06/24/08

Date: 06/24/08
Open: $55.93
High: $56.44
Low: $53.88
Close: $54.45
Volume: 2,747,162
Advances: 9
Advances>=4%: 1
Declines>=4% 22
Daily Change: -2.803%
Dow: -0.30%
Nasdaq: -0.73%
S&P: -0.28%

06/23/08

Date: 06/23/08
Open: $55.12
High: $56.78
Low: $54.20
Close: $56.02
Volume: 2,529,149
Advances: 70
Advances>=4%: 27
Declines>=4% 2
Daily Change: 2.03%
Dow: 0.00%
Nasdaq: -0.85%
S&P: +0.01%

Next two weeks

I will be unable to post any new studies over the next two weeks due to a vacation and some parallel research I am working on. One component of this involves a method for testing dynamic portfolios in Traders Studio and if all of that comes together, it will make for some very interesting studies moving forward.

Traderfeed posted a great link this week I am reproducing here as it will probably be of interest to readers of this blog. BreakoutFutures. Daily updates to the IBD100 index will also be irregular as well but it is being tracked and will be updated when possible. Thank you for your patience.

Turnover for week beginning 06/23/08

11% turnover on the IBD100 this week.

Oil and energy continue to dominate the IBD100 with 3 of the new additions being off-shore drilling related securities. 1/11 is alt-energy.

06/20/08

Date: 06/20/08
Open: $55.58
High: $56.39
Low: $54.09
Close: $54.90
Volume: 2,818,319
Advances: 31
Advances>=4%: 1
Declines>=4% 8
Daily Change: -1.247%
Dow: -1.83%
Nasdaq: -2.27%
S&P: -1.85%

06/19/08

Date: 06/19/08
Open: $56.47
High: $57.20
Low: $54.64
Close: $55.60
Volume: 2,856,372
Advances: 43
Advances>=4%: 4
Declines>=4% 18
Daily Change: -1.041%
Dow: +0.28%
Nasdaq: +1.33%
S&P: +0.38%

06/18/08

Date: 06/18/08
Open: $56.19
High: $57.07
Low: $54.94
Close: $56.18202
Volume: 2,539,460
Advances: 44
Advances>=4%: 5
Declines>=4% 4
Daily Change: -0.054%

06/17/08

Date: 06/17/08
Open: $55.08
High: $56.29
Low: $54.39
Close: $56.20818
Volume: 2,514,825
Advances: 71
Advances >=4%: 15
Declines >=4%: 0
Daily Change: 1.486%
Dow: -0.89%
Nasdaq: -0.69%
S&P: -0.68%

Today was the index's highest close since I began tracking it.

06/16/08

Date: 06/16/08
Open: $54.80
High: $56.13
Low: $54.12
Close: $55.38509
Volume: 2,474,092
Advances: 83
Advances >=4%: 9
Declines >=4%: 0
Daily Change: 1.854%
Dow: -0.31%
Nasdaq: +0.83%
S&P: +0.01%

Limit Orders and Performance

End-of-day traders can often feel at a disadvantage to their day-trading colleagues, even when trading a system developed with EOD data and designed for EOD trading. This week I wanted to try and determine what kind of advantages might exist for the intraday trader with the breakout system we have been developing and look at some ways the EOD trader might still take advantage of them.

Using our latest standard entries and exits listed below, I began with a basic data mining exercise probing specifically around the day of, and day following our entry signal, all still with the use of OHLC data. The following statistics are averaged between all three of our standard test portfolios.

% of Close to Close Winners: 49.43%
% of Open to Close Winners: 49.27%
% of Overnight Gap Ups: 41.88%
% of Overnight Gap Ups that don't fill the following day: 10.65%
Average Overnight Gap: 0.02%
Average Close to Close Return: 0.18%
Average Open to Close Return: 0.17%

At first look, these results do seem to offer a slight edge to the intraday trader who can place orders before the market closes on the Entry Signal Day (ESD). However, 89.35% of these stocks do retrace back below the close so the next step was to take a closer look at these.

The method I decided to use for this was to calculate the difference in price (Close-Open) on the ESD and then use a percentage of that to determine what percentage of stocks had a low below that point the following day. For example, if a stock had an ESD open of $40 and an ESD close of $46, the total ESD price change was $6. A 50% retracement would mean the stock had a low the following day below $43. The percentage of stocks hitting these retracement points were as follows:

5% 81.71%
10% 73.71%
15% 64.66%
20% 55.31%
25% 46.58%
30% 38.61%
35% 31.59%
40% 25.09%
45% 20.24%
50% 15.73%
55% 11.95%
60% 9.03%
65% 7.04%
70% 5.27%
75% 4.57%
80% 3.86%
85% 3.34%
90% 2.89%
95% 2.23%
100% 1.84%

What I gathered from this was that the use of a limit order rather than a market order at some retracement point below the ESD close may offer enough of a price advantage to increase expectancy and provide the EOD trader with a technique to level the playing field a bit with their intraday colleagues.
As usual, we will run the test on three separate portfolios to increase our confidence that the results are systemic and all tests will be run from 01/01/1998-12/31/2007. Other than the use of limit orders at the various retracement points, the entries and exits are identical to the ones used in the past several weeks:

Setup:
10-day average daily volume >= 100,000 shares
Entry:
200% volume increase over 10-day average daily volume
2x ATR breakout (Close >= Yesterday’s close + 10-day ATR*2)
Exit:
8% fixed protective stop (GTC stop order)
20% fixed profit target (GTC limit order)

In the following graphs, I have also indicated the performance level for the corresponding market order for easy comparison, identified by the thin horizontal line. The performance criteria are as follows:

PF=Profit Factor. This ratio is derived simply by dividing gross profit by gross loss.

