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crashmonitor

Experimenting With A Trading System

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My life experience has told me that everything in life relates to timing and not time which is why I absolutely stand by reversing that old saying.

Meanwhile I have been putting my money where my mouth is since 1st October, using an expensive tracker fund that allows me to trade free and without a spread, it charges 1% pa. (by 1st October I mean I was resolved to buy the first dip( post that) which happened to be Ebolageddon 16th October, I have taken the performance of the FTSE 100 tracker from 1st October by way of comparison to my trading record)

The fund has gone up 6% in that time, I have made 16% as my modelling showed it would. The system in theory should not work as well when the market rises strongly. In fact I still bucked it by 10%.

My system

Sell on an approx. 3% profit, buy back on a reasonable fall.

If I have misread the Market and I have failed to sell near the top of the mini cycle and I am in danger of missing the boat, deploy a ''stop gain'' (my terminology). That is allowing the market to run and buy back on the first decent fall, even if that means buying back at a higher level than I exited. I have deployed a ''stop gain'' just once.

My trading history (going from memory so a bit of guesswork to the index at sale and purchase( but each transaction will have been mentioned on this forum somewhere as I have pondered my timing and can be verified)

Bought at 6400

Sold at 6725

Bought at 6500

Sold at 6600 and 6760 (two tranches)

Bought at 6830 (stop gain deployed)

Sold at 7015

Bought at 6800

Sold at 7068

Bought at ?? (order in for the noon fix today)

And before someone says what happens if the market tanks...well I will stick with it and be merely tracking the index with everybody else.,,no stop loss. Neither winning or losing over the Market.

Edited by crashmonitor

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Well looks like the noon fix came in at 6969, I take every reset as a victory, 100 points isn't bad. If it tanks from here, hands tied...but that's the system. When you are long you have never lost, revisitation at 6968 is 99% guaranteed one day and dividends take care of inflation.

The weird thing is I feel more comfortable in a losing position invested ( I am already down on the noon fix) than out of the Market altogether, when there is a danger of being left high and dry if you get a +300 day etc . and having to deploy a ''stop gain'' on the first dip.

Edited by crashmonitor

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Well it does sound like a lot of gibberish, and I have made up the word stop gain.

But it's an antidote to those books on trading ( every single one in fact) that actually don't show you how the individual made any money other than the usual noises about time and not timing (that makes no mathematical sense to me in amarket that by its nature spikes up and down forever). At least I have concisely mapped out the trades and explained how I am operating. Early days we will see.

Edited by crashmonitor

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Well it does sound like a lot of gibberish, and I have made up the word stop gain.

But it's an antidote to those books on trading ( every single one in fact) that actually don't show you how the individual made any money other than the usual noises about time and not timing (that makes no mathematical sense to me in amarket that by its nature spikes up and down forever). At least I have concisely mapped out the trades and explained how I am operating. Early days we will see.

Mmmmm this is a difficult one.

System trading is great trading until market conditions change or an expected event comes in early than anticipated.

I day trade and what I have learned is that the books are great primers, but ultimately the conditions and your own psychology will determine your style / results. Patterns, pivots, news support & resistance levels all have their place for me.

Good luck.

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In essence you appear to want to have an unleveraged, long only system which periodically attempts to trade by selling after periods of rising prices and re-invest after periods of declining prices. So far so good.......

My understanding is that to do that you have decided to limit your upside to 3%. So 3% price increase appears to be your exit signal. You then re-invest but with some rather indeterminate entry signal to effectively capture the fall in price.

I think you need to consider why you want to sell each time prices rise 3% (since this will happen quite frequently you're going to have quite a high turnover and you will also miss significant moves in a bull market. FTSE has been quite unusual in its up/down moves this last 2 years or so - see SPX for instance which has seen larger, steadier rises. This is also causing you to have to complicate matters with what you've called a "stop gain", by which I take it you mean you will go long again if prices haven't fallen and triggered whatever your indeterminate entry signal might be.

