Three Trading Systems (Wk7) – Lessons, Ideas, Tests, Drawdowns

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Welcome to week 7 of the Three Trading System series!

This series looks at three trading systems in real time, and allows us to discuss lessons, trading system ideas, tests we’ve done or anything else related.  If you have ideas or comments, please leave them below to continue the discussion!  Collaboration is how the best ideas come about.

The Trading System “Off” Switch

A few trading system creators out there (most notably Gary Stone)  have spoken about an “off” switch, where if the overall market (usually measured by an Index, like the All Ords or S&P 500) falls a certain amount or meets some other condition such as increased volatility or trading below a Moving Average etc, then the system will sell out of ALL stocks.

This is slightly different to a standard Index Filter, where you only enter if an Index is moving up.

This “off switch” is very handy for a few reasons:

  1. You miss out on the emotional turmoil, during down markets like this
  2. It potentially reduces the severity of draw-downs as well.

The “Less Wiggle Room” Off Switch

One method from a very popular system – Nick Radge’s Weekend Trader – moves the Trailing Stop Loss from a 40% stop, up to a 10% trailing stop loss on the stock if the Index trades below its 75 day Moving Average.  In other words – it doesn’t sell the stock immediately, it just gives a small amount of wiggle room to prove itself, and if it can’t keep moving up, then it sells.  It’s a fantastic idea.  This method doesn’t work with all trading systems though – as with anything some testing and tweaking may be required.

The “High Correlation” Off Switch

Another idea I had for an “off switch” when testing this week was this:

  • If the Index is trading below its moving average (whatever time-frame you like – I chose 75 days again)
  • And if the individual stock is more than 65% correlated to the Index (e.g. it moves down when the Index moves down),
  • Then, sell out of that stock.

In other words, if the stock is not correlated to the Index (and more likely to move up as the Index moves down), then hold on to it as per your normal rules.  This is not too hard to code into Amibroker, as it has its own function – “Correlation()”.

I tried it on the Dow/Gann Trading System.  What were the results of the test?

  • From a 1000 run Monte Carlo test on the ASX 200 from 2000 to 2015:
  • Most Common Annual Return reduced from 24% to 22%
  • Range of Annual Returns became more focussed: from 19%-28% to 18%-24%
  • Range of Drawdowns increased, but average was lower: 18%-24% to 15%-24%

Overall I wouldn’t trade it, as it is.  But it is something to keep in mind as you and I test other things.

Ways to Make Money in a Down Market

It’s always interesting when I Google something I want to know, and an article from my site comes up.  It’s been so long since I’ve thought about making money in a downward market – when I Googled it I found an article I wrote a few years ago.

In it, I talk about shorting stocks directly using Macquarie Prime, or using products such as Options or CFDs.  I also wrote about an Exchange Traded Fund with the ticker name “BEAR”, that moves up when the Index (such as the All Ordinaries) moves down.  Interestingly, that ETF is showing an entry signal on a weekly chart now.

Might that be an easy way to hedge, while I wait for my stocks to hit their stops… 🙂


Current Trading System Results

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


While the Dow/Gann and the Leap of Faith trading system are still above the Index, the Dow/Gann still has more “Heat”, or stocks in its portfolio.  It has 12 just waiting to be stopped out, as opposed to just 4 in the Leap of Faith system.  This is why I was investigating those “off switches”, and I expect to see some larger draw-downs for the Dow/Gann over the next few weeks.

The Moving Average Channel is tracking the Index currently, but this system also has a lot of stocks left to hold (13).

It was a good time to start this experiment, in November 2015 – almost perfectly coinciding with a large down leg in the markets – possibly even turning into a bear market.  This way you and I get to see how they perform, and whether any parts make us uncomfortable (such as draw-downs, especially up to or over 20%) and how we might improve these systems (and the systems you trade yourself) going forward.

Don’t forget with the results below, I’ve taken out the largest winner (Blackmores) to get a more realistic equity curve.

Leap of Faith Trading System

Starting Value: $50k,  Current Portfolio Value (since November): $48,816.08

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


Current Trades:


Dow/Gann Trading System

Starting Value: $50k,  Current Portfolio Value (since November): $48,876.03

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


Current Trades:


Moving Average Channel Trading System

Starting Value: $50k,  Current Portfolio Value (since November): $46,604.54

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


Current Trades:


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 17, 2016  Tags: , , , , ,   Posted in: Trading Diary

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