This entry was posted on Monday, January 7th, 2008 at 8:43 am and is filed under Education, Trades, market commentary, 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.
It has been about 12 trading days since I first highlighted a system to trade extremely oversold conditions in the overall market using the T2108 indicator. Based on the last foray below the reading of 20 on that indicator we picked up 2 positions, VNQ and EWS. Remember we only add 2 positions per day and we only spent 1 day below that 20 level. VNQ had quickly hit it’s profit target of 3% and EWS stands -4.7% below it’s entry level. So our 8 position portfolio using this system has a return of -0.2% over the past 12 trading days. Not too bad considering the nature of the market since then. Basically it has sat in 75% cash waiting for another poke below the 20 level or have a current holding hit a profit target. Or cross above the 50 level on the Ultimate Oscillator as the other exit rule.
The current market weakness has now pushed T2108 to a reading of around 30.
So maybe with some bad market days we can get that sub 20 reading. If so maybe the system will have an opportunity to add some exposure.
Speaking of exposure, as I have mentioned in the past where do you think the trend component, on daily bars, of equity correlated stocks would be invested now? That is right. Cash. So in very negative type market environments it is a good idea to have opposing systems each with their own segment of the overall portfolio. In the ETF oversold type system it could potentially add a few positions. But would that system be 100% of the overall portfolio. No it represents a portion of a collection of systems. A collection of systems with positive expectancies can lead to less volatile returns as well avoiding large drawdowns. What do you think a trend system of non-equity type ETF’s based upon daily bars would be invested in now. That is right all that commodity based stuff that has been on a huge run. Look at the charts below. Blue dots are entries. Red are exits. John has discussed this trend following system in the past he named Fuzzy.
I want diversification of timeframe, investment class, and trading systems (good post explaining system diversification). With the whole portfolio being a proper balance of systems that best enhance and complement each other. This is in my opinion the most difficult part to piece together as it really takes some walk forward in real life to see how the systems react together. Having seen many of these market waves up and down in the 20 years I have followed the markets on a very close basis it has helped me to piece systems together that make logical fits. Over time these have evolved and will continue to evolve as I find new ideas and concepts that I believe may have a role in the overall living breathing portfolio.Have a Great Week!
Dave Johnson
January 8th, 2008 at 12:13 am
Excellent, I have no content to add, but I’m always thinking about new plays and how to better diversify. Periods like this may scare investors, but in truth, they offer opportunities to try new ideas and find the next big wave. Trend riders freak, but real traders can’t wait to get the results of the new system they’ve been plugging some numbers for.