I think you need to also consider what metrics you will use to determine when/why you would re-enter. Is it an oscillator, a duration signal (1 wk, 2 wks, 3 wks and so on) a breadth signal, a % retracement from highs/from exit etc.

Also, are you attempting to beat the index or simply make a positive nominal return? Do you want to remain invested for as long as possible to capture dividends? What/where will you buy when "out" of the market - cash? short term bond ETF? etc.....

You've not said which ETF you are trading. I'm afraid I'm rather sceptical about how that is being priced. 1% annual fee with no spread doesn't sound too expensive, depending on how frequently you intend to trade, but a daily noon "fix" i.e. a price you do not know when you give your buy/sell order seems prone to manipulation. I wouldn't be happy with that and I'd want to know exacrly the basis of how that price is arrived at. Moreover what happens between you giving your order and their fix? What if the market crashes meantime (on a sell order) or rockets (on a buy order)? Are they simply netting off their bids/offers and adjusting their mid-price accordingly? Have you compared their fix price v actual market price? Someone somewhere is being charged and if it ain't you it's someone else.

Anyway, well done for beating the market - let us know if it continues!

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In essence you appear to want to have an unleveraged, long only system which periodically attempts to trade by selling after periods of rising prices and re-invest after periods of declining prices. So far so good.......

My understanding is that to do that you have decided to limit your upside to 3%. So 3% price increase appears to be your exit signal. You then re-invest but with some rather indeterminate entry signal to effectively capture the fall in price.

I think you need to consider why you want to sell each time prices rise 3% (since this will happen quite frequently you're going to have quite a high turnover and you will also miss significant moves in a bull market. FTSE has been quite unusual in its up/down moves this last 2 years or so - see SPX for instance which has seen larger, steadier rises. This is also causing you to have to complicate matters with what you've called a "stop gain", by which I take it you mean you will go long again if prices haven't fallen and triggered whatever your indeterminate entry signal might be.

I think you need to also consider what metrics you will use to determine when/why you would re-enter. Is it an oscillator, a duration signal (1 wk, 2 wks, 3 wks and so on) a breadth signal, a % retracement from highs/from exit etc.

Also, are you attempting to beat the index or simply make a positive nominal return? Do you want to remain invested for as long as possible to capture dividends? What/where will you buy when "out" of the market - cash? short term bond ETF? etc.....

You've not said which ETF you are trading. I'm afraid I'm rather sceptical about how that is being priced. 1% annual fee with no spread doesn't sound too expensive, depending on how frequently you intend to trade, but a daily noon "fix" i.e. a price you do not know when you give your buy/sell order seems prone to manipulation. I wouldn't be happy with that and I'd want to know exacrly the basis of how that price is arrived at. Moreover what happens between you giving your order and their fix? What if the market crashes meantime (on a sell order) or rockets (on a buy order)? Are they simply netting off their bids/offers and adjusting their mid-price accordingly? Have you compared their fix price v actual market price? Someone somewhere is being charged and if it ain't you it's someone else.

Anyway, well done for beating the market - let us know if it continues!

I'm aware I have been very lucky with the volatility meaning I have had the opportunity to get the rise in the market at least twice, except for when the market did leave me standing back in February and I had to re-enter it with what I call a ''stop gain'' at approx. 6800 having exited at 6600 and 6760 in two tranches. Had the market not retraced, I admit I would have been left high and dry and the system would have failed. But trading since has more than made up for that lapse.....indeed getting back in at 6969 actually resets the last two sales of 7015 and 7068, meaning I should get the gain between 6969-7015 three times over.

I have no control on the price of purchase because I have to submit my purchase on the previous evening by post, indeed it always moves against me. They do not have a cash holding facility, and it is in my bank. The last time, 6930 at close became 6969. I have control on the sale price...fax....within an hour or so of the noon fix anyway.

