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What is a reasonable annualised return?

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Archive through December 26, 2005mosaic199630 26-Dec-05  06:05 pm
         

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mosaic1996
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Spider,

I have been busy with Christmas, backyard cricket, Bocce/Boules, shopping (new tele, camcorder, home theatre, dvd recorder, cloths, etc.), etc., so I will get to your questions shortly.

I believe that TonyM has done an excellent job addressing your question on Rate of Return filter. ROAR has been discussed before on IC - so a Search may reveal something useful (formula etc.)

IC is pretty limited on Rate of Return filter. You can use Rate of Change (see my charts in this thread) but it is very limited when looking at trends that are just developing. Maybe I just don't know how to use it effectively.

Whilst I do use Rate of Change (Price) from time to time, I tend to use LOG scale and draw a trendline. This trendline then gives me a ballpark rate of return. I always do a quick calculation to make sure that well above the XAO: I take 12 months on the time axis, and price change to calculate percentage return p.a. However, it is very hard to judge if the rate of return is slowing.

I also plot XAO as a price comparision sometimes as a first level filter to identify significant outperformers. However, it is virtually impossible to compare relative performance of similar outperformers.

Cheers,
Mosaic


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david_louisson
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I don't wish to upset anybody, but I think the L-Plate / P-Plate / Competent / Superior / Exceptional type of rating system is missing an important point.

If one wants to double one's annualized return, it doesn't require superior entries, exits, management skills, or even discipline. All one needs to do is double one's position sizes. However, the following is also true: drawdown will also be doubled. (Leveraged instruments can potentially offer plenty of scope here. :-)

IMHO, success should not be assessed only on the basis of return, but by measuring return against drawdown across one's chosen trading timeframe and frequency, and somehow balancing all of this to meet (emotional) tolerance to risk, consistency of return, financial goals and lifestyle considerations.

A medium term trader with a lower tolerance to risk might be happy with a stress-free and labor-unintensive 20% return p.a. with 10% max drawdown, by occasionally trading stocks; while a daytrader with a higher tolerance may be happy to monitor highly leveraged CFD positions all day, while trading a greatly diversified portfolio for a 40% annual return with 40% max drawdown. The second guy is making double the return of the first, but who would be bold enough to say that his is the superior system?

David







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davkell
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Excellent comment David.

Could we also say that a successful trader (let's not worry about categories or return pa), is one who has made enough profit over the years to siphon off enough of that profit into passive income investments, so that they can choose when (and if) to trade. Trading is fun, but I'd love to be in a position to hit the beach or see a movie etc etc. A person who has the luxury of when to trade, is truly the Superior Trader in my view.


"Trade Your Way To Financial Freedom" - Van K Tharp

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david_louisson
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Further to my previous post:

I've recently overhauled my system of entries and exits, and about 2 weeks ago began paper trading an imaginary NZ$100,000 account, trading UK sector index CFDs with CMC, as realistically as possible. In the two weeks I've closed out 4 wins and 6 losses, and have 6 open trades all currently in handsome profit, for an overall net gain of $10,500, or 10.5% in two weeks (this is net of all spread and interest costs, and includes adjustments for "dividends"). If one was to compound 10.5% fortnightly (1.105^26), the result is around 1241% annual return.

If I'd doubled my position sizes, I wouldn't have suffered anything remotely approaching an account meltdown, and I'd be 21% ahead, for an extrapolated annualized return of something like 14,104%.

If I'd tripled my position sizes, I still wouldn't have suffered an account meltdown, and I'd be 31.5% ahead, for an extrapolated annualized return of something like 123,514%.

And so on....

Obviously all of this is utterly meaningless, but hopefully it illustrates how it is possible to manipulate leverage and size positions to achieve "astronomical" results. System sellers take note! :-)

David


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mosaic1996
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David,

My target rates of return are based on a very conservative approach (risk wise) to the market that requires minimal time, and assumes no leverage. Note the short example, where I kept the market exposure to the account size. Check out TonyM's and Stevos' stated approach and performance.

The measures that I proposed are based on relative market performance, and only rely on doing better than the market index. My hypothesis is that you should be able to do better than the average if you can avoid several pitfalls which have been discussed ad nauseum on the forum. I must admit that this is easier said than done, and it took me ages to work out the basics, and please be aware that improving my performance is and always will be a work in progress.

On reflection, I regret using the term incompetent: it is too harsh, and it doesn't reflect reality. Specifically, it has been widely reported that the majority of people managing their own money underperform the market. Many of these individuals will revert to using Fund Managers. It is also worth noting that 50% or more of Fund Managers underperform the index.

Perhaps apprentice would be a better term. The reality is that most apprentice traders/investors don't become tradesmen (outperformance of the index). The attrition rate is especially high when apprentices are left to their own devices. I am positive that IC Forum has helped many apprentices make the grade. I know and appreciate that IC Forum has had a huge positive impact on my thinking and performance.

Cheers,
Mosaic


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adetsec
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David
Well said. QED


Comments for discussion only. Not to be construed as advice.

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david_louisson
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Adetsec and davkell – thanks for the positive feedback. Dave, I remember listening to a successful trader speaking at a STANZ (NZ equivalent of ATAA) conference who said that his ultimate measure of success was the precious time that trading, as a career, allowed him to spend with his young family.

Mosaic – I have been following the thread, and I believe that I understand where you're coming from. By selecting high flying stocks in growth sectors, and timing entries and exits with discipline, then even trading "hands off" medium to long term with conservative sizing (e.g. max allowable loss per position = 1%) I expect that it should be easily possible to outperform the market index.

It is theoretically possible for shorter term (swing, day) traders to make higher returns, as they are playing a completely different time-frame, that allows frequent compounding of gains (and losses!). One can also diversify across multiple uncorrelated simultaneous positions to expose perhaps 5% to 10% of one's total account, perhaps even using leverage. All of this creates the opportunity to make significantly bigger returns (perhaps anything between 100%-500% p.a. if one's system's profit factor > 2**) but of course the risk of drawdown is greater in like proportion. Given a large enough sample of prior results from either actual trading or back-testing, it is possible to run Monte Carlo type analyses to aid in establishing optimum theoretical position size, but of course one must always keep the psychological factors in mind.

** see https://forum.incrediblecharts.com/messages/12/408975.html
(However, it might be more difficult to achieve a PF > 2 when trading shorter term??)

It may likewise be worthwhile for a medium-to-long term trader to perform this kind of analysis, even if only as a guide. A PF > 2 or even 3 might well justify increasing position sizes beyond the "2% rule" (assuming sufficient experience, and the necessary emotional tolerance to risk).

As for the results that I quoted, I was fortunate to encounter a pre-Xmas price upsurge, with some positions giving 2-3 times return (thus far) to risk. Positions are sized at 0.5% to 1.5% each, with the 6 currently open positions totaling 5.3% risk on total capital, at the times they were opened. (Too bad it's only paper trading! :-)

Experience-wise, I am very much an L-plate apprentice.

David


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mosaic1996
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David,

I understand the theory of greater returns being possible to short term traders - that is why I started the thread by asking the following

I am interested in the return that others are experiencing so that I can gauge if it is worth the effort to develop and trade/monitor a short term trading system.

Is anyone willing to share the typical return that their system yields during bull markets?


To date, I haven't had any feedback from short-term traders that supports our theory/hypothesis of better returns for short-term traders.

Cheers,
Mosaic


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yogiinoz
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:-)

Hi folks,

Interesting thread you have going here Mosaic.

Sometimes the results of the sharetipping
competitions can be a guide to answering
such questions, as Mosaic has posed.

Recently, this confirmation came through from
Kiwi forum, where we pick 5 stocks at the start
of each year, with no changes throughout the
competition.

Here's the results of the average returns for
players in the past 4 years, as posted by the
organisers of that share tipping competition.

You may remember last year, we also won that annual,
online stock-picking contest ..... well now it's
official, financial astrology is streets ahead of
the competition. Here's our average, over the past
3 years of the competition, as posted by the
competition organiser .....

Posted by The P.O.D - 22/12/2005 :

For all those trainspotters out there...

Here's some results of punters who have been in the
competition at least three years...

NAME______2002_2003_2004_2005__Average

yogi-in-oz_____68%__101%__28%___66%

Rev____________58%__139%__-19%__59%
hob____________85%____4%___46%__45%
you_______16%_105%___-9%___57%__42%
stol____________35%__-28%__113%__40%
Go____________114%__-13%____4%__35%
The P.O.D______69%___-3%___18%__28%
Old____________58%___22%___-7%__24%
paul_____-28%_102%__-27%___46%__23%
spar_____-43%__91%__-20%___59%__22%
Tur____________43%____6%____1%__17%
bull____________43%__-27%___25%__14%
Dime__________-13%___47%___-5%__10%

AVERAGE___-2%__77%___-1%___35%__33%

Interesting that Yogi with his astro methodology
is at the top (and all positive) while Dime with
his fundementals is at the bottom.

This all means nothing at all, except that
unforseen random events play more of a part than
anyone here cares to admit.

ps - no offence dime.
The P.O.D. 22/12/2005 10:02:06 PM

==================================================

You will note that our average is DOUBLE that
of the average entry in the competition, over
the past 3 years ..... so, it looks like we
are doing something right ... :-)

happy days

yogi

:-)

(Message edited by yogiinoz on December 28, 2005)


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mosaic1996
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Yogi,

Excellent performance.

I am interested in the 5 stocks that you selected for the years that you were in the competition. Specifically, I am interested in the variance in performance between the stocks and whether the stocks are ASX200 or from the pennies.

Can you post a list of the stocks by year?

Cheers,
Mosaic


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mosaic1996
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Spider,

Your question BTW, where would you say that you fit on that 'scale of success'? prompted me to analyse my performance for the last 9.5 years against XAO. Whilst my performance over this period is more volatile than XAO, I have flip flopped between Fully Competent and Outstanding, with one Exceptional year, offset by a few L-Plate performances (in fact, if I was sensible I should have returned my learner's permit). I have mainly under-performed during bear markets as you can see below, but I am hopeful that I have addressed many of my shortcomings in this area.

In response to your question Do you have any figures for non 'roaring bull market' years?

Bear___XAO__Me
97/98 0.4% 20.0%
01/02 7.6% 45.0% up in a down market
02/03 6.1% 25.0%

Bull___XAO__Me
99/00 9.7% 10.0% down in an up market - not proud of this effort. I consider it to be my worst year.

I would like to add that I have become much more disciplined in the last 3 years largely due to joining the IC Forum. Prior to joining the IC forum, I was largely oblivious to XAO performance as I was happily doing my own thing. The main IC Forum impacts have been
* I have incorporated TA considerations into my investing decisions. I learnt these virtues from forum members, and by reading numerous TA books. I would not have read these books had it not been for this forum.
* One of the first exercises that I did with IC charting software was to cycle through the ASX200 stocks. I was completely gob-smacked when I saw the divergence in performance between these stocks. There were stocks with exceptional performance throughout bear markets, and others that had performed poorly in bull markets. This exercise had a profound influence on my thinking in regard to rate of return/hurdle rate/opportunity cost considerations for stock selection.
* the influence of the ASX200 exercise was strengthened by reading Weinstein, Elder, et. al, and from input from forum members such as TonyM, Stevo and Snifter.
* Whilst I had previously considered going short, I had not done so. My main stumbling block was ethical considerations. Thanks in large part to the forum, with special thanks to Spider and Dirty Red, I have become comfortable with the concept of shorting stocks and/or the market. I have setup an account with CMC, and have taken a few short positions to ensure that the process works. CFD providers paying interest on short positions, and not having to pay franking credits on short dividends also makes shorting far more appealing.

Hence, I am hopeful that my performance during bull, bear and trendless markets will continue to improve going forward. I am quietly confident that I can get my performance consistently into the Outstanding bracket in both Bull and Bear markets.

Cheers,
Mosaic


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yogiinoz
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:-)

Hi Mosaic,

Mostly oil stocks in past years:

2003 - NVS - ROC - CVN - KBO - TIM ..... 8th place

2004 - BPT - MOS - CUE - LIO - MPO ..... WINNER

2005 - EPE - COE - GOG - ICN - MPO ..... 21st place.

-----

Due to an expected downturn in energy prices,
have diversified into lotech/hitech/biotech,
for the 2006 competitions.

happy days

yogi

:-)


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dug
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I don't want to bug this educational and entertaining thread,but I just have a point mosaic about you're designating yogi's contest between pennies and ASX 200.
As I read the contest rules it was pick 4 stocks and look at end of YEAR results with NO Changes in portfolio allowed.

