This entry was posted on Tuesday, December 18th, 2007 at 9:18 pm and is filed under Education, Trades, system trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Just a quick follow up on my post last night about the T2108 and Ultimate Oscillator System. The T2108 indicator popped back above the 20 level so we will not have any new entries tomorrow. As I noted last night the entries were to be EWS and VNQ at the open this morning.
EWS was entered at $13.84 with a 3% profit target at $14.25
VNQ was entered at $61.87 with a 3% profit target at $63.73
also if the Ultimate Oscillator were to close above a reading of 50 this would also trigger an exit.
Walking the readers through an example like this zeros in on the critical component of exposure. Before the trade we determined the number of entries the system can hold and how many can enter per day. If the market were to have a big up day tomorrow and trigger the 3% profit target my exposure would have only been 2 out of 8 potential holdings, or 25% exposure. Yet if I had taken all of the entries that triggered I could have 7 holdings as that was the number of buy signals we created yesterday. In portfolio level backtesting this component is so important to define. If you use the same entry criteria at all times your exposure could soar on some waves and on others it will be light. That is reality- real trading. You can’t just keep buying beyond your levels of equity or comfort. Yet if you are too conservative you may end up always having to little exposure. The key is through backtesting finding a happy medium.
Yet if I were not to explain this component and just throw out signals, and they happen to all win….what did that tell you? How much did the system move up? Without knowing how many positions the system can hold there is absolutely no way to say. Next time you see a trade thrown out by another market commentator make sure you know how much of the particular systems equity it represents and how much equity that system makes up of the total portfolio. Otherwise the value of such advice is quite limited.
Have a Great Night!
Dave Johnson
December 18th, 2007 at 10:21 pm
Dave,
For this system, is there a hard stop loss level that you adhere to? Or you just follow the system, and get out when it tells you to, for either a profit or a loss?
I’m thinking that it’s possible for the oscillator to turn down again from here before reaching 50; for example, that could happen if there’d be a sell-off tomorrow, although the chance is low. Eventually the oscillator will turn back up to over 50, but maybe at a much lower price level, where the system exits with a loss.
If, for example, the loss would reach 3% before the indicator reach 50, I believe you’d stay until the system tells you to exit, even though that could mean a much bigger loss?
By the way, it looks like you’re using different parameters than the default (7,14,28) for the ultimate oscillator. Please ignore my curiosity if it’s proprietary. I’ve tried a few settings, and the closest seems to be 6,12,24.
Thanks,
Rob
December 19th, 2007 at 9:09 am
The system as tested has no hard stop. What must be remembered is that we are buying ET’f so we are essentially raising exposure in this one system. Whereas because of a lack of trend we are in a high cash position. This type of system typically is the first to say “i believe we are oversold and we need to add some exposure” The system as it stands now is only exposed 25%. On a historical basis getting up to the full 8 holdings is not always easy. Again this is based on backtests I’ve run on a multitude of scenarios.
As you noted this could go down further. If it does the T2108 would move back under 20 and we possibly could add
another position or 2. Just slowly creeping exposure in these oversold areas. Technically on the indices we are potentially in an area where that could happen. But adding some exposure down here is the trade.
December 19th, 2007 at 9:21 am
also i should add that the average holding period on these entries is only 6 days. So being in these oversold conditions have tended in the past to mark reversals. Beyond 11 days the performance does begin to wane so if you felt uncomfortable without a stop I would use a 12 day timeout exit. After that you could pull the plug on a trade. But these first initial entries could easily be down 15%. Whereas newer entries would typically have a lesser drawdown as they enter after the big drop. But again the trade is not really heavy until we hit more entries.
I am as concerned about a further fall in the market as anyone but this system has a very positive expectancy. If I am wrong this wave I only give back what I made the last time we came down here. Also I do believe the default setting is 7,14,28 on the indicator although I need to verify that. We would need to compare data to see how much were off.
December 20th, 2007 at 1:24 am
Dave,
Thank you for your detailed explanation of the trading plan. The reason I was asking about the oscillator’s settings was that I used stockcharts.com, and their oscillator showed slightly higher value than your system’s, and according to that, a couple of signals wouldn’t have been triggered yesterday, VNQ and HHH, if I remember correctly.
Rob