Three Trading Systems (Wk 6) – Thank you, Drawdowns, and Trading System Talk

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Welcome to week six of the Three Trading System series!

Thank you so much for your feedback by comment and email on what you like and where you want the series to go.  I really appreciate it!  And I’m happy to be surrounded by such great visitors at the site.  The calibre of the questions and comments was really first rate.  I learned a lot – as I continually do (including significantly revising down the result for the system I trade – more on these lessons below).

What You Came Up With

Some people enjoyed just seeing another portfolio at play – especially mechanical, as a mechanical trading system can help in taking (a little bit) of the tough psychology out of making trades.  Others were interested in Trading Systems in general, and coding them in Amibroker specifically.  These things interest me as well.  Trading mechanically will especially be interesting during this market downturn, as we will get to see a draw-down in play.

So I am tentatively setting the direction for this series to be:

  • Continue with the trading systems for a short while, with the aim to follow them into the draw-down, and learn where to improve
  • As these systems aren’t perfect (two were designed as examples only), I will take the lessons learned and compile them.  The lessons will be on both finding rules for creating new systems and correctly analysing trading systems

And ultimately, that is where the series will move to – rules for new trading systems, with input from you, or books and forums, and even Twitter – and how to code them and analyse them for robustness.  It will be really cool and I’m pretty excited.

One Big Lesson on Trading Systems to Add Already

Over the last few weeks there has been a lot of interest in the Dow/Gann trading system.  I found it a bit strange, as I knew it was average, but it is the system I personally trade as the signals make sense to me.  I also used it to make around 28% for 2015, and the equity curve generated in this series looked, admittedly, too good to be true.

Many people commented that other public figures had had tough years – Jon Boorman, Big Wave Trader – and some people gave me results of well known trading systems that I follow as well (for example the Bollinger Band and Weekend Trader systems).  Many were down on the year.

These trading systems are so similar to the Dow/Gann system, that I honestly thought something was up.  I had to ask:

  •  Why were these results so different?

So I ran a back-test, and looked at the actual trades, and found something shocking.  Almost all of the outstanding profit came from one particular stock – Blackmores – which went from around $30 to $200 during the year.  When I saw that, I just shook my head.  How could I have been so silly?

So from now on I am running the back-tests without Blackmores in the test-universe.  It is much closer to the results of others out there.  I’m guessing the interest in the Dow/Gann system will wane, and that’s ok too.  But I still had another question:

  • How did I still get 28% in my own trading?

Was I unconsciously choosing some stocks over others?  Did I have a rule, in my head, that I hadn’t put into words?  After meditating on it a little, I came up with some answers:

  • Firstly – I was using a wider universe in my own trading – the All Ords list of around 500 stocks.  These are typically more volatile and move more than stocks in the ASX Top 200 (both up and down).

But also:

  • Similarly to the ASX Market Watch portfolio, my own portfolio relied on a handful of large winners.

VTG, AMA, IRI and a few others were the ones that helped make my year.  But they also had something else in common:

  • They were all sub $1.50 when I bought them

In my testing, I’ve found taking smaller stocks over larger ones to have some benefit, as it can be easier for a stock to move from $1.20 to $2.40, than it is to move from $30.00 to $60.00.

There was one more lesson I had to add

I remember reading Robert Pardo’s book recently “The Evaluation and Optimization of Trading Strategies”.  In it, he describes a method of evaluating trading systems where he takes out the largest winners and runs it again.

This would make perfect sense, going forward, to ensure I don’t get another “Blackmores” scenario.

I’ll research this a bit more, then add it to a page dedicated to the lessons I’ve learned.

Now – Back To The Current Trading System Results!

Below is the chart of the returns since this experiment started (The All Ords are in Yellow):

2016_01_09_Comparative

The Dow/Gann is still holding up in real time, although I am not looking forward to the coming draw-down.  I have a feeling things are about to get ugly, but that is another reason I started this experiment – to see what happens in times like these!  So, this is perfect.

Leap of Faith Trading System

Starting Value: $50k,  Current Portfolio Value (since November): $49,040.68

1 Year Equity Curve (with largest winner taken out):

2016_01_09_DowGann2

Current Trades:

2016_01_09_LOF

Dow/Gann Trading System

Starting Value: $50k,  Current Portfolio Value (since November): $50,300.13

1 Year Equity Curve (with largest winner taken out):

2016_01_09_GapUp2

Current Trades:

2016_01_09_DG

Moving Average Channel Trading System

Starting Value: $50k,  Current Portfolio Value (since November): $47,911.24

1 Year Equity Curve (with largest winner taken out):

2016_01_09_MAC_EC2

Current Trades:

2016_01_09_MAC

I hope you’ve enjoyed this post.  Please leave a comment below!

Happy trending,

– Dave McLachlan

More Posts and Videos in the “Three Trading System” series:

  1. Three Trading Systems (Wk 11) – All Filters On, New Buys
  2. Three Trading Systems (Wk 10) – Leap of Faith System Index Filter Switches On
  3. Three Trading Systems (Wk 9) – When There’s Nothing Doing, Do Nothing
  4. Three Trading Systems (Wk8) – Two Additions, Dry Powder and “No Psychics”
  5. Three Trading Systems (Wk7) – Lessons, Ideas, Tests, Drawdowns
  6. Three Trading Systems (Wk 6) – Thank you, Drawdowns, and Trading System Talk
  7. Three Trading Systems Series Week 5 – Can I Ask You a Question?
  8. Three Trading Systems Week 4 – Buys, Sells and YTD Returns
  9. Three Trading Systems Week 3 – Current Trades and YTD Returns
  10. Three Trading Systems Week 2 – Current Trades and YTD Returns
  11. Three Current Trading Systems – Buys and Sells and YTD Returns

January 10, 2016  Tags: , , ,   Posted in: Trading Diary

2 Responses

  1. Nick - January 11, 2016

    Hi Dave

    Thanks for these posts. I would be interested in a LONG / SHORT on a market based ETF like STW with maybe a 50/200 cross (or similar) if you haven’t made modelled already.

    It might be attractive as a super alternative or for time poor investors.

    Regards

    Nick

  2. David McLachlan - January 17, 2016

    Hey Nick – that’s a great idea!

    Especially considering how much attention the “death cross” on the Indices got recently, and it seems to be working.

    When I get time, I will check it out and post here 🙂

    Happy trending – Dave

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