Three Trading Systems (Wk 10) – Leap of Faith System Index Filter Switches On

This excerpt is for educational purposes only and is not to be interpreted as trading or investment advice.  See Terms Of Use here.

Welcome to another week of the Three Trading Systems experiment!  This series has been really great for my learning so far, personally.  I’ll share some of those learnings below.

Probably the biggest lesson this week was looking at the trades and equity of the Moving Average Channel trading system, which initially looked quite promising.  The draw-down is inching ever higher, and to be fair I don’t think I could trade this in real life.  Sure – I’ve had worse draw-downs myself, but the key word is “confidence” that it will recover and out-perform in the future.

There are a few ways I’m learning about currently to gain confidence in your trading system (or to figure out if you should throw it away).

Here are a few I’m looking into – please let me know if you can think of any more:

  • Keeping a larger window for Out of Sample testing – three years minimum to ensure the system is not over-fit to the in-sample test period.
  • Monte Carlo testing, during the in-sample period, to check the range of returns and draw-downs.  Too large a range from worst to best, and we can’t be sure if our system will give good or bad results in the future.
  • Monte Carlo testing during the out-of-sample period, for the same reasons.
  • Choosing a trading system that, during optimization, has a good result surrounded by many “slightly less” good results – a smooth-topped hill in our distribution, if you will.  Choosing a system with a single good result surrounded by terrible results means there is a higher likely-hood the system will fall over as our data changes and shifts in the future.
  • Reducing or removing the greatest winners from back-test results, to ensure it doesn’t rely on only a few winning trades in the future.

While it started out as an experiment and used very basic, example-only trading systems, as this series evolves I’d like to focus on creating seriously robust trading systems that we can all use, with a high confidence they will out-perform in the future 🙂

Golden Cross Index Timer

2016_02_21_Golden Cross Timer

 

ROC and Moving Average Index Timer

2016_02_21_ROC Index

Three Trading Systems Comparative Returns

The Index – All Ordinaries – is the Yellow line.

2016_02_21_Comparative

The Leap of Faith’s Index Filter is a shorter term filter, to catch shorter term moves.  It is a 25 day moving average on the All Ordinaries, and was turned on this week.  The trades in grey are closed trades.  Lots of losses, starting in a Bear Market, and yet dividing each trade into equal percentages of the portfolio has helped reduce the overall impact.  I’ll remove them next week, but this week we get to see what they were 🙂

Leap of Faith Trading System

Starting Value: $50k,  Current Portfolio Value (since November 2015): $48,144.54

2016_02_21_LOF

Dow/Gann Trading System

Starting Value: $50k,  Current Portfolio Value (since November 2015): $48,720.03

2016_02_21_DG

Moving Average Channel Trading System

Starting Value: $50k,  Current Portfolio Value (since November 2015): $47,123.40

2016_02_21_MAC

I hope you’ve enjoyed this post.  Have a great week 🙂

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

Read Related Articles:




  And, subscribe for free to stay in touch and receive the latest updates:

Enter Your Email Address:

.
(Check Your Junk Mail, Just In Case)

February 21, 2016  Tags: , , , , , , , ,   Posted in: Trading Diary

2 Responses

  1. Kayson - March 1, 2016

    Hi Dave,

    Really appreciate the effort and videos, some strategies backtested that really ‘wow’ your audience. You definitely deserve a donation to keep your site running and motivating. I was wondering if you can also spare some time to backtest the Weekend Trend trader written by Nick Radge in his book? To test if this system really perform as it suggested? From what i read, he basically just uses 20 weeks high and a ROC indicator for entry and exit (not sure he will enter on the bar or the next bar)

    Thanks and keep up the good work

  2. David McLachlan - March 1, 2016

    Hi Kayson,

    Thank you! Great question.

    I have tested that system, and I too got good results. It is a great system and Nick is a top guy – he’s the real deal. Others have tested it on the Russell 3000, and the draw-downs are larger than on the All Ordinaries, but the returns are still good.

    I was looking at why it worked so well, and I have a few answers. It buys on quite extreme, long term momentum upward. Like a freight train, it can be hard to slow down. Then, it defends those gains vigorously. The 10% stop loss when the Index is moving down means it holds on to gains as much as possible.

    In that way, I found it didn’t ride every trend ’til the end, but it didn’t have the severe fluctuations more trend following systems have, either.

    It’s good stuff. I highly recommend his work and website to all traders.

    Happy trending! Dave

Leave a Reply