{"id":15792,"date":"2011-12-05T13:14:37","date_gmt":"2011-12-05T18:14:37","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=15792"},"modified":"2011-12-05T13:15:35","modified_gmt":"2011-12-05T18:15:35","slug":"a-few-spins-of-the-wheel-redux","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/a-few-spins-of-the-wheel-redux","title":{"rendered":"A Few Spins Of The Wheel Redux"},"content":{"rendered":"

We made a fundamental error in calculating the returns in our last article, and many thanks to one of our readers who was on his toes and caught it.\u00a0 Some of our calculations were based on dollars per trade and others on dollars per share\u2014clearly a case of pineapples and pomegranates, along with doing the calculations much too late at night, so let us clarify the situation:<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 Rather than using a made up example, we will show everything running through one of our models, using the Russell 2000 ETF, IWM.\u00a0 In each case we are using $10,000 per trade and not compounding the results.\u00a0 All examples are holding trades overnight\u2014that is, they are not day trading examples.<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 We will use $0.01 of slippage on each side and $0.005 in commissions per share.\u00a0 The slippage would \u00a0be close to zero if we were using limit orders, setting the limit a penny or two above\/below the price that triggered the signal, but we want to show the impact of a modest slippage assumption so are including it in the calculations.<\/p>\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 The trading system we are using will have a sweet spot\u2014they all do\u2014and if we go much above or below that range, results will start to deteriorate even without slippage.\u00a0 I don\u2019t know where that will be with the Russell, so we will discover it together.\u00a0 This was going to be the subject of another article down the road, but let\u2019s take the time to look at it here as long as we are filling out the table.<\/p>\n\n\n\n\n\n\n\n\n\n
Signal\u00a0 Generator Periodicity<\/strong><\/td>\nExpectancy<\/strong><\/td>\nAfter Friction<\/strong><\/td>\nImpact From Friction<\/strong><\/td>\nTrades Per Day<\/strong><\/td>\nNet $$ Per Day<\/strong><\/td>\nNet $$ Per year<\/strong><\/td>\nReturn On Capital<\/strong><\/td>\n<\/tr>\n
Weekly<\/td>\n$146.97<\/td>\n$142.46<\/td>\n-3.0%<\/td>\n0.034<\/td>\n$4.84<\/td>\n$1,211<\/td>\n12.1%<\/td>\n<\/tr>\n
Daily<\/td>\n$88.25<\/td>\n$84.24<\/td>\n-4.5%<\/td>\n0.063<\/td>\n$5.27<\/td>\n$1,316<\/td>\n13.2%<\/td>\n<\/tr>\n
Hourly<\/td>\n$55.42<\/td>\n$51.53<\/td>\n-7.0%<\/td>\n0.47<\/td>\n$24.13<\/td>\n$6,031<\/td>\n60.3%<\/td>\n<\/tr>\n
30 Minutes<\/td>\n$35.12<\/td>\n$31.14<\/td>\n-11.3%<\/td>\n0.93<\/td>\n$28.96<\/td>\n$7,240<\/td>\n72.4%<\/td>\n<\/tr>\n
10 Minutes<\/td>\n$14.02<\/td>\n$9.91<\/td>\n-29.3%<\/td>\n2.6<\/td>\n$25.77<\/td>\n$6,442<\/td>\n64.4%<\/td>\n<\/tr>\n
5 Minutes<\/td>\n$2.17<\/td>\n-$2.14<\/td>\nna<\/td>\n5.1<\/td>\n-$10.82<\/td>\n-$2,706<\/td>\n-27.1%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0A few hours later after burning a lot of electrons, we now know the answer\u2014the sweet spot is somewhere south of a daily timeframe and north of 5 minutes. \u00a0Going below 10 minutes for example was pretty horrible\u2014it wouldn\u2019t take a lot of work to see exactly where things fall off the cliff\u2014ditto for going above hourly–but it really isn\u2019t necessary since the \u201cperfect\u201d timeframe for today will move around a little over time, and we don\u2019t want to curve fit so tightly that there is a cliff just above or just below\u2014that is a pretty sure way to not make much money, or more likely to lose it.\u00a0 In this case, we would want to stay north of 10 minutes since the cliff is near, and we would probably look a little harder between daily and hourly signals to see what we could learn.<\/p>\n

5)\u00a0\u00a0\u00a0\u00a0\u00a0 Take a look at the impact of friction.\u00a0 It is nominal until we get down to the 10 minute level, and then it balloons, so it will also be a major factor in falling off a cliff somewhere below the 10 minute timeframe.<\/p>\n

6)\u00a0\u00a0\u00a0\u00a0\u00a0 Unless you were going to just trade IWM\u2014nothing wrong with that idea by the way\u2014we would go through all the potential candidates and look for patterns in common, such as where do the timeframes group; what are the best parameters for each time frame; can we get all the assets into a single set of metrics, or at least just a handful so we minimize the risk of curve fitting; and so forth.<\/p>\n

7)\u00a0\u00a0\u00a0\u00a0\u00a0 The key message is that we want as little curve fitting as possible even if it means we sub optimize every single asset, if by doing so we can have more confidence that we will achieve similar results in the future on a portfolio basis even though every single asset may vary from the back tests when looked at on a standalone basis.<\/p>\n

8)\u00a0\u00a0\u00a0\u00a0\u00a0 A general comment about trading lower order signals\u2014the lower the stock price, the more shares you have to trade to make a reasonable dollar return, so friction can mount.\u00a0 When we are trading intraday signals, our average stock price is in the neighborhood of $50 per share which minimizes friction.\u00a0 We do trade stocks as low as in the teens, but they have to be very exceptional in our selection process to make the cut\u2014we\u2019ll save that discussion for later.<\/p>\n

And next time we really will look at how you can lose all your money even with a trading system that has a high expectancy<\/p>\n

Author:\u00a0 Rick Martin<\/p>\n

For more information or answers to your questions, email Rick at rmartin@smbcap.com<\/em><\/p>\n

Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.<\/em><\/p>\n

There are no relevant positions in IWM.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

We made a fundamental error in calculating the returns in our last article, and many thanks to one of our readers who was on his toes and caught it.\u00a0 Some of our calculations were based on dollars per trade and others on dollars per share\u2014clearly a case of pineapples and pomegranates, along with doing the calculations much too late at … Read More<\/a><\/p>\n","protected":false},"author":921,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,1936,1938,1937],"tags":[19,70,1019,68,215,1947,1943,1710],"class_list":["post-15792","post","type-post","status-publish","format-standard","hentry","category-general-comments-2","category-ricks-blogs","category-systems-development","category-systems-trading","tag-algo-trading","tag-algorithims","tag-algos","tag-blackbox","tag-developing-trading-systems","tag-gray-box","tag-system-trading","tag-trading-system","no-post-thumbnail"],"yoast_head":"\nA Few Spins Of The Wheel Redux | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/a-few-spins-of-the-wheel-redux\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"A Few Spins Of The Wheel Redux | SMB Training\" \/>\n<meta property=\"og:description\" content=\"We made a fundamental error in calculating the returns in our last article, and many thanks to one of our readers who was on his toes and caught it.\u00a0 Some of our calculations were based on dollars per trade and others on dollars per share\u2014clearly a case of pineapples and pomegranates, along with doing the calculations much too late at ... 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