Thus I conclude that it is of little importance whether the picks be Swamp or Blue Chip.The volatility percent gains on low price stocks is Negated by the time period involved.IMHO.

on your classifications I tend to think of ASX200 exclusives as BarBque-set traders.
Only want to talk about the Well Known,a follower of Broker Fashion,can't work out a Buy Possible on their own without Industry back-up.
BarBque traders,to me that's more of an insult than being incompetent!! but I know you only buy Blue Chips because of the 'Liquidity' Issues.

Sorry if I've wrecked the party.Just ignore me.
No Reply Neccessary[NRN]


Dig for it.

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mosaic1996
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Dug,

I am just a bit bored because I am stuck at home waiting for them to deliver (today or tomorrow if all goes to plan) my new TV and Home Theatre system.

I gather that you don't want to share your performance with us.

Would you be willing to briefly explain your approach to mining the market: e.g., market cap, sectors, long/short/range tradig, duration of trade, etc as I haven't been following IC Forum very closely recently and am not familiar with your approach.

Re. My trading style. I do not concentrate on the ASX200. In fact most of my portfolio is outside the ASX200. Whilst I do consider liquidity, I am not overly concerned when I am very confident about a stocks prospects on fundamental grounds. In fact, I have one position that is probably 15 or more times average daily volume.

Re. Yogi's returns I was just interested in the composition of the results for the tipping competition. The rules (designed to make admin practical) are a bit strange, specifically, no changes to selections. Typically, people select predominantly pennies that have a chance/reason that they can become 10 baggers. I believe that this is a much riskier approach than ASX200.

I was also interested in assessing Yogi's claim that astro-analysis was superior to other more traditional approaches. If astro-analysis was in fact the magic bullet, I would expect that all of his selections would have performed well relatively speaking, rather than most of the gains being attributed to only 1 or 2 stocks each period.

Cheers,
Mosaic


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mosaic1996
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Yogi,

As I am a bit bored, I have done some charts of your performance in the tipping competition. Given that I have gone to the trouble of doing it, I thought that I may as well share it with you and the rest of the forum.

Year 2003


Versus XAO: 3 outperformers (inc 1 takeover), and 2 underperformers

NVS (takeover timing was perfect)


TIM (I recall your TIM posts on IC Forum)


KBO (the best performer)


Year 2004


Versus XAO: 2 outperformers, and 2 underperformers

It is a pity that the year didn't end in November. In the real world, you may have been stopped out with a trailing stop.

LIO (a penny dreadful, and now delisted?)


CUE


Year 2005


Versus XAO: 1 outperformer and 1 underperformer

COE


Cheers,
Mosaic


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dug
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I just shuffle money around,basically,mosaic.That's my style,I suppose.I'm not up to computer spreadsheets and fine details like that because,well I've diddled in figures for some years and I just want to give it a rest.It's like a plumber who won't fix his own houses'washers.So I can't even begin to lay out my results on an annual basis,I do my own tax return but I get the shivers looking back over them,so I'll pass.Lets just say I'm not exceptional.I just like to have the money there for what I need.

Now what I need is not things like Home Theatres.The Bill won't be any better on Plasma and Bold'n'Beautiful wouldn't improve on Wide Screen,so I get to give such 'Must Have' desires a miss.Guess I'm not very sophisticated but after all I am Brizzo born and bred so suppose one cain't have it all.

Now I think yogi's point was that there are too many random factors in the market to analyze fundo or techno so you may as well give Waves a Go.Something like that anyway.I think his selections are on a par with a method I use from time to time that's called Scenario Trading.Basically what's next Quarters/Years Dynamic to the Market going to be?You make a play based on that.It's a method for at least developing a WatchList segment so,for example,we have that Oil and Materials have gone up as a cost so you check out IT and Bio's for possibilities because these sectors should shine.
Sorry Mosaic,I feel like I'm telling you how to suck eggs or somethin'.

I've whiled away enough time in front of the Fan.I must get Air Conditioning.Wonder if any units have hit Cash Converters yet?Such are my concerns,miniscule right?
cheers,
jr


Dig for it.

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mosaic1996
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Spider,

To further highlight the importance of Rate of Return to trading results, and my simplistic approach using IC as outlined above.

I have plotted CTX and GAS with a trendline on a log chart (which gives a constant rate of return) that has been/was respected for a few years, the IC Rate of Change on a 12 month basis (an estimate of annualised return), and the relative performance to XAO.

I still remember CTX being discussed at around the $5 mark on the forum, and to be honest, I felt that the trend wouldn't continue - boy was I wrong. So there has been plenty of opportunity to get into CTX. I would be more cautious with CTX now as the energy complex looks like it may be starting to rollover. I suppose that we need to let the chart tell us when.

I hope this helps. Please let me know if you want more information.

CTX has been an excellent investment...


and much better than GAS....


Cheers,
Mosaic


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mosaic1996
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Dug,

I only got the plasma to watch Judy Judy which is about to start. See ya.

Cheers,
Mosaic


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mosaic1996
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TonyM,

I have faint recollection that you use StockDoctor as a fundamental stock selection filter.

Assuming that my memory isn't failing me, do you still use StockDoctor?

Cheers,
Mosaic


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msparks
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Hi Mosaic and Tony M and all
Interesting thread.
I was curious to know what period do you use to decide the share price ROR is outperforming the ASX.
Do these stocks then become the universe of stocks which to select from based on FA and liquidity ?

I have read that manage funds and shares that outperform for one year are usually in the top percentile band the following year and underperformers for one year will tend to congregate in the underperformers the next year.(most, not all of course)

Would anyone have any links or reference to this type of analysis,or studies or backtesting ?

All we are talking about here is RSI which means buying the breakouts and outperformers isn't it guys,(all sounds very professional as ROR etc but hey,lets get back to basics) which is also relevant to "what you see is what you get","don't second guess the market ", and "go with the flow Joe".

Merry Xmas and Happy New Year to all on this great forum.


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mosaic1996
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hi msparks,

I tend to get very nervous if XAO under-performance persists for more than 2 to 3 weeks. If it is really bad, I will normally pull the plug/get stopped out. I am more tolerant if I believe that I understand the reason for the under-performacne, and believe that it only temporary.

In regard to fund manager performance, I believe that what you say is spot on: of course there is an element of luck involved, but the returns are very much related to the skills of the people involve. I believe that smaller funds have the potential to out perform as they can be far more nimble. Unfortunately, I do not know of any research in this area. Many moons ago when I was looking at fund managers, I always looked at the 1, 3 and 5 year performance figure to look for consistent results. There were many funds that made virtually all of their returns in 1 or 2 years, and had shockers in the other years.

I have had a look at RSI as an alternative to my clumsy approach - I also like to keep it simple. I assume that RSI is Wilders RSI as I have plotted for GAS and CTX below.

My understanding is that the BUY signal in trending markets is an upward cross to above 40, which I have plotted for CTX and GAS. I have used 14 week period for RSI calculation (I used 14 as it is the default, and weekly because I am interested in longer term trend following - so no quantitative rationale).

I may have the charts/RSI wrong, but from what I plotted, I can't make an obvious distinction between CTX and GAS. Can you shed any light on how to best interpret RSI, or have I stuffed up completely?

GAS


CTX


Cheers,
Mosaic


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msparks
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Hi Mosaic
I cannot see much value in the chart RSI and would need to look further.
Try this
Hence my question re time frame you are working out the ROR of your shares compared to xao.

For example, seems we would have been a bit silly holding anything but materials and energy stocks over the last 5 years judging by the outperformance of these sectors compared to the xao and all other sectors (almost)in all time frames available from IC scan.

Sorted by 5 year Percent Change


Or perhaps just a top 20 trader may do the same

Sorted by 3 Month Percent Change (sorry about the label)


All we need to do now is prove that outperformance is not a one off event ?
Not much use if you are a long term trader and concerned about a few days underperformance however


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tony_m
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Mosiac, yes I do use Stockdoctor but not as a front end filter, that is, I first scan the entire market with my own scan first which focuses on the trend strength but includes a TMF threshold, a liquidity or cash flow threshold and a prescribed buy zone. FA is the last test.
Many stick with the ASX200 for liquidity purposes but there are highly liquid stocks in the medium/small companies offering high growth rates which I dont want to pass up, so for me the liquidity test works ok.

Whether the stock outperforms the XAO is a given anyway because the ROAR threshold is always above the XAO anyway so I dont worry specifically about RSI comparison.

The natural selection process tends to bring the outperfoming sectors to the top of the list which is sorted by ROAR anyway. However I stick with a policy of never having more than 30% or usually 3-4 stocks of my 10-12 stock portfolio in one sector. This means sometimes I might not get maximum exposure to the sexy sectors/s but it also means the risk is lower when sectors tank, sometimes quickly as they can.

I broadly try to stay out of sectors if the current market indications are not positive even if the scan throws up stocks which have great TA. For example right now I am out of consumer stocks with the bias of rising interest rates and gasoline prices reducing consumer spending. I do take notice of sector rotation. Conversely I try to have as broad market a exposure as I can within the framework of a 10-12 stock portfolio for risk management purpose.

Finally I pass the stock through FA with particular emphasis on company financial health then earnings growth, value in terms of PE compared to industry and PEG which is a good yardstick for growth potential. For example I haven't been in CTX for some time because it numbers suggest it has lost its growth oomph and it is better to put the money elsewhere.

I know that using FA is dismissed as unnecessary by many but I always have at the back of my mind the situation of the market tanking virtually instantaneously and I dont want to be in anything but companies I would be happy to hold on to if I have to. Also when I initially select stocks with TA it is normal to have more candidates than I need so it makes sense to use FA and pick the best from a risk management viewpoint.

Having this sort of approach works for me and is producing solid and fairly smooth returns. i.e. when the market is ok it is unusual to have a down week although with only a 10-12 stock portfolio the odd stock tanking can at times drag down the entire portfolio performance for a week or two. This happened recently with RCD going into an unusually deep retrace.....Tony_M


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mosaic1996
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Tony,

Thank you very much for your detailed response - it is much appreciated. I am sure that many others would have found it useful as well.

Mark,

I suggest that you have a look at this thread that covers a lot of ground including Hull's/TonyM's ROAR.. Start with the archived bits first, i.e., start at the start.
https://forum.incrediblecharts.com/messages/12/312624.html

IC doesn't have ROAR, so I use trendlines on log scale charts which is similar but not as sophisticated as ROAR, to determine if the trend is weakening/breaking.

Many authors have advocated using the simple system of selecting the best stocks in the best sectors. This is really self-evident. As TonyM rightly points out, it is sensible to add an element of diversification to mitigate risk.

Re. RSI. If you are referring to Weinstein RSI, then it is not the Wilder RSI. IC has two options for Weinstein's RSI: Price Ratio and Price Comparison. Personally I tend to use Price Comparison as it is clearer to me, and you can compare several stocks and/or indices on the same chart. See previous charts that I have posted in this thread.

I have plotted Price Ratio and Price Comparison for GAS and CTX.

CTX


GAS


Cheers,
Mosaic


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mosaic1996
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Spider,

Firstly, let me state that you were one of a select few IC members that made me realise that incorporating TA into my investment decision making could substantially improve my performance. I don't know if you recall my baptism of fire on the LLC thread http://www.incrediblecharts.com/userscripts/forums/show.plx?tpc=8&post=16687#POS T16687 that you started all those many months ago. Post number 8 for me, and I incurred the wroth of the BEAR!

Subsequently I learnt a lot from your excellent advice and opinions freely given during forum discussions, our personal e-mail exchanges, as well as discussions at several meetings of the Eastern Suburbs Traders Group. Is Bill Mason still around?

Furthermore, having read many of your IC Forum posts I am of the opinion that you have outstanding, if not exceptional TA knowledge and skills. You posted on this thread

Firstly,.....
My returns would probably not look as good as some others due to the cautious nature of my system which rarely sees me more than 50% involved.
So a 30% return might be easily called a 60% return on actual funds employed.
"Lies, damn lies, and statistics".

and later......
I confess to feeling a little inadequate in light of these levels that you have set, but I'm sure that I will climb the ladder in time.

From these posts I am reasonably certain that your outstanding/exceptional TA skills are not being translated into outstanding investing/trading results. This is why I offered the Rate of Return Filter suggestion.

Rate of Return Filter

In the second post you stated......
I also appreciated you helping me with my rate of return problem, the only problem here is that I don't remember mentioning what my rate of return was.

I remember using an example to point out the complexities of trying to answer your question, so maybe you mistook this for my rate of return.

