trade this system for such marginal gains. The posted system gain/loss numbers need to be multiplied by 1000 (or 100) (or whatever the position size you choose) The results produced by this report present 1 contract (share). You can see the actual impressive gains that this system produced in the trade breakdown above.

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