I take on board what you say about why I keep exiting the FTSE 100, I believe it is mid valued compared to global assets of all types, which appear in a bubble. I am considering locking in the fact I have bucked the Market (leave that part as a permanent balance) and may be start with some new money. A big mistake, of course, if the Market corrects.

I'd rather not mention the tracker fund I am trading, for one thing I am afraid they might kick me out; I don't think it was designed for trading and they have already queried my excess trading once. I will keep going while they let me.

Edited by crashmonitor

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Fair enough. I'd imagine they wouldn't be too happy about frequent "trading" unless they're profiting from it.

Agree FTSE is reasonably valued or even cheap compared to other markets. The volatility is likely a function of commodity sector and currency compared to dollar indexes like SPX.

Something else you could think about possibly is changing your weighting rather than all in/all out so you always have some long exposure and perhaps look to combine that with a bear market exit signal. Ofc there is a whole internet full of timing systems attempting to call a bear market turning point. I suspect some combo of value and momentum is required.

Or if you want minimal work, just buy Berkshire Hathaway and come back in 30 years.

Edited by R K

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A constructive suggestion: I note that your downside is not so clearly defined as your 3% upside. I'd be inclined to add a defined rule on the downside to protect from bigger losses. So far you've done well and not needed to take a loss. This is the time to think about it!

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A constructive suggestion: I note that your downside is not so clearly defined as your 3% upside. I'd be inclined to add a defined rule on the downside to protect from bigger losses. So far you've done well and not needed to take a loss. This is the time to think about it!

I've decided to accept losses, no stop loss; I am trading a whole Market and not individual shares and take the attitude that it will come back even if that is years. With interest rates where they are the dividends minus the 1% annual charge would take care of inflation during that time.

I note now that my second purchase at the back end of last year was at 6444 (not the 6500 I estimated on my OP). And indeed the Market moved against me straight away during oil shock one to 6072...had I taken a stop loss at say -3% I would have been out of the game now or at least starting again from square one.

Edited by crashmonitor

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Even if you have a high tolerance for losses I agree with RK that you should consider a bear market indicator to get you out of the market. If you haven't faced big losses before there is the risk that 'they' will "scare you out or wear you out". If you have faced them down before then you should be fine of course.

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Sounds like it'll work until it doesn't. If you're keeping some cash put by then you could consider that as some 'protection' if your stuck in a bear, and put in more money as it goes down. As you say the market will go back up eventually so you'll be buying cheaply with the new cash.

I'm in a similar position, been in the market since 2004, but not put much new money in for a couple of years. So I have a 'cushion' in the event of big falls, which I could put to use.... at some point. The difficulty is when! I suppose if the FTSE goes down to 5,000 that'd be a hefty drop. I remember Buffett going all in, in October '08 before the final low in March '09. He didn't catch the very bottom but was pretty close and there was a lot of fear in the markets. Unfortunately I was too fearful to put any in back then.

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Sounds like it'll work until it doesn't. If you're keeping some cash put by then you could consider that as some 'protection' if your stuck in a bear, and put in more money as it goes down. As you say the market will go back up eventually so you'll be buying cheaply with the new cash.

I'm in a similar position, been in the market since 2004, but not put much new money in for a couple of years. So I have a 'cushion' in the event of big falls, which I could put to use.... at some point. The difficulty is when! I suppose if the FTSE goes down to 5,000 that'd be a hefty drop. I remember Buffett going all in, in October '08 before the final low in March '09. He didn't catch the very bottom but was pretty close and there was a lot of fear in the markets. Unfortunately I was too fearful to put any in back then.

I got into the Market far too late ,,,spurred on by the Greek election crisis of May 2012 at 5300...I find it inexplicable now why I didn't go in at sub 4000 in spring 2009 , except I was worried about the pension liabilities caused by the Market crash. The trading started last October.

My equity position is not quite as the thread suggests. 28% is in mortgage free property (half share, not girlfriend's 1/2) our finances are independent), 7% pension (cashable in four years) 50% cash, leaving only 15% in the FTSE 100 tracker.