An easy mistake to make, I do that sort of thing all the time, I see something written down, and instead of reading what is said, I jump to a conclusion, often the wrong one, and I get myself all mixed up. So don't worry about it, I do it all the time.


In actual fact, I did not pay much attention to example that you gave at it didn't make sense to me. My belief that incorporating some form of rate of return filter into your stock selection is based on reading many of your numerous posts (at least 2,342), and a previous response to a ROR question.

1. During an early ESTG meeting I asked you what sort of return you expected during bull markets, and you responded 25% to 30%. At the time I thought that this was on the low side.

2. You have stated on several occasions in the past that you don't believe rate of return should be a consideration, e.g., http://www.incrediblecharts.com/userscripts/forums/show.plx?tpc=12&post=46538#PO ST46538

3. On several occasions members, including myself, have pointed out that your selection of a strongly trending stock has a poor rate of return. Your typical response, whilst more eloquent, was that it was a strong/robust trend, and whilst it was a bit like watching paint dry, it was yielding a positive return, and that it is advisable to ride the trend until it ends.

4. As I place a lot of emphasis on rate of return, I automatically do a rough calculation of rate of return for stocks that have respected a trendline over several months. You are a prolific poster of these types of stocks. My observation is that many of these stocks that you posted, whilst in strong/robust trend are/were under-performing XAO.

Range Trading and Shorts

I also note that you have focused most of your efforts on IC Forum on shorts and range trade opportunities for approximately the past 12 months.

Personally, I believe that the aussie market is still in uptrend. If my interpretation is correct, then it is correct to assume that it would be much more difficult to make money going short/trading against the trend?

I also believe that Range Trading is a lot tougher than trend trading during a bull market, especially if the range is relatively skinny - I have seen you quote Elder's advice re. % of the range that you are likely to capture. However, I have also seen you post Range Trade suggestions that have a very skinny range. Of course, there is a big difference between posting a candidate and taking a trade, so I suspect that this is not an issue.

How to Measure Performance

If, and I really have no idea if this is the case, you have been focusing most of your investing/trading efforts on range trading and playing the short side, then this may explain your less than outstanding performance as I have defined it during a bull market returning 20%.

In an earlier post I guesstimated that Outstanding Performance in a Bear Market would be in the 13.5% to 27.5% range.

Given that you may be(?) trading against the trend, you could argue that you would require an even higher skill level to reach this level of performance. So would Outstanding Skills (not Performance) be required to a return 10% to 20% p.a. if you are trading against the trend?

Summary

I believe that your level of TA competence should translate to the higher end of my outstanding performance band.

I have hypothesised that your stated under-performance is possibly due to
a) a lack of a Rate of Return filter on your stock selection
b) possibly concentrating too much effort trading against the market trend
c) possibly concentrating too much effort on (skinny?) range trades in a strongly trending market

Clearly this is only my opinion. I will leave it up to you to decide if it has any merit.

Cheers,
Mosaic


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tony_m
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Mosaic, the rate of return factor is largely restricted to weekly charts and the chart needs to have developed a discernible trend slope. The calculation uses a variable period linear regression line or best fit trace of the trend as a base.

Daily charts tend to have much more volatility and consequently produce a somewhat more erratic rate of return picture of the trend growth rate, so ROAR is not really practical or informative. I use daily charts to complement the weeklies and in this case rely on a 14 period ADX to give me same relative idea of the trend strength. I also find that it is useful to ensure that the positive directional indicator is > or = 25.

Although I base my scans and TA decisions on weekly charts, the dailies also have to be good as well and are useful in refining entry timing in particular. I have a daily with the Guppy MMA's and ADX/DI and a buy decision expert and I always look for synergy in both timeframes. I think it is important to look at the dailies, since occasionally a weekly chart might be hiding something and also dailies are handy for pattern analysis.

Tony_M


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msparks
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Mosaic and Tony M

Thanks for this great thread.
Compliments to Snifter at the link posted here also https://forum.incrediblecharts.com/messages/12/312624.html

The rate of change in price seems to be a good indicator and will ensure the money is working hard if the trend continues and that is about all we can do.

Cheers and Happy New Year guys.

***********************************************************
Why be ordinary when we can be exceptional with much less effort !



I know it will, i don't have to hope it will anymore !


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david_louisson
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Hi Mosaic

Re your question about whether it's possible for shorter term traders to outperform medium/longer term, you might like to check out the following links:

http://www.tradingmarkets.com/tmu/store.site/swingtrading/Courses%20Web%20Semina rs/6284/

http://www.adaptiveswingtrading.com/

As far as I can tell, both of these products appear to "swing" trade US stocks, taking long, unleveraged positions only. The Raptor product is apparently averaging > 100% p.a. return over 10 years of simulated trading, with fair consistency. It does appear that its monthly gains are being compounded.

I'm not endorsing either of these products; I have no easy way of verifying the authenticity of the results. I don't know what allowances are being made for costs and slippage.

However, this does seem to suggest that results of > 100% p.a. are achievable using shorter term trading, under favorable market conditions.

David


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mosaic1996
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Tony, thank you for generously sharing details of your approach to trading that has shown outstanding returns.

David, I am very skeptical of the black box spivs. Personally I wouldn't even look at them.

Cheers,
Mosaic


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msparks
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Hi David

With the results the systems achieve,according to the tables posted, i just wonder why they would want to sell their golden goose to anyone else.


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julles
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I couldn't read the thread Moz,

I went from how does one to percentages, that did me in!


I will admit due to the shock of the question and the out come of response I Don't know !

That says a lot really.

But Simply a percentage of $50 000 is a heck of a lot greater than $5 000


Comfort zone's should be acknowledged ... Anyone who earns $100 a day compared to Packer earned (spec) $1 million a day , HAS a different outlook regarding their investment and or Trade!

Those that do trade and or invest in larger sums out side of their home,(super etc, self saved, inherited) should Not assume every one has been given the same opportunities.

Anyway great to see you posting and stirring up food for thought again.


Julles


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yogiinoz
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Saturday, December 31, 2005 - 01:36 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



:-)

Hi folks,

Just for the record, mostly oil stocks
in past years ..... :-)

Entries for the same 2006 competitions:

ASX: BKP - IMU - MOG - MOS - NHE

NZX: NZO - TTP - ABA - BCF - CML

Due to an expected downturn in energy prices,
have diversified some, into lotech/hitech/biotech,
for the 2006 competitions.

happy days

yogi

:-)


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david_louisson
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Hi Msparks

Yes, I agree - I've posted my feelings elsewhere on the risks of spending money on "third party" systems.

I too have always wondered why vendors feel the need to sell their "amazingly successful" systems. If their claims were true, then at 100% upward per annum, they could simply trade their way to colossal wealth in only a few years, and all without the administrative hassle of supporting customers. It's my guess that a lot of these guys make more money from system sales than they ever do trading.

Some of their sales pitch can be very entertaining. With particular reference to your golden goose comment, one of the best I've read is as follows:
"You must solemnly swear to keep the SECRETS you learn with XXX to yourself, and to never disclose this information in any way or any form to anyone outside your family - forever.... For the future of my family, I'm doing everything within my legal power to protect this information." Yet he is selling XXX over the internet (and of course the next 'n' buyers get it at a reduced price)!!

Nonetheless, I don't dismiss the possibility of achieving 100%+ from short term trading. Many of the "market wizards" apparently attain it. It's a goal I would like to (slowly) work towards myself (wouldn't we all? :-)

Happy New Year to all!
David


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cjb
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Hi David,

In reference to the links, I have in the past asked such companies for at least 1 year of verifiable trading results. Strangely enough they do not respond to such requests. One would think that it would be in their best interest to do so if their system is as claims.

CB


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redback
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Julles your on fire that punch must have been strong. I'm looking at contributing this year 2006 but man with comments like that I'll be thinking twice.

Hoping your year goes well in 2006. I know mine will do!!!! Well at least I hope it does.

Cheers and happy trading.

Can't believe the number of members joining in the forums in 2005 good to see. Is this normal?? It's a great site 4 charting/chating exchanging information everyone should become a member.



(Message edited by redback on January 01, 2006)


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carolyn
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Hi guys, interesting thread.

Just a question for msparks, and the post 284 on the 28th of dec, how did you do the sector scan. I have been looking for something like that, but I haven't really mastered the IC scan system yet, any help valued, like how did you set the scan up.

Thanks, carolyn


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david_louisson
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CJB – I agree, there is a message there! I recall encountering a vendor who offered to provide verifiable results AFTER I had signed up: http://www.successtradinggroup.com/2track.htm
(I note that they boast 247 winners from their last 254 trades.)

All – I finally got around to reading the interesting article in Stevo's link. The author's (Terry Odean) research tends to suggest that those who are "overconfident" (i.e. hold a strong belief that they can beat the market) are most prone to under-performing the mutual funds. I suspect, then, that he is very skeptical about TA – see also his parting comment: "The market is not completely efficient, but it is very hard to make money trying to beat the market. It is not impossible, but it is not easy. It is probably out of the reach of the average investor to do so through anything but luck."

And, asked the question as to whether winning and losing relates to one's level of investment expertise, Mr Odean concludes: "What I worry about is that investors with experience tend to split into two populations - active traders and buy-and-hold investors. I don't have a lot of confidence in the active traders."

But Technical Analysts believe that, by disciplined trading of a plan involving stock selection, setup, entry, exit, risk and capital management, that Mr Odean's assertions can be turned around sufficiently to allow the trader to:

1. Break even, by overcoming costs

2. Beat the market index

3. Ultimately trade for a living (i.e. profit highly and consistently enough that it is possible to keep the account growing while simultaneously depleting it to pay household bills on an on-going basis)

From what I read earlier in the thread, anybody from Mosaic's "(b) a competent or P-plate trader" through "(e) exceptional trader" can supposedly achieve both (1) and (2) on a yearly basis. (I'm neither agreeing nor disagreeing, and any skepticism in my tone is certainly not intended). I wonder what level of return is required to attain (3).

Mr Odean apparently favors the long term, buy-and-hold approach to investment. But what of the investors who (unwittingly) buy just prior to a crash? In it for the long term, they are unlikely to cut their losses quickly, so it may take several years for them to simply recover to break-even point. Isn't the notion that, since the markets have trended upward (overall) across the last 100 years, that they will continue to do so for the next century, nothing more an assumption? (To me the world seems more rife with economic and political unrest these days, than when I was growing up in the 1960s/70s). And isn't buy-and-hold putting all of one's eggs in one basket, time-frame-wise?

My last question raises, at least for me, the issue of statistical confidence. Mr Odean discusses the role of luck in trading, and further makes the comment "don't confuse brains with a bull market". For how many months (or years), then, must a trader outperform the index – or, put another way, how many trades must a trader make – before he can safely say that his success is conclusively due to his own expertise? (I guess that depends on one's objectives, and definition of success). I suspect that, for a medium to long term trader, a track record of several years – allowing for differing market conditions – would be necessary, which may be rather longer than many traders realize! Day and swing traders enjoy the potential benefit that they will attain statistical significance that much more quickly (some thoughts on short term trading here: https://forum.incrediblecharts.com/messages/12/524997.html#POST69348 – and of course the posts preceding and following it).

With a high enough profit factor over a statistically representative track record, and assuming that one can stomach the increased risk, it should be possible to safely and gradually increase one's position size beyond the 2% rule. As discussed in earlier posts, position size has the single greatest bearing on annual bottom line.

I don't necessarily expect answers to my questions. I simply note them as points for us all to ponder.

David


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stevo
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David
Nice post on Odean's research. What I like is that the research is based on actual brokerage trading accounts. Unfortunately Odean looks at averages not the extremes. For example what is the range of results achieved by traders in his analysis? I couldn't find it in the paper. How much variation was there in the results? We are probably more interested in the outliers, that percentage that consistently beat the market by a significant margin. I think that the idea that many overtrade and are overconfident is worth taking on board.

Trading for a living is much easier if you start with $10 million - you would be comfortable with a 20% return on $10 million, whilst a 100% return on $10,000 would not support too many traders desires.

I updated my quarterly results - I put them sideways otherwise IC said that the image was too big. Remember that I am a longer term trader, or "active investor" (whatever that means).

2005 did not have the level of realised profits as 2003 & 2004, although unrealised profits are building nicely for 2006. Q3 & Q4 2005 was the start of an accumulation phase for the portfolio - I virtually had to start up the systems again after the first half sell off.

Q1 & Q2 2005 saw some realising of longer held profits. Profits don't include dividends or bank interest I may have received and are before tax.

