Checkpoint 5

Project finished. The technical paper documents project b. It will be used as basis for future development of system z. Off for a break.


PS: I have been in market for two years, this is my sincere advice.

Stay out of stocks or funds if you havent start. You will most probably going to lose money. Chances are that you will be richer putting hard-earned money in a bank. Take my word as final.

If you are already deep into it and still want to learn, then:

1. Understand the stock market cycle, institutions & public
2. Pick and master any entry method (eg FA, TA, fengshui)
3. Use trailing stop to automatically cut losses run profits

Paper

Snippets from system z technical paper.

Stress-testing strategies:


Trailing stops on HSI:


Entries versus exits:


Trading systems on DJIA:


Recent signals posted to CNA:


The stock market cycle:

Oil

System Z analysis of black gold.


Updated April:
Somehow program is able to avoid first two whipsaws and initiate buy call on the 3rd rally, which sees oil rallying from 40 to 50+.


Updated May:
There's a whipsaw around 48 where system exit and re-enter, riding rally to 66. Shall stop updating or risk sounding presumptuous.

System Z

My understanding of trends after two years. Completed my first trading system. Its a starting point, not destination. What's next?

I use the program to read market. It takes care of my trading principles and rules. Leaving pattern recognition to me.

Checkpoint 4

System Z completed.

The trend-following program automatically analyze market price movements and suggest the position (long, short, stayout) a trader should take to maximize his returns over longterm.

Its strategy is as follows:
1. Buy on long impulse with cutloss stop
2. Raise stop if next entry signal is higher

The long impulse detector is built using principles of price acceptance, consensus and timeframe. The program is developed and rigorously tested on wide range of counters/indices, over periods from 2 to 80 years.

To further confirm its robustness, when the program is applied to counters that are not used in the development process, it yields similar outstanding results. For eg AUSGROUP:

How system would trade Hongkong Stock Index:


Besides trending stocks, it can also handle cyclic stocks:


Through reducing discretionary interpretation and emotional handicaps of a trader, system helps to increase objectivity and hence profitability of trading. It is able to apply my trading knowledge in a consistent and emotionless manner.

The beauty of the system is it does not attempt to predict the future. No one can be sure of the future only until it happens. Nobody can see a huge runaway trend until after it happens.

The program identifies the likely short term price direction and take up a position. If its wrong it cut losses short. If its right it pushes the edge until the full move has played out. It is more like a sensible betting system than an elaborate analysis of technicals.

THE LESSON:
This is a special moment for me. What's next?

Project P - using public analysis as basis for TA?
System Z - building a live trading track record?
Project B2 - R&D enhancements for System Z?

Project P

After the paper I will rest, before starting a new project
(3-month long) to research the following:

1. Fundamental-analysis investors
2. Institutional support and propaganda
3. Public interest level and participation

After two years in stock market, I still choose the technical approach to trading. We have seen how in 2007 fundamentals are still rosy with optimism and how prices of market leaders start stalling and making technical lows. The phrase "price action precedes news and fundamental readings" cannot be contented.

However, after seeing pretty much the technical perspective, I have come to the conclusion that technical analysis is but a small aspect of profiting from market. It is the tool to tell me when to act on what, with fairly acceptable precision. But, the environmental conditions that provide the basis for TA to work is definitely not based on price action. It is based on a bigger scheme of things, which I suspect by mastering it, half the battle is won for the technical trader.

This bigger scheme of things come in different names, fundamental analysis is one of them. I not going to throw away TA and embrace FA. Rather, I am interested to understand the people who believe in FA (there's a huge crowd out there). The thinking process of institutions picking credible sectors/counters which they know can spin a good story and attract a following from FA-practitioners. Followed by technical traders who spot price actions from FA motives. And finally the public, whose interest and participation is the pre-requisite for providing "madness of crowds", the very fuel that sustain big and strong trends.

Bottomline - I need to know how interested and involved is the public and what institutions are planning to get the public interested and involved. Without public participation, you can only have professionals playing with one another. There is no "meat"; there is no strong trend. To have big gains, somebody has to take big losses. That somebody has to be the public. By hook or by crook, they have to be lured into taking on that role.

As I understand, the technical investor could possibly come out as a winner, amid this trading world with too much information.

Revisions

Prototype Revisions:
1.8 - long/short system
1.7 - user & trader mode
1.6 - finalise buy signals
1.5 - negation trailing stop
1.4 - inc cole breakout signal
1.3 - port system to short-term
1.2 - finetune system parameters
1.1 - entry strategy & basic exit

Lots of late nights and burnt weekends. The results outperform what I set out to achieve 6 months ago. Writing a technical paper soon.

Future Directions for Project B2:
0. sensitive entry
1. newlow negation
2. enhanced shorts
3. hourly raw data
4. sizing strategies
5. anti-ranging filter
6. pattern recognition
7. symmetry estimation
8. artificial intelligence

Backtest

Notice the following while backtesting:
Post-project comments in bold.

1. A typical winning trend system (generally most profitable strategy) will subject a trader to large number of small losses and only a few big winners. If risk position sizing or psychology falters how? Understanding this and inevitable drawdowns is vital for someone to sit tight to plan.

2. Without leverage at all and using 100% of capital, such a system will subject a trader to 50% max drawdown within few years. Imagine always leveraging just 2X, what will be the unescapable fate? Either dont leverage at all or should you leverage adaptively? To chew.

3. Even for such profitable methods, commissions can eat between 10-50% of final profits. What if the method chosen is not good and doesn't even yield enough profits to cover commissions? Development goals of System Z is to balance max profits vs min number of trades.

4. The inherent noise level of a stock doesnt change just because you trade it short term instead of long term. The short term position is exposed to larger odds of price going against it. The bigger cutloss required reduces reward vs risk. Sitting tight will make most in trending markets, not in-out.

5. Depending on an investor skill of interpreting market cycles, buying and holding can often yield better profits than trading a counter, without the hard work of trading in and out. Combine Public/Institution/FA analysis with TA to be technical investor? To chew in Project P.

6. The shortterm method of buy at channel support and sell at channel resistance is not a good strategy. It only works in final phase of bull where prices go up steadily, even then profit gains is small compared to riding full move from inception. Adult scalper. Miss big move due to short focus.

7. Most breakouts retrace to test breakout price. If you chase, you can almost always get it cheaper later. If don't chase, you will miss entirely the rare (and big) runaway trend without retracement. Results favour chase but whichever way more important is consistency.

8. There is no "best" method as 2 methods applied to 2 different counters can give no clear winner. Should we adopt a method that yield consistent good profits over broad range of counters? Or instead one "perfect" just for a few counters? Of course, one with evenly spread results for stability.

9. Systems live. They grow, mature, die, revive. Some systems that work for long time, equity curve will break major support one day and go downhill. Systems built on general laws of price action less susceptible but still not infallible. Before that, note signs and develop a successor system.

10. The only time when it is easy to make profits is last 10% time of a bull market. Trades yield big gains with little cumulative drawdowns and paper losses in between. Thats when you see many friends getting interested in stocks.With public interest, its time to make hay while sun shine.