So you see the Mother of all buffers, I should really be speculating more. (risk percentage (with pension) only 22%.

Trouble is I was born a Bear and will die Bear.

Edited by crashmonitor

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It's a cringey title, but I would say Tharp's "Trade Your Way to Financial Freedom" is perhaps the most universally useful trading manual I've read. (not cheap I'm afraid, but worth it if a penny drops)

Also perhaps to be read in conjunction with "Market Wizards" by Jack Schwager that introduces you to just how many different ways there are to make money in the market (but in order to do so, they have to fulfill Tharp's rules).

Someone has tried to summarise the whole book here in one blog..........

http://www.informedtrades.com/blogs/theragstorichesstory/3506-review-van-tharps-trade-your-way-financial-freedom.html

Edit...Tharp takes a dim view of oscillation trading, oh well.

Edited by crashmonitor

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Someone has tried to summarise the whole book here in one blog..........

http://www.informedtrades.com/blogs/theragstorichesstory/3506-review-van-tharps-trade-your-way-financial-freedom.html

Edit...Tharp takes a dim view of oscillation trading, oh well.

Ignore him. In fact, 90% of that is concerned with leveraged "trading" which has very little to do with unleveraed long only index trading/investing. There are only 2 things you could possibly mess up 1. Being in the market when it tanks. 2. Not being in the market when it rises. In neither case will you wipeout. (theres a counterparty risk of course if your ETF issuer etc. goes t1ts but thats about it).

In fact, since you have already "beaten" the market there is an argument in favour of remaining long in perpetuity. Doing something will likely see you underperform relatively at some point.

or to quote Pascal (there are variations on this but I cribbed this one from the intellient investor) :

"All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room"

Edited by R K

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Ignore him. In fact, 90% of that is concerned with leveraged "trading" which has very little to do with unleveraed long only index trading/investing. There are only 2 things you could possibly mess up 1. Being in the market when it tanks. 2. Not being in the market when it rises. In neither case will you wipeout. (theres a counterparty risk of course if your ETF issuer etc. goes t1ts but thats about it).

In fact, since you have already "beaten" the market there is an argument in favour of remaining long in perpetuity. Doing something will likely see you underperform relatively at some point.

or to quote Pascal (there are variations on this but I cribbed this one from the intellient investor) :

"All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room"

Difficult to know what my thinking will be if and when the Market hits circa 7200. But yes I'm taking the attitude perhaps it's time to quit trading this tranche when I am up, give the trading a rest, and lock it in long in ''perpetuity''. Any new money will have to come on a significant dip and may be I will trade that part only.

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I got into the Market far too late ,,,spurred on by the Greek election crisis of May 2012 at 5300...I find it inexplicable now why I didn't go in at sub 4000 in spring 2009 , except I was worried about the pension liabilities caused by the Market crash. The trading started last October.

My equity position is not quite as the thread suggests. 28% is in mortgage free property (half share, not girlfriend's 1/2) our finances are independent), 7% pension (cashable in four years) 50% cash, leaving only 15% in the FTSE 100 tracker.

So you see the Mother of all buffers, I should really be speculating more. (risk percentage (with pension) only 22%.

Trouble is I was born a Bear and will die Bear.

Yes, that is a big buffer (that you no doubt worked hard for). As a bear or value buyer, I'm guessing you're waiting for lower prices to put more in. I think that's wise; you're only trading with a small portion of your portfolio so emotions - a trader's worst enemy - don't figure all that much. Why not set mechanical limits to increase exposure, but the increases will be long-term and not the trading part?

For example; continue trading the tracker using 15%, at 6700 add an extra 3% but leave it in? Every further drop of 300 points add another 3% of your total portfolio? It doesn't even have to go into a FTSE tracker and could go into an all-world index. When/If the FTSE is at 4000 again you'll (hopefully) still have the 15% as trading and 30% long-term.

Or something along those lines, anyway. If I were you I'd not raise the 15% too far, unless your system proves unbeatable (lol).