Trading capital in the market over the 3 years averaged $424,000, I've kept it pretty constant, although I was nearly 100% cash Q1/Q2 2005. The results are what I expect to achieve based on backtesting of the systems that I use. Also my current house is a bit of a money pit!

regards

stevo

quarterly

I would post my blog address with more info but IC doesn't allow it.


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tony_m
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Despite having had a great run since the market turned in early Feb/Mar 2003 I have no illusions about what the situation might be once the market really turns into a downtrend rather than the series of corrections we have seen since the bull run began.

I have had the comfort of living on my returns and just about doubling my funds since then. I certainly dont have any confusion about the ' brains versus the bull market theory'. Obviously the bull market has been the driving force behind the success and aided by what I believe to be a solid trading system which allowed me to consistently outperform the market.

I certainly understand as I think most medium/long term long trend traders do, that we are going to do it tough and the experience of watching the wholesale damage done during the downleg of the last correction in October 2005 should have been fair warning to everyone that no one will be immune to any downturn.

Very few stocks escaped the selloff unscathed and ably demonstrated that swimming against the tide would be difficult.

So for us portfolio trader/investors where to from there once the turn comes. One has a number of options like, hang in and hope for the best, retreat to the sidelines and wait it out with the funds in the bank , learn to trade short (not sure what the tax man thinks about that for DIY super funds), wait for the smoke to clear and look for the limited stocks that might still perform like the typical defensives, utilities and property trusts etc.

The solid downturn which ran from march 2002 to March 2003 with a fall of around 20% plus gives us an opportunity to look at the possibilities. Surprisingly some 18 of the ASX200 returned better than 20% PA and 80 of the XAO (about 500 stocks ) did the same.

I have studied all of those charts and in the XAO there were at least 12 which basically rose with solid trends throughout the entire 12 months with returns at least above 20% PA and in some cases around 50% and many more that had solid trends lasting 6 months or more.

I ran my trend scan with the date set during the middle of the downturn i.e. Sept 2002 and this returned 9 stocks in the XAO and 14 stocks in the ASX. The stocks have to meet very tight criteria to pass the scan. If I lowered the thresholds somewhat to more modest levels I am sure the numbers would be higher.

Based upon the research I am hoping that there will be enough pickings to sustain a modest portfolio of long stocks with the intent of at least maintaining the status quo, i.e. making enough to pay the bills without depleting the capital. I know that this flies in the face of the 'Dont be a bull in a bear market' theory and has yet to be tested.

Undoubtedly when the market turns the existing portfolio will face its fate and I would expect serious casualties until the portfolio was reshaped by the process of natural selection which would take over in much the same way as it would operate at any other time. Stocks will stop out and candidates although fewer will be assessed on their merits and life will go on albeit in a constrained environment.

Since I have not actually traded through a prolonged downturn this is all a hypothesis right now and I hope there are forum people out there who have been through this with an experienced view of reality. I would like to hear if so.

Tony_M


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julles
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Redback .... I'm so glad you found something to comment about. A forum isn't a forum unless people speak their mind.

I am looking forward to your buy's and sell's, Who knows maybe I could make some money riding on your back, the place that's marked RED.

Julles for ever yours, And always looking either way. :-)


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spider
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REASON FOR NOT REPLYING SOONER..................
AND SPIDER HAS A PROJECTOR!

Hi Mossie,
sorry for taking so long to reply.

Down to business.

I'm glad that you started this thread, as it has made me think.

I guess I dismissed ROR a while back, so it was time to take another look and see if I missed something.

I tried to remember why I put it to one side initially, and it dawned on me that it looks like the kind of crystal ball tool that investors would use to project their earnings on any particular position.

As I don't consider myself an investor, I guess I put it to oneside on that basis.

I notice that you use CTX as an example.
There is no arguing that it has been a spectacular run
, but I doubt that anyone would have 'projected' it's rise to these levels.

And that is where the problem lies with ROR.

No one knows what will happen next.
The best traders move on probabilities.

If CTX was so bleedingly obvious then why did approximately 260,000 people choose to sell their CTX shares just in the last 12 months?

The answer is an interesting one, that deserves it's own thread.




I am always concerned about trades that move too quickly


You mentioned a conversation we had a few years ago about how much I expected to make each year.

The 30% that I quoted was the minimum that I believed my system was capable of UNDER ALL MARKET CONDITIONS.
It was also based on trading only shares (as that was what I was doing at the time).

Naturally I expect my system to perform a little better than that when the market suits my system.

To be honest, I don't find these conditions to be ideal for my system.

My system is best suited to markets that change direction.


spider



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mosaic1996
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Spider,

Forget about ROAR for the moment, it is only muddying the water. My analysis of CTX, WPL, GAS etc are purely based on trendlines - nothing to do with ROAR.

I am sure that we both agree that a very sensible TA approach is to identify a trend, and then ride that trend until it ends.

I am not suggesting that you should try and predict what will happen in the future (for CTX or any other share), I am just saying what you have said on many occasions - ride the trend until it ends. Now if the trendline is respected, then you will continue to get the same rate of return going forward. So all you have to do is assume that the trend will continue, until your system tells you to get out.

All I am saying is that it is better to ride trends that have the best returns. This approach is advocated by many TA authors including Stan Weinstein and Alexander Elder.

Are you aware that if you draw a trendline on a log chart, then that trendline defines a rate of return?

Since IC fits the chart to the full screen area it is not obvious which stock has the best rate of return. The main clue is that the price gridlines are likely to be much closer together at the top of the chart.

Now CTX and GAS both respected their well established trends for many, many months.

It is unclear to me why you would prefer GAS to CTX. Do you have any TA reasons for excluding CTX?

If CTX was so bleedingly obvious then why did approximately 260,000 people choose to sell their CTX shares just in the last 12 months?

Thank god that there are always people (suckers - there's one born every minute) willing to sell me an excellent share at a bargain basement price!

I don't believe 260,000 people sold their CTX shares in the last 12 months. Where did you get this number?

Cheers,
Mosaic

(Message edited by mosaic1996 on January 05, 2006)


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chriso
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Hi everyone, getting onto the subject of annualised returns.
I calculate mine on the total amount of funds available to me if they are invested or not. Currently up %27.75 including dividends minus loan repayments this financial year.

Chris


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stevo
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William O'Neil uses something like ROR or ROAR in CANSLIM. It's the "L" in CANSLIM - Leader or Laggard. ROR, or simply rate of change over the last year can help to filter out the slower movers. Obviously the idea is to pick the strongest moving stocks. You can use something as simple as Excel to sort stocks using ROC.

stevo


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spider
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Mossies words.........
2. You have stated on several occasions in the past that you don't believe rate of return should be a consideration, e.g., http://www.incrediblecharts.com/userscripts/forums/show.plx?tpc=12&post=46538#PO ST46538

3. On several occasions members, including myself, have pointed out that your selection of a strongly trending stock has a poor rate of return. Your typical response, whilst more eloquent, was that it was a strong/robust trend, and whilst it was a bit like watching paint dry, it was yielding a positive return, and that it is advisable to ride the trend until it ends.

4. As I place a lot of emphasis on rate of return, I automatically do a rough calculation of rate of return for stocks that have respected a trendline over several months. You are a prolific poster of these types of stocks. My observation is that many of these stocks that you posted, whilst in strong/robust trend are/were under-performing XAO.


I had a look back at the post that you mentioned, and my feelings on the subject have not really changed.
I'm still amazed that experienced traders give this topic so much ink (including myself!)

But, what I didn't realize then, and I know now, is that we are probably talking about two different species of people, namely traders and active investors.


I cannot speak for active investors, but I do know that as a trader I am happy with any profit, any time!

My lifestyle depends on it.
No bucks no food, simple as that.


Like most traders, I regularly examine my progress.
I try to maximise my potential.
I try to find out where my weaknesses are, and discover ways of turning them into strengths.
I try to revisit my strengths.


So, you might ask, what is the difference between a trader and an active investor.

It seems to me that AI's trade the 'long' side of the market, and traders are constantly looking for opportunities to make make a buck no matter what the market is doing.

AN EXAMPLE:
You see GAS as a slow moving underachieving trade.

I see a position that has created several opportunities for me to maximise my return from GAS.

GAS has , so far , not given me any reason to exit.
It has given me a modest capital gain so far, and a spectacular return on each upleg by trading CFDs.

The reference you made in your most recent post to Stan W is a good one.
When Stan, and others , talk about A and B trades, they are refering to those times when the market is moving so quickly that we have so many trades to choose from that we have to be careful to choose the trades with the most potential, and I have written on this subject several times.

This is not the case at the moment, neither was it the case when I first opened the GAS position.

It's a utility share. You don't have to be Einstein to figure out that Utilities are not normally great growth shares. But, at the time the Utilities sector was doing well and GAS was doing better than most.

So, why wouldn't I choose to trade it?

All of the other positions that I picked up around that time have run their course, but GAS is still chugging along.

My point is that an "A" trade can look quite different at different times. (I never considered GAS to be an 'A' trade, just a good trade at the time).

Like most other traders, since that time I have traded several positions that have moved very quickly and returned high percentage returns (SPC springs to mind).

Sometimes you pick them right, sometimes you just get lucky, and sometimes you don't.

There have been heaps of things wrong with my trading this year, but not considering ROR has not been one of them.

spider.



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spider
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CTX.
Average number of trades times the number of trading days in a year, equals the the approximate number of people who bought/SOLD CTX during the past year.

260K is probably a bit conservative.
Even if you halved that figure, at least 100,000 traders believed that CTX would go no further, for the whole year that it went up!

The point being that nothing is certain, and I'm sure that I could find several trades that started out at the same trendline angle as CTX but did not continue on that angle.

I'm sure that I could find some examples of shares that started out with lower angles which ended up exceeding that of CTX.

YOU JUST NEVER KNOW UNTIL IT IS OVER.

spider.



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mosaic1996
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Spider,

We have been discussing longterm trend riding over several months. It doesn't matter if you call this trading or active investing - it is the same thing.

Having just reread Weinstein, I am still of the opinion that he is simply talking about the relative strength or rate of return irrespective of the stage of the market (see page 18 - Relative strength definition, and the numerous examples throughout his book).

If you can't see that it is better to own a stock returning 50% p.a. instead of a stock earning 20% p.a., then it looks like we will have to agree to disagree on the merits of considering rate of return.

However, you didn't answer my questions

a) what was wrong with CTX when it was $5 onwards? What was the sell trigger?

b) where did you get the 260,000 number of CTX sellers?

Cheers,
Mosaic


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mosaic1996
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Looks like our posts crossed.

CTX is an interesting stock. It doesn't have very many shareholders.

Number of shareholders
2002 25,592
2003 22,815
2004 20,612

So there is a trend there, Shareholders are making the assumption that CTX can't go any higher. Weinstein warns against making this stupid error.

Clearly some new shareholders will be entering, which means that there would be more sellers to offset the new shareholders as well.

However, your 260,000 or even 100,000 seem very unlikely. I think that you will find that there are a small band of very active traders that try and scalp few pennies at a time. You also need to allow for buyer/sellers that sell over a longer period of time, i.e., one buyer/seller generates many transactions.

The other interesting thing with CTX is that the TOP 20, the ones with the resources to analysis CTX, and those that get access to CTX management are accumulating whilst the small holders are selling. So once again the smart money has been fleecing the mums and dads.

TOP 20%
2002 72.99%
2003 80.28%
2004 83.11%

Cheers,
Mosaic


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mosaic1996
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Spider,

You stated that.......

The point being that nothing is certain, and I'm sure that I could find several trades that started out at the same trendline angle as CTX but did not continue on that angle.

I'm sure that I could find some examples of shares that started out with lower angles which ended up exceeding that of CTX.

YOU JUST NEVER KNOW UNTIL IT IS OVER.


We are in complete agreement on these points.

However, if you consider rate of return as part of your criteria for entering and staying in a position, then

a) if the high rate of return stock stumbles, then you exit the position

b) if the lower rate of return stock picks up pace, then you may enter this stock

this is the whole point of considering rate of return.

There is often a reason that many stocks respect a trendline, i,e,. they experience a near constant compound growth rate: typically the growth rate of the underlying business; the increase of project NPV with the passing of time; the derisking of projects as they get closer to reality; etc.

Cheers,
Mosaic


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stevo
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Spider
I would rather not push any particular style of trading, although I have my biases. Fortunately all sorts of approaches work (or don't work!).

Active investing could be considered trading; it certainly is by my accountant some years ago although, for some reason, I was trying to convince him otherwise.

