Wednesday, August 12, 2009

Qs Meet the Double 3s

As I try and get back on track exploring some notions about systems development and testing, I thought I'd first switch horses. . .off of the SPX and onto the Qs. I don't trade the SPX or SPY for a number of reasons. I understand a lot of folks do and swear by their technical alignment characteristics . . . I'm not one of them.
I got a little sidetracked over the past few days on the VIX % Change system and the subsequent Topticker post, but now I'm headed back to the barn and saddling up the Qs as I get down to business with refining (hopefully) this 3x3 system.
Bear in mind these upcoming posts are a work in progress and may end up a complete fiasco so as long as your expectations are as modest as mine we may all come out of this OK.
Per the above Qs performance report I've optimized the Qs Double 7s for the same arbitrary time period used for the SPX on Monday. The optimized settings returned are 3,3,5,9. Now, don't send me nasty emails or comments saying I handpicked the time frame. . .I didn't. . .and in future posts I'll suggest some signals that optimization has become curve fitting and that input variables need to be reconsidered.
Keep in mind that our ultimate objective is a system with only a few variables that can utilized as a timing model not only for swing traders but for day traders as well using a variety of intraday time frames.
For the time being we'll focus on the daily bars . . . and I find it somewhat remarkable that the first 2 inputs defining the higher highs and lower lows entry thresholds are the same as the SPX : 3 and 3. This leads me to suspect a higher correlation between the SPX and the Qs than I had considered earlier. At the same time, the fixed exit bars for the Qs optimize at 5 & 9, whereas for the SPX were 9 & 10.
Given that the SPX system made 174 trades and the Qs made 197 trades in the same time period this was somewhat to be expected.
The other interesting data generated by this study was the optimized period of 9 days for a short position in the Qs.
The 9 day fixed bar short position has been generated by over half of the Qs Dirty Dozen systems that I've profiled even though they are based on a non-correlated basket of entry conditions, so I think this is a valuable number to file away when trading the Qs short.
In addition to the system development questions mentioned on Monday two more of extreme importance to me include:
What is the time exposure of each trade and how much time is capital at risk?
For my own account, the larger the size of the capital pool at risk, the shorter the targeted time frame I prefer. Which is one of the reasons that daytrading is my preferred MO and where I focus my risk and why my swing trading is focused on lower risk premium decay and hedged strategies. Again . . . just my comfort level. . .you may have a completely different (and completely legitimate) risk tolerance level.
Is there a balance between long and short trades?
If the system trades 80% long then I'm likely to question why and look closely to see what happens in down markets and why no corresponding short signals are generated. This long/short balance will come into play in future posts as we explore how periodic resetting of the system variables can produce a dynamic market timing model without compromising risk exposure. . . and those last 4 words are the key.
Net gains of the Qs 3x3 start out slowly on the equity curve, picking up momentum until trade 47 (12-27-09)when equity begins to turn negative and continues down until 2-15-09 when the system starts to kick in again. It then requires another 2o trades to bring the equity curve back into parity with the 12-27-09 level.

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