Hunting for 100%

For some reason unbeknownst to me, back testing is considered a viable means of study, but forward testing is dismayed as paper trading and therefor inconsequential if not outright detrimental.  I've come to the conclusion that these are not mutually exclusive strategies for trading improvement if you identify their strengths and weaknesses and how the information gleamed is personally applicable.

Highly successful traders tout the idea of studying past winners.  This is a common them past down from one generation to the next like a family yarn, but one thing I've observed is that there is a lot of effort placed in the fantasy of focusing on the unicorns.  In addition, there is a lack of attention paid to how these traders of yore modified their techniques over time accounting for varying market conditions.  While the winners of the Dot Com era may have net 100% gains over night, the study of them from a swing trading perspective to eke out a 10% gain over a week or two under current market conditions is somewhat misplaced.

While there is nothing wrong with studying past winners, and these studies can lead to future benefits, the issues I've noted that often arise is attributing incorrectly one's time frame, risk tolerance, capital allocation --among other biases-- to the chart in question.  In realizing the star gazer within me I've made focused effort in moving my market studies to real time so that moving forward I can more accurately access the past I've experienced.

For 2017 I've given myself a challenge of isolating stocks making 100% moves in real time.  The goal is not to capture these 100% moves, but one or two slices of 20% gains from them.  I want to isolate what makes these moves tick as they're unfolding to reinforce what the current market conditions favor as well as have data to back up whether or not I was able to capture these moves.  It's one thing to believe you would have been in a rocket stock of the past, but another to find your future self looking successfully backwards knowing you were.  

Through forward testing both in theory and in practice one of my aims is to dispel the charms of past patterns and the delusion of being in 1000% moves in stocks and focus these dreamer periods into actual effort of churning out 20% gains on a more frequent basis.  If I'm consistently aware of stocks that are on their way to making such moves in real time and not capturing a slice then there is a completely different issue to address.  Holding myself accountable for missing these is a priority in 2017.

Hunting 100% Movers in Real Time

Weekend Review 02/26/2017

One of my personal objectives this year is keeping money.  This seems like a patently obvious notion --and it is-- yet this has been a notable blind spot in my track record which I'm looking to rectify.  In practice this means being more disciplined and selective of the periods I will trade and how heavily I will expose capital.  In order to better quantify these periods I've begun to increase emphasis upon my % Win/Loss and Avg. Winner v. Avg. Loser to determine when my risk of ruin is drifting upwards as well as a risk/reward quadrant that aligns my trading philosophy more closely with my trading objectives.

One thing I've noted as the month of February comes to a close is that my Avg. Winner/Avg. Loser ratio has begun to decrease.  This is coinciding with the overall market reaching a zone that I consider to be extended.  A metric I pay close attention to is the percentage of stocks greater than 70 over multiple time frames, the 20, 40, and 200 day period.  As the number on all three time periods has clipped 70 over the past month of trading my near term expectation is an upcoming pullback across the shorter period with the possibility of carrying over into the higher time periods.  There is already evidence of this occurring over the 40 day period.

% Stocks > 20 Period Moving Average

% Stocks > 40 Period Moving Average

% Stocks > 200 Period Moving Average

Additionally the breadth trends I follow have been waning for some weeks now so the overall market is entering a phase that I consider to be higher risk with lower reward on my time horizon.  At these levels I'm becoming increasingly skeptical and focusing more on capital retention then appreciation.  I'll lean more towards reducing position size and expectation along with avoiding margin.   Continued erosion of these numbers would result in a breadth flip that would increase my cautiousness and begin to look at exposing capital on the short side.

Ratio of Stocks > 25%+ in a Quarter

Stocks > 13% over 6 Weeks

Test Driven Trading

In software development there is a technique called Test Driven Development which is a process of taking requirements of a project and breaking these requirements down into cases which will be accepted if proven.  These test are often derived from user stories and are typically broken down into unit test which test expectation of a function or method, as well as integration test which test a feature from end to end.

There are two common ways of testing.  One is to write the test the code is expected to pass first, and the other is to write the code then test against it.  What I'm interested in exploring from these concepts is how traders can incorporate this thinking to test their plan, debug inefficiencies, as well as introduce new concepts without breaking the current flow of execution.  How can traders approach their trading from the perspective of a software developer?

The process of an integration test can be used to develop a process from how to approach studying to setting alerts, entry, stop placement, and exit.  Once we have applied the theory of integration test we can apply the concepts of unit test for handling the minutia of a trading plan whether it be entry, placing a stop, or exiting a position.  For this I'm going to look at one specific syntactic approach: Given, When, Then.

Given, When, Then is a syntax that when coupled with Feature and Scenario complete an approach called Behavior Driven Development.  In this approach a small chunk of the trading plan such as an exit can be broken down such as:

Feature: I have an open position
Scenario: Exiting the position
Given: A trade hits my target
When: I take half off
Then: I will move my stop to break even on remainder.

Feature: Half Sized Open Position
Scenario: Exiting the position
Given: A trade hit my target and I moved my stop to break even
When: Price hits 20% from entry
Then: I will exit the remainder position

Now, when reviewing previous trades or searching through previous winners we have a focused set of criteria to pay attention to.  We can better understand how our previous trades would have worked under these guidelines.  Additionally since these test are being applied to the minimal amount of execution on our part, complexity setting in can be more easily identified by noticing when the test are getting too verbose and have too many steps or moving parts.  And, while these test may pass on past data, a complete integration test of this on one's actual trading plan may not work out as expected.

Simply because something worked in hindsight doesn't mean I will be able to execute.  As such, whenever I make a modification to a critical part of my trading plan such as an exit, I drop down in size and take twenty trades.  I don't assume I am going to act in accordance and can not presume potential frustration should this new exit technique not work under current market conditions or be psychologically comfortable to me.  By dropping down in size I reduce the risk to capital and some of the stressors associated with a position size I may not be comfortable.  Being undersized when using these parameters increases my chance of success in abiding by the rules and achieving a large enough sample size to be meaningfully analyzed.

Additionally, thinking in terms of test prevents straying from one's trading plan when making adjustments.  Often when something isn't working traders will jump ship and adopt a different trading style instead of maintaining a consistent philosophy and making necessary adjustments. Through testing each function of the trading plan it become easier to isolate and identify where potential problems are creeping in and handle them accordingly.