If someone only shorted stocks and did not take positions on the long side would that make them an active investor? Time and activeness in the market seem to be important, but maybe the difference between a trader and an active investor is just a state of mind.

What category a market player falls in is probably irrelevant really; what is important to each player is whether their approach meets their goals. I am fortunate enough to not be reliant on trading returns to prosper so my goals are different.

stevo


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spider
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What category a market player falls in is probably irrelevant really; what is important to each player is whether their approach meets their goals. I am fortunate enough to not be reliant on trading returns to prosper so my goals are different.

stevo,
I could not agree more.
I only brought it up because I was trying to put my finger on why I don't use ROR.

If we agree that trading/investing is 95% psychology then the mind set of the person involved is most important.

Thankyou to all the kind and patient people who have contributed to this thread, I think that mossie and I have beaten this particular horse for long enough.
You made me think mossie, and for that I thank you.

spider.



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spider
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To answer the question at the top of this thread...........

just a little more than I made last year.

spider.



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holycow
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CTX Daily 06jan6


CTX Daily



My 2c...


1) chart 1 shows CTX has been trading range bound between $1-$5.50 from 1990 to end 2003, therefore if someone (back in 2003) were to tell me he didn't believe CTX has the potential to blast beyond 5.50 and chose to sell it at that level, I would agree if not praise him on that decision because on HINDSIGHT, it's not hard to see THAT decision was the most logical and the most rational one.

Also, on hindsight, at this point in time (7Jan06), it's not hard to see 2004-2005 had been an exceptional year for CTX, and if I have to make a call, I would say 2004-2005 for CTX looks more like an exception to rule. Applying 20/80 rule, last two years makes the 20% and the rest before that the 80%.

So moving forward, and it's what counts, what'll CTX's ROAR be? What's CTX's 2006-2010 growth, profit outlook is likely to be?


2) Chart 2 is the close up look of CTX between 2004-present, I believe point 1 is when I had a discussion with Bundy on CTX; I was making a series of assertions on why CTX was due for a correction, etc - in a way I was right, the correction set in. But subsequently I was proven wrong, because after the intermediate correction, CTX shot off like a rocket.


3) In point 3, I was crowing for a market correction, again I was right but against I was proven wrong subsequently because the market shot off like rocket one more time; but this time I have learned from my previous mistake, I took a ride with CTX at point 4.


4) If I were to tell people I got point 5 right I am sure no one will believe me and call me a hindsight hero... but no matter, here's the question on looking forward:


4.1) What's the expected growth, ROR and ROAR on CTX going into 2006? (good fundamental here: crude stays above US$60, US economy cruising, China commodity demand has not slackened - not my view, the "expert" view, Aussie commodity export is still growing if not maintaining the pace)

4.2) When will its trend fail? Or more specifically WHERE is the cut off level?

4.3) What's the accepted Rate of Return? And what is the anticipated rate of return? (The drop from 22.40 to 19 is about 8.4% loss; so at which point the cutloss will set in?)


Cheers.


HC

"... if you've got a chart, I have an opinion!"

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satitoca
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Good afternoon HC
not sure if im on the right track but it has already broken the long term trend line its tried to break back over on two occasions to no avail.I suppose it depends on what time frame you put on the trend my trend lines where on march 03 and nov 04. Short term to feb ive got it going down to $17.40 ish. As to ROR and ROAR no comments
Satitoca


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david_louisson
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Further to my earlier post (#175, 26 Dec), after another month's trading, the profit of 10.5% has become a loss of 3.5%. So the annualized return of 1241% is now more like a projected loss of 20.6%. Frustrating – how methods that work superbly in one type of market can fail so miserably in others. If only we knew what type of market to expect, in advance :-)

I came to the markets with my own agenda – to investigate the extent to which short term price movements were random – and I feel that, after almost 5 years of trial and error, I've achieved what I set out to do, at least to my own satisfaction.

David


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mosaic1996
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David,

What do you mean by random?

What are your conclusions after 5 years of research/trial and error?

Cheers,
Mosaic


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david_louisson
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Hi Mosaic

Re "random", see my post here: https://forum.incrediblecharts.com/messages/12/504749.html#POST83189

In terms of time frame ("swing trading"), see my chart at the end of this post https://forum.incrediblecharts.com/messages/9/661670.html#POST86226

What I'm saying is that the swing-trading approach I've been using doesn't seem to work. For it to do so, there needs to be a minimum of 3-4 consecutive bars in the same direction to allow costs (CFD spread + entry + exit) to be overcome, and this doesn't occur often enough. I've also been following the NR4 thread (Chart Patterns forum), and have been reading books, which I hope will provide fresh ideas. Swing trading means playing with very small numbers, very often, and necessitates great accuracy.

To perhaps exacerbate my problem, I've been trading sectors instead of stocks (CMC's UK stock prices are at frequently at colossal variance with the market: see my post https://forum.incrediblecharts.com/messages/106/702306.html), and I'm discovering that sectors move even more randomly than stocks, due possibly to the differently weighted stocks potentially "moving" the index simultaneously upward and downward in different degrees. Also, with CMC there are only 21 tradable sector indices to choose from – the stock trader could potentially be pattern scanning several hundred stocks for the best possible candidates.

While swing trading, to maintain the same risk/return profile as a longer term "position" trader, one would need to keep a tighter stop (since the profit target must be closer, given the short time frame). But I've found that this causes several potential winners get stopped out prematurely, turning wins into losses, while loosening the stop creates a very poor risk/return profile. Hence one needs an extremely high percentage of winning trades to compensate – which hasn't been happening. I've also had problems with overnight gaps – creating undesirably high (for long positions) entries, and also gapping over stops to increase losses.

Similar problems with entry: given the short cycle lengths, one either enters early (less confirmation that the trend has established itself) or a bar or two later (which risks missing the movement altogether).

Of course the alternatives are to move back to trading stocks and/or move to a different time frame, either "position trading" (which appears to be in keeping with the concepts in this thread) or conversely to day trade, where one has more bars (e.g. 5-min, 15-min, etc) to work with. Obviously in the latter case, one would need to find instruments with very small transaction costs (e.g. market indices).

Don't know how well I've explained this, but I expect that the "position trader", by trading across a longer time frame, has less problem with randomness, and is of course encountering (transaction + entry + exit) costs less frequently. Moreover, his costs are likely to be relatively smaller, e.g. whether trading a 10% move over a month, or a 2% move over 5 days, the cost is still likely to be (say) 1%. So it's more difficult for the short term trader on every front.

In some haste, sorry
David


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stevo
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David,
Nice post - 5 stars from me!

Your post sums up problems many people experience with shorter term trading. Yet it appears to many that greater gains will come from greater activity.

"Don't know how well I've explained this, but I expect that the "position trader", by trading across a longer time frame, has less problem with randomness, and is of course encountering (transaction + entry + exit) costs less frequently. Moreover, his costs are likely to be relatively smaller, e.g. whether trading a 10% move over a month, or a 2% move over 5 days, the cost is still likely to be (say) 1%. So it's more difficult for the short term trader on every front."

That's the way I see it. Transaction costs are lower, stress levels are lower and less mistakes are made. Also minor market fluctuations (as we have recently experienced) are much less likely to cause major havoc with the portfolio and a flurry of activity. I might have one sell next week, although I doubt it. A longer term trading strategy means that I think in years in terms of measuring performance, not weeks.

I am sure that some people do really well short term trading but I am not one of them. I realise more gains - in a triple bottom line sense (economic, social and environmental) - from trading longer term. I am a bit of a "stock plodder" when it comes to trading - caught in the grey zone between trader and investor. I think systems and process, but go with longer time frames for maximum gains.

They reckon experience is a good teacher - I would rather have the answer up front than learn to trade from experience!

stevo


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jimdene
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Stevo when trading for long period of time. What is your method as regards trailing stops


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david_louisson
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Hi Stevo

I don't want to be accused of too much mutual back-slapping :-) but thanks for your insight.

I came to the markets with my own agenda, the idea of a "casino" system, i.e. a casino can not fail to make money due to:

1. Positive expectancy on every transaction, i.e. edge, however small, is always in favor of the house

2. High transaction throughput, to give the edge most frequent and optimum opportunity to prevail

3. Money management: tiny max bet size relative to total capital backing, to allow survival during prolonged losing streaks

4. Strict adherence to fixed game rules (equates to following a mechanical plan with total discipline)

Recently I read this – http://www.arbtrading.com/expectancy.htm – which suggested that somebody else was thinking along very similar lines.

Doru Stoian posted this link – https://forum.incrediblecharts.com/messages/12/690220.html – which I enjoyed reading, especially given my interest in Blackjack.

I note your comment that "Yet it appears to many that greater gains will come from greater activity." I still believe that the basic "casino" idea has theoretical merit (some more thoughts on short term trading here: https://forum.incrediblecharts.com/messages/12/524997.html#POST69348), but the burning issue is whether the markets (i.e. in the context of short term trading) can deliver the positive expectancy needed for success, in the form of non-randomness, consistently enough. Linda Raschke points out that one only needs to discover a single pattern that delivers, on balance, to make a fortune – obviously (potentially) correct, in the context of all the above.

I read in Jack Schwager's "New Market Wizards" [Harper Business, 1992] that Raschke claims that she was winning 70% of her trades, and that the ave win size was more than 2x the ave loss size. That's a colossal profit factor, especially if that's swing trading (but I realize that the book was published 14 years ago). Still, the wizards are (supposedly!) confronted with the same price movements, and all of their randomness, that we mortals are. What I find frustrating is that, instead of disclosing precise data about their entries and exits, is the wizards' constant comment that trading is all about managing risk, and mastering your emotions. Of course that's true, and I don't mean to trivialize it in any way, but if one doesn't have a setup/entry/exit system that delivers more winnings than losses (over whatever trading time frame) then the best that money management and psychology can do is slow down one's (disciplined!) descent into bankruptcy. IMHO, Dean points that out nicely in his posts here – https://forum.incrediblecharts.com/messages/35933/725695.html).

I've just purchased, and am slowly working my way through, Alan Farley's "The Master Swing Trader" [McGraw-Hill, 2001], and was considering buying Larry Connors' "Connors on Advanced Trading Strategies" and Connors/Raschke "Street Smarts", but these books are expensive, and get incredibly polarized reviews ("best book on trading I ever read" through "absolutely none of their strategies work") on Amazon.com. So far I've found the Farley book fairly heavy going.

A quote from Gil Blake in one of your older posts (https://forum.incrediblecharts.com/messages/11/295533.html#POST43974), also from "New Market Wizards":
"2. Identify non-random price behaviour, but recognise that markets are random most of the time."
(In your post, you highlighted the first part of the quote, but for me the second part is becoming increasingly significant :-)

I can always revert to a longer term approach – there are a wealth of approaches (Blind Freddy, Weinstein, Snifter, etc) on this forum, and plenty of successful traders at our local TA group to swap ideas with. Perhaps I'm a glutton for punishment, but I really wanted to convince myself that the shorter term was unworkable, at least in the first instance.

All the best
David


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stevo
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David
Mutual backslapping when one is goes for tiny consistent gains and the other tries for 100% plus winners! We are really poles apart in many respects.

What you say makes sense, having an edge, high throughput, risk management and discipline. I suppose the issue is the requirement for throughput to make lots of small gains and, hopefully, a lesser number (or dollar quantity) of small losses.

My thoughts;
1. Someone on another forum said that they wanted to compound their returns by trading more frequently. I would suggest that profits don't have to be constantly realised to compound money. If a stock is going up the money in the stock is building on itself.

2. How many times have I held a stock for a few weeks only to see it put on 20% on a single announcement - lots. ASL is a recent example. It is surprising how often big announcements are signalled weeks before they happen. Chasing these stocks must be hard work for the shorter term trader.

3. How many times have I seen a stock move up/down 10% or more in a week, yet close a couple of percent from last weeks close? Frantic activity for a shorter term trader whilst the longer term trader might only notice a long tail on a candle.

4. The odd big move can really damage a shorter term trader, both financially and psychologically. Relatively big moves, in terms of average profits per trade, come along more often than I would like. If a trader is after 2 or 3 percent on average from a trade what does a 5 or 10 percent (like BDG down over 10% in one day recently) move feel like? If average profit/loss per trade is expected to be 35% then a 5 or 10 percent move doesn't appear to be such a big deal. If a trader is only after a 2% average profit then 10% wipes out 5 winning trades. Losses can get out of hand given the nature of the markets. Shorter term requires a lot of skill and not a lot of room for error. Sure there are guaranteed stops but I would rather not tell my broker where my stops are, even though I am sure that they wouldn't take advantage of this knowledge.