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Difficult to know what my thinking will be if and when the Market hits circa 7200. But yes I'm taking the attitude perhaps it's time to quit trading this tranche when I am up, give the trading a rest, and lock it in long in ''perpetuity''. Any new money will have to come on a significant dip and may be I will trade that part only.

My take is this (basis US):

* Bull aint over (demonstrably)

* Lead up to lift off is usually +ve for equities

* Lift off tends to see a retracement

* Post-lift off tends to continue to be +ve up until yield curve inversion, unemployment trend persistently ticks higher, price trades below major averages even during short term peaks etc.

All with caveats that US is richly valued on historical perspective (but qualified by low discount rate and high equity risk premia due to low bond yields) but UK is (as you point out) reasonably cheap to middling (CAPEs etc). hence why those calling the end of the bull market since around 2010/11 have been completely wrong.

So long as all this persists then counter-trend oscillators (technical, sentiment, breadth etc) should be useful, but clearly once we move into a bear market (perhaps 2-3 years away) the opposite applies, and of course a short-run dislocation can occur in any market - flash crash 7/5/2010, august 2011 Euro panic but they dont change the primary trend. Not even Oct 1987 did that. It was a buying opp in a bull market. hence why the (usually very vocal) bears have been and continue to be wrong

ofc the point about rich valuations (as any value investor will tell you) is that future real returns are necessarily lower and possibly negative over the medium term (say 7-10years) irrespective of short-term fluctuations.

edit: typo

Edited by R K

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My take is this (basis US):

* Bull aint over (demonstrably)

* Lead up to lift off is usually +ve for equities

* Lift off tends to see a retracement

* Post-lift off tends to continue to be +ve up until yield curve inversion, unemployment trend persistently ticks higher, price trades below major averages even during short term peaks etc.

All with caveats that US is richly valued on historical perspective (but qualified by low discount rate and high equity risk premia due to low bond yields) but UK is (as you point out) reasonably cheap to middling (CAPEs etc). hence why those calling the end of the bull market since around 2010/11 have been completely wrong.

So long as all this persists then counter-trend oscillators (technical, sentiment, breadth etc) should be useful, but clearly once we move into a bear market (perhaps 2-3 years away) the opposite applies, and of course a short-run dislocation can occur in any market - flash crash 7/5/2010, august 2011 Euro panic but they dont change the primary trend. Not even Oct 1987 did that. It was a buying opp in a bull market. hence why the (usually very vocal) bears have been and continue to be wrong

ofc the point about rich valuations (as any value investor will tell you) is that future real returns are necessarily lower and possibly negative over the medium term (say 7-10years) irrespective of short-term fluctuations.

edit: typo

I find the anomaly of UK asset pricing very surprising at the moment, the inflated DOW aside.

Looking at the assets on offer we have housing at ten times average salary, but as a BTL the yield is something like 30 years the price after costs, and that is being generous. And it actually involves a hell of a lot of work and worry to boot.

Bonds have an almost negative yield and yet the FTSE 100 is stuck at a mid 15 p/e or about 13 based on CAPE...adjust for cyclical factors.

Don't get it. I should probably be throwing more money in, but obviously the Market can't be wrong, can it? Can only think that debt is the missing factor which pulls valuations so low compared to other UK and global assets, with most stuff more richly priced by 50-100%.

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We seem to be at a crossroads pending the outcome of Greece. I can see the Market tanking quickly to 6000, rising to 8000 ,if the fear is removed by some mid term agreement, or even staying level if they find another can to kick.

I have decided to hold now come what may and cease trading, but add units if the opportunity presents , the best scenario for my wealth long term is the market tanks.

Scenario 1...market tanks...add units aggressively or average down at the very least...market will revisit 7000 in short order, still about the cheapest asset class on the planet short of unsafe assets in places like Russia.

Scenario 2...market drifts up....Very risky to add units as we enter the blow off phase......so long term not good.

Scenario 3...market goes sideways...look to buy on the dips.

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