5. I am right into mechanical trading systems, but I want a decent positive expectancy, not a small one. For example for every dollar risked I would be looking for greater than a dollar return.

I don't have the platform or the tools to trade shorter term. I am sure that it is doable but I would have to spend a lot of time and money on datafeed, different brokers and research to get a potentially less robust approach to the markets.

Brokers love us to trade lots and actively encourage it. More trades equals more brokerage.

Jim
Trailing stops (or any sort of exit) can be anything that works! If it didn't work in the past what chance is there that it will work in the future? I don't put stops into the market since I activate them off the weekly close.

I find that an ATR trailing exit pretty good, but also use moving averages and maximum loss exits in one system. I check the systems on the weekend to see if any closes were below my exit point and act in the following week.

stevo


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david_louisson
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Hi Stevo

Re the "mutual back-slapping": Sorry if we were at cross-purposes, I was trying to compliment your post, and then explain the reasons behind my approach. When I came to the markets, my background (apart from being a computer programmer) was in games of chance. I am slowly coming to the realization – it's taken me 4 years, perhaps I'm a slow learner! – that short-term trading is extremely difficult, for the reasons we've both stated (increased randomness, higher and more frequent costs, etc). In trying to trade short term, I am experiencing for myself many of the problems that you've described.

On paper, the parallels between casino games and the market appear plausible, but in reality the similarities seem to break down. From what I've learned, I now put this down largely to the fact that one can't calculate probabilities in the market with any degree of accuracy, which is in turn caused by randomness in price movement. What I find curious, is that if short term price movements are essentially random, then one might reasonably expect longer term movements to be more so, since a long term movement is the aggregate of its component short term movements. Yet this is clearly not the case.

I think that what the guy on the other forum means by compounding is this: if (for example) you compound 1% each week, turning it over every week, for a year, the end result is a 68.3% gain, whereas the person who holds for the whole year at 1% per week ends up with 52%. (But of course, in reality that means timing weekly entries and exits, and overcoming more frequent costs, etc – the additional barriers would more than likely eliminate any benefit).

I agree totally about achieving a decent positive expectancy. Because the market probabilities can't be calculated with any accuracy, I think it's important to have a wide margin for error. This should also give one more confidence to keep to one's plan.

Unless I can find some answers from the likes of the Farley book, I'm just about ready to give up on the idea of swing trading, and focus more on a longer term. Many thanks for sharing your confirming ideas.

David


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mosaic1996
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David,

There is a big difference between casinos and equities:
a) casinos typically takes 3% to 6% of turnover from the punter for the house
b) ASX returns greater than 8% per annum on average to the punters.

I know which game I would prefer to play.

Are Sequence of Stock Price Movements Random?)

In my opinion the answer is NO.

On the included weekly XAO chart the green candles appear to group together. In other words there appears to be correlation between consecutive candles. Look at the grouping by magnitude of chage as well.



Cheers,
Mosaic


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stevo
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There does appear to be a pretty strong trend in place, one of the best trends for a decade.

With regards to the 1% a week example. If you hold one position for a year that puts on 1% a week then the investment will compound. $10,000 becomes 10,100, 10,201, 10,303, 10,406, 10,510 etc. The position doesn't put on a flat $100 a week, at least that is my experience.

I would only have a win loss rate of 50 to 60%, but find that the profit factor is over 3. My ability to pick a winner is not much better than random, but when I do pick one I milk it for all I can.

My understanding with shorter term systems is that there is a strong advantage in picking winners better than random because the profit factor is often closer to one.

After thousands of hours backtesting all sorts of systems I would say that it is much easier to build a robust system with weekly charts and a long term approach. But there are always exceptions. With systems the aim is to see how easily it can be broken. Come up with the strategy then try to break it with slippage, time span, or database choice.

stevo


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mosaic1996
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David, Stevo,

You may find this link interesting if you haven't seen it or something similar.

http://www.hquotes.com/tradehard/simulator.html

Cheers,
Mosaic


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david_louisson
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Mosaic

The idea of the casino concept is to shift the positive edge into YOUR favor – the market equivalent is to have a system of setup/entry/exit that achieves this, i.e. delivers greater winnings than losses. The article I alluded to in my previous post explains this more fully, in the context of translating this idea to the markets. Casino games like Roulette offer negative expectancy to punters, an expectancy that is precisely calculable; the house is guaranteed long term gain. Hence punters can really only play negative expectancy games for entertainment, not for profit.

Your XAO price chart shows non-random behavior in WEEKLY bars. Hence we are (supposedly) in agreement – that there is less randomness in longer term price movements. A daily chart would, I expect, show a more haphazard interspersion of green and red bars.

Day traders typically close positions the same day, swing traders perhaps within a week or two. My understanding is that the Connors, Raschke, Farley books, along with the contributors to the NR4/ID thread on the Chart Patterns forum, fit the swing trading time frame. There is one day trader who posts regularly here, who claims that he doesn't use weekly bars at all.

Those who hold positions for several weeks, even months – I would tend to call them "investors" rather than "traders". However, some books I've read describe this as "position trading". No problem – we're simply talking terminology.

Thanks for the link – I will take a look.


Stevo

Your comment "After thousands of hours backtesting all sorts of systems I would say that it is much easier to build a robust system with weekly charts and a long term approach." Given the difficulties I've encountered with swing trading (described in my earlier posts), I am fast reaching the conclusion that you are correct. But as you say, those who do succeed with short term trading – good for them; each to his own.

David


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cjb
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Hi David,

I personally do not see the similarity between casino games and the movement of a stock price. Using your example of the roulette wheel, no one knows what the next number will be. The game is designed around chance. In the stock market most people do not know what the next price will be for a stock but some do. They are the people making the current trade. There are also others who set the market. For me, price movements are not random as such. The price of a stock is arrived at by consensus. Of course this number may/will not be known before hand but is that random? An example:-

If I have an item that is worth $50 and have an auction with a mix of people ranging from people who know nothing about it to people who are experts and know that it is worth exactly $50 and run this auction multiple times you will find a distribution around the value of $50. The people who know the value will directly affect the price that will be set. The mugs will be buying over $50 and the pros under $50. Of course the mugs will soon learn they are paying too much and no one will pay more than $50. Now if the value changes to $45 dollars the mugs will still buy at the $50 level until they again realize they have been done over. The price will fall and once it gets below the $45 the pros will be back. For me, unknown numbers are not necessarily random.

As an aside, I developed a short term system a year or so ago that did work in testing but was somewhat intensive to implement. Some days you had no trades and others 4 to 8. With a short term system price points are quite critical and giving up a few cents on your entry/exit can really affect the bottom line. I just followed a watch list of 30 stocks but when the market was up you really had no chance of catching some of your prices. I have since given up on this system in favor of just trading the XJO/Aussie200 using knowledge of how the index moves intraday. Short term systems can work but contrary to belief the ones that trade most often are the worst. You need a high win rate in short term systems. This may mean you only have a few setups a week but many should work in your favour.

CB


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mosaic1996
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David,

You are confusing volatility and randomness. Stock prices movements are not random.

OK let's go to daily.



Again on the daily the reds and the greens tend to group together more than you would expect from a random sequence which indicates that there is a correlation between consecutive bars.

Now if I found a roulette wheel that threw up this type of sequence I would be very happy to play.

There appears to be more green than red, therefore I would bet on green.

It appears that red is more likely to come up after a red, and a green after a green, hence it may be feasible to only start betting after the first green, and stop betting when the first red comes up.

So how does this translate into a short-term/daily trading system?

Well, we only want to play the long side in a bull market. So only go long when the entry is above the 200 day EMA.

BUY on the daily close with the first green candle (the first up day).

SELL on the daily close of the first red candle (the first down day).

There will be lots of whipsaws, but I suspect that the returns would be slightly higher. Enough to offset additional tax? Probably not!

Do we have any volunteers to test this very simple system on XAO or XJO? For stocks I would also add some form of rate of return filter.

Not all trades make money.


Cheers,
Mosaic


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mosaic1996
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cjb,

You are 100% correct that the auction process is a primary reason that stock prices are not random.

Another dimension to this auction process is that a large buyer or buyers don't buy all of their desired position in a day. Their buying is undertaken over many weeks, months or years.

They have people working to maximise profits by trying to minimise average entry price and to maximise exit price. They will even sell some stock why they are building a position, presumably to shake more stock loose from existing holders. I know that they do this as they have to announce it to the ASX.

Many of the investment ideas come from brokers, hence you have multiple institutions doing the same thing. Institutions also do their own research to get a competitive advantage. Other instos monitor the market for signs that someone is buying a stock so that they can get on board early.

I believe that some of the volatility in the market is a direct result of large buyers/sellers trying to disguise their buying/selling and/or trying to shake more stock loose from longer-term holders/suck bargain hunter in.

It is a lot easier to work the market on entry than on exit. Hence the drops are usually happen quicker than rises.

Of course much of the short-term volatility comes from world events: economic; geo-political; etc.

Cheers,
Mosaic


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stevo
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Mosaic
The system you propose is probably not tradable because the XAO index does not accurately represent the CFD providers price. For example the open on the index is always set to yesterdays close price, but this is not the way it works in real life.

It might be more realistic to test it based on the close price, but I am not sure and that doubt can kill a system. Better still would be to get actual CFD historic data, although I don't believe that it is available. SFE data is probably more realistic but I haven't been downloading it lately.

The quick test I did on the XAO lost money quite nicely as soon as $10 a trade was added in, although margin, slippage and position sizing would all have an impact on the results.

stevo


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mosaic1996
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Stevo,

Thanks for running the test. Another theory bites the dust. I would have expected a similar performance over the chart shown from May 29, 2003.

I specified buy and sell on close rather than open, and the commission should be 0.1% rather than $10. Just eyeballing the data I didn't expect a negative return.

Cheers,
Mosaic


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david_louisson
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Mosaic, CJB

I don't disagree with what you're saying. But I have a "non-market-based" perspective on the market, and I believe that Technical Analysis makes such an angle viable. If I understand correctly, "pure" TA says that it's not necessary to understand all of the complex interactions that are simultaneously taking place between market participants (buying pressure, selling pressure, auctions, hedging by bookmakers and fund managers, actions of market manipulators, stop loss raids, whatever), but that all of this ultimately resolves itself manageably into two values – price and volume.

Given that I don't understand economics, fundamentals, market harmonics, chaos theory, supply and demand, etc, etc, TA gives me the hope that I can potentially profit from the markets simply through a statistical analysis of a sequence of numbers called price and volume. To me, it doesn't matter where this sequence is coming from – they could be generated by the oscillations of a quartz crystal, the numbers on a heart monitor at a hospital, the 3 p.m. temperature each day in Sydney. It’s just a sequence of numbers, and it would be a completely irrelevant sequence to me, except that there are financial bookmakers out there who are offering what to me is a game (a casino game, if you like) that they call "CFD trading". The basic rules of engagement are simple enough – all I need to do is guess whether any future number in this sequence will be higher or lower than the current one. Put simply, if my correct guesses outnumber my incorrect ones, at least often enough to cover the costs that the bookmaker imposes, then my bottom line will increase.

So the issue is whether patterns/trending/non-randomness occur frequently and/or long enough in the sequence, on average, to allow costs to be overcome, and hence attain profit.

My argument is not whether the underlying cause of price movements (motivation and actions of buyers and sellers) are random in their nature – I agree that they are not – but the extent of trending (or non-randomness) in the sequence of numbers that is ultimately being generated, and (given my previous discussions with Stevo) whether that level of trending is greater in the shorter, or longer, term.

Re "randomness", successful futures trader Bruce Babcock says that prices are ostensibly random, but with a trending component. As I said in a prior post, wizard Gil Blake says much the same "identify non-random price behavior, while recognizing that prices are random most of the time". If prices are non-random, why are "experts" such as these alluding to randomness?

Making money in the markets is apparently not that easy. From what I've read, a great many more traders fail than succeed. If the level of non-randomness (trending) in price movements was high enough to easily overcome costs, then surely anybody with a rudimentary knowledge of statistics would be guaranteed profit?

It's 5.15 am here, I need some sleep, so I won't try to elaborate further in this post. I don't think we're really in disagreement, it's just a difference in perspective. Perhaps my TA-based perspective is too simple, but it's the only one that I have.

Mosaic, I will volunteer to test your system, over the next few days, and report back with the results. I tried something similar with the FTSE some years back, and was amazed with the result – even though the trends (clusters of green and red candles) appeared obvious in the chart, I found that it was extremely difficult to profit. One of the conclusions that I reached was that my eyes were drawn to the conspicuously positive patterns on the chart, and that I somehow (whether consciously or otherwise) overlooked those negative ones that weren't so obvious. I also tried a coin-tossing experiment and found that long sequences of heads (equating to price rises) and tails (price falls) occurred quite frequently, creating the appearance of "trends" from purely random event generation.

Thanks guys for your input. I find this kind of theory interesting (I guess that's obvious!)

David

(Message edited by david_louisson on February 12, 2006)


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snorter
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Sunday, February 12, 2006 - 05:35 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



David

I have read many of your posts here on IC and agree with most of your theories and the thinking behind them.
The more often you can trade a plan that has a positive expectancy, the better obviously.

My current thinking is that trading holds of 2 to 5 days ( like you have been examining) is the most difficult timeframe.
Overnight changes in direction and especially gaps remove such a large portion of your expected profit.
These sudden reversals are the norm not the exception.
Whilst TA gives some guide to what the next day will bring, there are so many outside influences (the dj or commodities overnight for eg.) that the chart can't help with.
If you started a trade with a hope that capturing a move of say 3 to 4% (over 2 to 5 days) was reasonable, then the possibile overnight change of direction that you almost know will come might represent a loss of up to half that. You don't know whether that change will occur after 1 day or 4. The real problem is that most of this loss occurs when you have no control, that is overnight.
Translate these figures to what a long term trader might expect including reversals but remember they still have only the same overnight moves and therefore the periods of no control that you would have.

I do however think that if one shortens the time frame even more, that is to look at intraday charts they more resemble a long term chart and so does the required plan just with all the numbers changed.
I use a daily chart (much like I imagine you do) to establish trend direction and find an entry day, then use an intraday chart to find entries and later exits to day trade.
I hasten to add this is still just "current thinking" and not traded as spikes, halts and many other possible risks are still being mulled over.
The period of no control being removed is the attraction for me.

snorter


"Failure is not an option"

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cjb
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Hi David,

"Randomness" almost appears to be a made up word. For me it has a close association with variance. Wikipedia has an interesting def. http://en.wikipedia.org/wiki/Randomness

RE: Short term trading. You are correct in that stats play a big part in these types of systems and it is possible to develop a successful trading system based around this premise. What I found when I was developing my system was that exits were critical to success. You have to take the money while it is there. How much money is that? That’s where the stats help. You may have already tried this and if so please ignore.

Run a test over your entry points and calculate the max high point for each trade. Work this out in % terms. You should find a skewed distribution to the left with a flat right tail. You can then use this to gauge where the best % profit target should sit. For me I was using a 3 day system and my profit target was anything greater than 4%. Try and pick something where the number of winning trades including costs is > 60%. This does not mean that all trades are over 4% just winning trades. You will find that maybe 30% of the 60% hit the profit target but it is enough to make the system viable. If you are going to hold trade's over 5 days the % target will be different. I also had a rule that if the profit target was not hit within my 3 days I would exit. My entries were based on swing points so they were known before hand. It is easy to vary these numbers and see how it affects the final results. You can also add slippage to the equations and see what happens. I also only used stocks from the ASX50 and avoided stocks that were also listed on other exchanges ie RIO, BHP, NCP (when it was here) etc. The overnight gaps will kill you. As I said before short term trading can be quite frantic at times and price points are critical. This is why I changed to the index. Only one thing to watch and it is quite hard for people to play silly buggers with it.

CB


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mosaic1996
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Friday, July 14, 2006 - 04:31 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Well, the end of the financial/tax year has past. I thought that I would reopen this thread to see if anyone would like to assess their performance against my trader criteria (see below).

In part I am posting again because this thread made me focus on what I could do to improve my performance. Whilst there was an element of luck in my performance, I did make changes to my approach that I believe will have an ongoing positive impact on my returns. Specifically I will dump a stock that is not returning an adequate return, i.e., a return well in excess of the XJO or sector index.

XAO/XJO returned approximately 20%, so we had a bull market in 2005/2006. I am not so sure what 2006/2007 will hold.

So my criteria as detailed below would be....
a) a L-Plater would have a return of less than 20%
b) a P-Plater would have a return of 20% to 30%
c) a Fully Competent would have a return of 30% to 50%
d) an Outstanding would have a return of 50% to 100%
e) an Exceptional would have a return of greater than 100%

Cheers,
Mosaic

I had previously posted the following......

In a Bull Market, I would suggest the following returns based on a moderate risk profile.

a) Incompetent or L-Plate Trader/Investor: less than XAO return
Many if not all L-Plate traders/investors make all of the mistakes outlined in Stevos' linked article, plus several other mistakes that have been addressed on numerous occasions on the IC Forum. If you spend too much time on your L's, then you are probably incompetent.

b) P-Plate Trader/Investor: 100% to 150% XAO return
If you simply avoid stocks are in downtrend, and stocks that are under-performing XAO in the last month, I believe that you would achieve this level of performance.

c) Fully Competent Trader/Investor: 150% to 250% XAO return.
In addition to b) above, if refine your entries (don't get stopped out of eventual winners) and refine your exits (don't exit prematurely), I believe that you would achieve this level of performance.

d) Outstanding Trader/Investor: 250% to 500% XAO return
In addition to b) and c) above, I believe that all you need to do is to select the stocks with the best recent returns: the best stocks in the best sectors. This is an approach that has been advocated by many: Weinstein, Elder, Hull (a la TonyM), Stevo, Snifter, etc.

e) Exceptional Trader/Investor: > 500% XAO return
I believe that this is consistently achievable by only a select few. You need a real winning edge.

XAO has been returning around 20% (including dividends) for this bull market (nearly 3 years). This gives the following target bands, as detailed in my earlier post..
a) Incompetent or L-Plate Trader/Investor: less than XAO return = less than 20%
b) P-Plate Trader/Investor: 100% to 150% XAO return = 20% to 30%
c) Fully Competent Trader/Investor: 150% to 250% XAO return = 30% to 50%
d) Outstanding Trader/Investor: 250% to 500% XAO return = 50% to 100%
e) Exceptional Trader/Investor: > 500% XAO return = more than 100%

Now if we take a 10% trend/bull market, we would lower the target bands as follows:
a) Incompetent or L-Plate Trader/Investor: less than XAO return = less than 10%
b) P-Plate Trader/Investor: 100% to 150% XAO return = 10% to 15%
c) Fully Competent Trader/Investor: 150% to 250% XAO return = 15% to 25%
d) Outstanding Trader/Investor: 250% to 500% XAO return = 25% to 50%
e) Exceptional Trader/Investor: > 500% XAO return = more than 50%
I believe that these targets are realistic.

In a bear market I am less certain about realistic percentage returns, but I believe that the following gives some guidance, and are probably fairly conservative for modest cash rates.

a) Incompetent or L-Plate Trader/Investor: less than cash rate (currently 5.5%), and probably negative
Probably stays fully invested (long). I've been there and done that.

b) P-Plate Trader/Investor: 100% to 150% cash rate (currently 5.5% to 8.25%)
There are always some stocks that have a positive return. Realises that cash is better than stocks that lose money, and hence is likely to hold some cash.

c) Fully Competent Trader/Investor: 150% to 250% cash rate (currently 8.25% to 13.75%)
Willing to go short as well as long, and to maintain an appropriate percentage in cash.

Is this achievable? Lets assume that you have no long positions. You go fully short to the value of your portfolio, say $100,000 with CMC that requires 10% deposit ($10,000) and pays cash rate less 2% (3.5%) on short position. Let's assume that the market/your stocks lose 5% p.a. (very, very conservative?). Lets assume that you put the other $90,000 in a CMA or Bank Bills. So your return would be:
a) CMA $90,000 at 5.5% = $4,950
b) Interest on $100,000 short position = $3,500
c) Gain on $100,000 Short Position = $5,000 (very conservative)
Total return = $13,450 or 13.45%

d) Outstanding Trader/Investor: 250% to 500% cash rate (currently 13.75% to 27.5%)
Selects shorts from the worst stocks in the worst sectors.

e) Exceptional Trader/Investor: > 500% cash rate (currently > 27.5%).
There is that elusive winning edge again!

I hope that this helps to clarify my thinking. Whilst, the numbers make sense to me, the reality is that I have plucked the numbers out of the air based on personal experience, observation of others, and gut feel. Hence they may not make sense to others.

Cheers,
Mosaic


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ittrader
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Sunday, July 16, 2006 - 04:01 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



I use a fully mechanical system that runs on a computerised trade simulator.
It generates unambiguous orders, that encompases all trading decisions.
It is a white box.

I have run it live for 2 years.
---FY 2006 = 36.69% = competent
---FY 2005 = 20.70% = p-plater
------(First year had bugs, fixed for second year)

Overview
- Based on Alan Hull
- Uses EOD data
- Generates orders overnight
- All trades are market orders for the next open
- Trades Only ASX listed stocks
- Long Only
- No Leverage
- Back tested since 1-Jan-1998 (on above basis)
- - Annualised return 98-06 = 48%
- - Worst draw (measured daily) = 16%
- - Loosing years = 0


(Message edited by ITTrader on July 16, 2006)


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chart_rider
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ittrader

I'm interested in your figures and I have some figures for the same period, but, firstly:

How is your annualised return figure calculated?
Does your backtesting include pyramiding of profits, or is the trade capital kept at a constant size, with the winnings taken out?

CR


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ittrader
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Monday, July 17, 2006 - 01:50 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Chart rider

The APR is calculated on a unitised basis ie Time-weighted return, which neutralises the effect of cash flow (deposits and withdrawls), dividends are reinvested.

I happen to pyramid all profits, however the fund performance reported would be the same either way, but the amount in the fund would vary.

In summary, using this method it is possible to have a +ve NAV return and a $ loss, or a -ve NAV and a $profit.

Here is an inro to TWR (Time weighted returns)
http://www.andreassteiner.net/performanceanalysis/?Return_Calculation:Returns_wi th_Contributions:Time-Weighted_Returns


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chart_rider
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Monday, July 17, 2006 - 06:35 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



ittrader

TWR is well suited to the situation of pyramiding profits.

With reference to competency, I consider this to be associated more with the ability of a trader to develop and then follow a system. The system may be purely mechanical or otherwise.

Different systems produce different returns under different situations, therefore, to define competency by comparing returns is, I think, perhaps not entirely appropriate.

Brett Steenbarger, in "The Psychology of Trading", talks about intuitive traders earning fantastic returns for a period of time, by intuitively detecting certain patterns. But, if the market behaviour changes and the patterns fail to materialise, the same trader can suffer greatly reduced returns until new patterns are learnt.

If the trader is able to learn new patterns and then follow them with discipline, then this still indicates a high level of competency.

Use of a computer and back testing is a method to discover patterns, but the returns still rely on the competency of the trader to then follow the strategy.

As a comparison with your results, my trend following system returns TWR of 16% without leveraging. However, the maximum drawdown is half of that you have posted, and, together with the risk management that the strategy is based upon, the system permits 2:1 leveraging, thus raising the TWR to 30% (with reference to the size of trading capital, before leveraging).

Just to highlight differences between systems, used as described above my system generated 125% return in 2005, but so far only 10% in 2006. This contrasts with yours which appears to be performing better in 2006 than 2005.

Unfortunately, I was still developing my system in 2005 and wearing L plates accordingly, so I can only look upon the 125% test result with a green look on my face. But I'm like the big groper, lurking in the depths, patiently waiting.........waiting............

CR


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mosaic1996
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Firstly, thanks for the feedback.

Hi IT,

I am not sure if you realise, but my classifications are relative to the performance of the XAO (or whatever measure you believe to be appropriate to yourself). I believe that XAO returned approximately 15% in 2004/2005, so 22.5% would be ranked as fully competent.

Hi CR,

A lot of the measures that I have proposed are very arbitrary. However, the main thrust is to compare performance to the underlying market. In essence, if you are under performing the underlying market you are worse off managing your own money.

I also believe that comparing returns to the underlying markets over time gives you a better measure of the performance of your system. For instance,returning 15% when the market returns 3% (or negative) is a much better effort than when your system returns 20% when the market returns 30%.

Incidentally, if you are using calendar years, then XAO has returned just under 5% from close 30/12/2005 to close Friday 14/7/2006. So my (somewhat arbitrary) classification would be as at 14/7/2006:
L-Plate < 5%
P-Plate 5% to 7.5%
Fully Competent 7.5% to 12.5%
Outstanding 12.5 to 25%
Exceptional > 25%

Cheers,
Mosaic


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ittrader
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Hi Mosaic

The data I have for the XAO for FY 04-05 was close 30-June-04 = 3530.3 and close 30-June-04 was 4229.9 = therefore return was 19.82% hence 20.7% was a p-plater.

I very much liked the concept of the rating as it is fully quantifiable definitive, simple and conceptually appealing (better in rising markets, worse in falling).


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chart_rider
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Tuesday, July 18, 2006 - 08:05 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



mosaic

Some valid points there, regarding comparison of returns against the XAO.

Perhaps the measure of competency is related not to one thing but to a number of criteria, such as comparative returns, emotional control, adherence to strategies etc.

Yet another view:

So the story goes, 90% of traders lose money on a consistent basis.

As most people cannot lose money forever, due to both emotional and liquidity issues, then this 90% pool of traders must consist traders with a low average trading life span (perhaps a few months).

Then, by default, the 90% of losing traders are learners, while the 10% of winning traders are experienced to some degree, and in fact, are in the top 10% of the class. Now, anybody in the top 10% of their class must be considered an expert.

Thus, it could be said that any trader that can trade without consistently losing money is an expert.

CR


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ittrader
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Tuesday, July 18, 2006 - 12:08 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Chart Rider

Use of a computer and back testing is a method to discover patterns, but the returns still rely on the competency of the trader to then follow the strategy
Thats the prime reason I use the computer, so following it is a no brainer, emotionally hard, but a no brainer.

Would you like to compare and contrast high level notes on our different system approaches?

Mosaic
The other reason I liked your post is that I am doing pretty much what you indicate (ie Hull) and get almost the same returns you anticipate.

personally Im not fussed what the catagory names are (ie expert v idiot) its the returns that count, but while I agree that maybe 10% make money consistantly. There is no point at all (except for amusement) to trade and get less that the index


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mosaic1996
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Tuesday, July 18, 2006 - 01:47 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi IT,

I agree entirely that it is the returns that count, and that there is no point trading if you consistently underperform the relevant index (unless, as you say, as a hobby). In reality, this would mean that you are losing money compared to investing in an index fund.

My main aim with the relative performance bands was an attempt to define what are reasonable return multipliers when setting realistic performance goals for myself.

I believe that most can make it to the fully competent band, and that many can make it to the outstanding band.

I spent many years below my true potential, mainly due to being blissfully unaware what was possible.

CR,

You are quite right to point out that there are many aspects to successful trading/investing. However, my basic premise is that trading/active investing is about making money. Hence the best measure of the efficacy of on approach is some form of measure of return on capital employed, and that the measure should be relative to market/index performance.

I suspect that there is an element of 'urban legend' in the 90% of traders fail. However, I know that a large number of people don't make it. There are also many traders/investors that will eventually fail that remain in the markets for a relatively long period of time. For example,

a) many get a positive return in a bull market (possibly less than the market), and then get clobbered in the bear market that follows.

b) many failed traders just keep hanging in. I am amazed at the number of true believers in stocks such as ERG, MST, CMQ, et. al. Maybe these stocks will come good at some stage, but it would have been much better to invest in some of the strong performers and then enter these dogs when/if they turn the corner. This is not a case of hindsight, it is a case of basic TA.

c) many people enter the market late in the cycle with out a plan. They enter due to the smell of easy money: typically a friend cleaned up. A very large percentage of these are doomed.

d) many get greedy. For example, they may have some initial success, and then increase position sizes too quickly, and blow out as a consequence. This is often a result of using leverage: a lot easier now with CFD's vs margin loans.

The point that I am making is that there are many reasons that people fail. I suspect that a common thread is that they (understandably) lose the support of their partner as the joint finances take a beating.

I also suspect that the majority of successful traders/investors perform fairly badly in their early period (which could last several years). I suspect that traders that rigorously develop a tested system prior to trading are a rarity.

So we can be labelled as being persistent as well as having great self-belief. On the other hand, maybe, successful traders are really just too dumb to admit defeat.

Cheers,
Mosaic


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chart_rider
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ittrader

Yep, I'd be interested in further strategy comparison. Did you have any aspect in particular you'd like to discuss - perhaps you might want to email me.

mosaic

Interesting reading, and many a true word. Perhaps also some beginners find that they actually don't like trading, but stay in with the hope of making it rich and get washed out, or just do the sensible thing and stop voluntarily.

There is certainly a number of traders, from what I have seen personally, who want all the returns, but claim they have no time to devote to learning and developing. It's no wonder.........

CR


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mosaic1996
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Wednesday, July 19, 2006 - 04:31 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



CR,

The 'get rich quick fraternity' most often asked the question "which stocks?" I usually set them some homework (stuff to read) and tell them to get back to me. I don't fob them off. I really try and encourage them to do it. I typically speak to them for 30 minutes to an hour or more. Unfortunately no-one has got back to me so far. I find this really surprising.

Bottom-line, if they don't have the time to learn, they are better off in managed funds.

IT gave a very brief overview of his/her approach a few posts ago (see this link)
http://www.incrediblecharts.com/userscripts/forums/show.plx?tpc=12&post=96415#PO ST96415

Could you give a very brief description of your approach as well.

So far all of the people that have posted better than average returns are using a system that identifies strongly (rate of return wise) trending stocks.

Cheers,
Mosaic


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chart_rider
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I have a trend following system, that is essentially mechanical, but not 100% so, more details shortly on this.

Something I consider to be of utmost importance is the general condition of the market. To me, the XAO contains all information about the national and world socio-economic and geopolitical status, and trend trading can only be profitable when these events are favourable.

A day trader may consider only the market condition for a particular day. As a position trader, I like to know the condition of the market from a day to day basis and do this by combining a few different methods:

The first hard rule in the trade plan is trade only when the XAO is trending up, which is defined by the EMA10 being above the EMA20. If the moving averages become inverted, all positions are immediately closed until the trend recovers.

The XAO is about the only chart where I do other types of analysis, mainly support / resistance and fibonacci analysis. The fibonacci analysis is conducted on both the price and time scales and on the daily, weekly and monthly frames. Fibonacci analysis on monthly time frames is done with log scale on a chart covering about 15 years. In particular, I seek confluence between S/R and fib lines from several different time frames. In addition, I keep a chart of the number of ASX 300 stocks in which the price is above the EMA20, and look for divergences between this indicator and the XAO.

example.......
http://www.incrediblecharts.com/userscripts/forums/show.plx?tpc=6&post=93501#POS T93501

This type of XAO analysis helped me to retain profits in all of the past three corrections. However, as an additional precaution, if the XAO falls more than 2% in any one day, all positions are immediately closed. It is not unusual for a 2% fall to be soon followed by a moving average inversion.

Once having contended with the general market conditions, the rest of the plan is based upon moving averages. I trade only liquid stocks from the ASX300.

As you pointed out mosaic, many systems identify strongly trending stocks and I do this by monitoring the SMA100. Not enough slope on the SMA100, the stock is passed.

Entries and exits are then based upon the price action around the EMA20 and a couple of associated trading bands. Trading bands allow me to take advantage of price moves when the crowd goes into emotional overdrive on a particular stock.

Entries and exits are generally executed during the closing auction, but occasionally I will use 15 minute charts during the last hour or so to try and improve the entry or exit. However, sometimes this tactic goes against me.

All actions regarding the actual entry and exit are purely mechanical. Except for gold, which I analyse by its own merit, the bulk of the analysis work I do is on the XAO. As they say, trading has very little to do with picking the right stock and a lot to do with timing.

CR


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mosaic1996
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Hi CR,

Thanks for the detailed response. It was a lot more detailed than I had expected.

I am sure that many members will appreciate your openness.

Cheers,
Mosaic


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ittrader
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my system in outline

Essentially its a long momentum system that
•Buys high sells higher
•Has no take profit (all exits are trailing stop or time expired)
•Pyramids (buys again if it goes up)


On a monthly basis (first Monday of the month) build a pick list:
Starting with all the stocks on the ASX dump anything that:
•Trades less than $300,000 a day
•Less than 250 Mil market cap
•Returned less than a 10% (APR) annualized (share price growth)
•Has dropped more than 16%
Pick list is the remaining stocks sorted by APR.

Every day, on tomorrows open:

buy if
•53 day moving average on the index (XAO) is moving up
••For each stock in the top 10 of the pick list
•••If the stock closed yesterday on its highest close
••••spend 10% of portfolio cash on the purchase

sell any stock being held that
•has dropped more than 16% (trailing stop highest close since buy) OR
•Hasn’t made a new highest close in 40 days


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chart_rider
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ittrader

Some differences I think in trading style with regards to the trade durations. In my case the slope of the 100 day moving average is tested over very recent data, rather than checking annual rate of returns. This means that a stock with only recent recovery can qualify.

Also I enter more aggressively with larger capital portions, but a tighter stop loss of 5% or less, instead of pyramiding trades (not to be confused with pyramiding profits, ie adding profits to the trading capital).

Average trade duration is about 20 trading days.

Would you like to compare some other backtest statistics, based on 1 Jan 1998 to end June 2006:

Average win to loss ratio = 51.5%, standard deviation 0.8%
Maximum absolute drawdown = 6.3%, standard deviation 0.7%
Average profit index = 55%
Average win / loss size = 2.1

CR


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mosaic1996
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CR,

You may be interested in this site http://www.hquotes.com/tradehard/simulator.html if you haven't see it/something similar before.

Whilst my approach is mainly fundamental/company prospects based, and looking for technical confirmation, I found that introducing 'pyramiding' successful trades improved my performance substantially. Many of my successful (pyramid-able) trades have a much longer time-frame (many months to years) than your average trade, so 'pyramiding' may not add any value to your system. I just thought that I would mention my experience in case you have not yet fully researched the potential of pyramiding.

Cheer,
Mosaic


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chart_rider
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mosaic

Thanks for your words regarding pyramiding of trades, for it is these words, together with some discussions with IT, that have coerced me into figuring out how to run backtests incorporating pyramiding.

I can now see, even with the trade durations of a month or so produced by my method, that pyramiding really does offer some improvement.

More development work still to do, but by the looks of things I will soon be modifying my strategy.

CR


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ittrader
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CR/et al

Also think about it this way, back winning trades with more dosh, and take money away from less performers, hence the other rule.

•Sell if a stock hasn’t made a new high in x days

it serves to recycle cash that is not be put to optimum use

IT


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mosaic1996
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CR,

I would be interested in a summary of your findings on pyramiding, e.g., impact on returns.

Depending on the results, I may have a another suggestion.

Cheers,
Mosaic


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chart_rider
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mosaic

The effect on returns for my short term system, as it turn out, is minor. Once the additional brokerage is factored in, the effect is indeed negated.

There is some side effect in that pyramiding can spread the risk a little, but as I already have the risk aspects in my strategy well defined, this offers little advantage.

IT

I probably should do some more testing with time stops. Previous tests showed negative effect with my trade plans, possibly due to the running of fairly tight price stops.

A lot of the trade wisdom published in books, I have found, does not stack up well when rigorously backtested. This could be due to differing trade plans responding differently, or, the fact that many published methods are based upon historical traders who did not have the tools available today to properly test their methods.

The methods these traders from the past used may have been profitable, but not necessarily the most profitable, and not necessarily applicable to current market characteristics.

CR


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ittrader
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Hi CR

Agree fully, there are many potential reasons why what used to work may not now. I also believe that if one of the traits of a strategy are changed, then this may result is quite different optimum values for other parts.

I have the view that its worth separating out the stock selection logic from the logic that looks at the amount of money to be invested in it.

That then opens the question for discussions on allocation strategies separate from the selection, potentially then allowing for mix and match testing.

Would anyone care to propose different algorithms for cash allocation? Obvious candidates are:
1) All stocks get equal cash $(eg 5K)
2) All stocks get equal portfolio %(eg 10%)
3) ??
4) Pyramid based on extra 10% cash on each buy signal
5) ....

All have drawbacks, mainly around having limited funds but wanting to trade with most of the trading funds to get a worthwhile return

IT







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davkell
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IT;

You could consider Elder's 2% & 6% rules.

Don't risk more than 2% of equity on any one trade. Utilise a calculation of 2% of your equity with your known stop loss to determine how many shares to purchase.

With the 6% rule, you don't risk more than 6% of your equity at any one time. So initially you could only open 3 positions, but as your trades (hopefully) go up, your total risk will lower allowing extra trades.

A simple but worthy cash allocation and risk management strategy I think.


"Trade Your Way To Financial Freedom" - Van K Tharp

"Manage the downside; the upside will take care of itself" - Donald Trump

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