EDR=Expectancy per dollar risked. It is calculated by Average Trade/Average Loss. The results are in dollars with .60 representing 60 cents per dollar risk.

EER=Efficient Expectancy Ratio. This is our EDR/Avg. Days in Winning trades. This number is meant to reveal the most efficient use if capital as it calculates expectancy per dollar risk per day in trade. The results are in dollars with .01 representing 1 cent per dollar risk per day in trade.

Although the results are not as smooth as we would like, what is important to note that in almost all instances, the use of a limit order outperformed that of a market order. As indicated in the raw data below, the number of trade opportunities diminishes rather quickly as the retracement level requirement increases but the use of a small 10% retracement increased our Avg Trade and EDR by 19.1% on our Nasdaq portfolio, 9.4% on the IBD portfolio, and 13.8% on the S&P portfolio.

It is also interesting that the higher retracement levels have a pretty clear bias towards higher trade efficiency as shown in the EER graph resulting from the fewer average days winning trades are held. Perhaps most ironic is that the use of a limit order instead of a market order improved expectancy by over 3x what the use of the infamous moving averages did in last week’s tests.

The conclusion here is that there is really no need to chase these. The likelihood of at least a small retracement the day following an entry signal is high and waiting on that better price can offer a rewarding increase in expectancy. Furthermore, the use of limit orders at predefined levels allows the EOD trader to place these outside of market hours and still capture some of the price advantages typically reserved for intraday traders with the added advantage of reducing or eliminating entry price slippage.

Turnover for week beginning 06/16/08

14% turnover on the IBD100 this week.

06/13/08

Date: 06/13/08
Open: $53.52
High: $55.01
Low: $52.80
Close: $54.38
Volume: 2,830,048
Advances: 81
Advances >=4%: 14
Declines >=4%: 1
Daily Change: 1.895%
Dow: 0.00%
Nasdaq: +2.09%
S&P: +1.50%

06/12/08

Date: 06/12/08
Open: $53.97
High: $54.88
Low: $52.57
Close: $53.37
Volume: 3,118,386
Advances: 32
Advances >=4%: 1
Declines >=4%: 8
Daily Change: -0.872%
Dow: +0.48%
Nasdaq: +0.43%
S&P: +0.33%

06/11/08

Date: 06/11/08
Open: $54.39
High: $55.32
Low: $53.14
Close: $53.84034
Volume: 3,072,686
Advances: 41
Advances >=4%: 4
Declines >=4%: 16
Daily Change: -0.621%
Dow: -1.68%
Nasdaq: -2.24%
S&P: -1.69%

06/10/08

Date: 06/10/08
Open: $54.86
High: $55.67
Low: $52.94
Close: $54.18
Volume: 3,231,885
Advances: 21
Advances >=4%: 3
Declines >=4%: 19
Daily Change: -2.054%
Dow: +0.08%
Nasdaq: -0.43%
S&P: -0.24%

06/09/08

Date: 06/09/08
Open: $55.34
High: $56.49
Low: $53.85
Close: $55.32
Volume: 3,306,257
Advances: 62
Advances >=4%: 11
Declines >=4%: 6
Daily Change: 0.637%
Dow: +0.58%
Nasdaq: -0.61%
S&P: +0.08%

Filtering Trades by Moving Averages

Most people who trade breakouts realize that there are times and market conditions where breakouts work fantastically well and times when they just don’t. Furthermore, these periods where breakouts have a high tendency to fail is often what constitutes a large percentage of the drawdowns and frustration associated with them. A technique for reducing profit targets, tightening stops, or simply staying out of the market all-together would be a huge benefit in improving the overall performance characteristics of these types of systems.

Pradeep Bonde of Stockbee has his Market Monitor which in my experience, has done a fantastic job recently of giving the all-clear sign for breakout and momentum based trading strategies but this is a proprietary indicator and one that is difficult to backtest without archived historic data for it. There are way too many such indicators out there to test them all but I decided this week to test one of the most common and simple to implement filtering techniques, moving averages.

Everyone has there favorite so at the risk of being accused of literal curve fitting, I decided to test a wide range of them from 10 to 200 days in 10-day increments so everyone can see how there favorite holds up. To keep things simple, we only require that the close be greater than or equal to the X-day simple moving average.

In addition to filtering by the individual MA of the stock being tested, I also looked at filtering by the MA of a corresponding broader index. For those tests, we use an independent data series; NDX for the Nasdaq portfolio, SPX for the S&P portfolio, and RUT for the IBD portfolio, and require that these broader index's close is greater than or equal to the X-day simple moving average before taking the trade.

As usual, we will run the test on three separate portfolios to increase our confidence that the results are systemic and all tests will be run from 01/01/1998-12/31/2007. Other than the addition of these moving averages, the entries and exits are identical to the ones used in the past several weeks:

Setup:
10-day average daily volume >= 100,000 shares
Close >= X-day SMA

Entry:
200% volume increase over 10-day average daily volume
2x ATR breakout (Close >= Yesterday’s close + 10-day ATR*2)

Exit:
8% fixed protective stop (GTC stop order)
20% fixed profit target (GTC limit order)

I will post charts of all 4 of our performance ratios and then discuss the results, followed by the raw data. The heavy lines are the results of applying the MA filter to the individual stocks themselves while the thin lines represent filtering of the corresponding indexes. The results are a little surprising.

EDR=Expectancy per dollar risked. It is calculated by Average Trade/Average Loss. The results are in dollars with .60 representing 60 cents per dollar risk.

PF=Profit Factor. This ratio is derived simply by dividing gross profit by gross loss.


EER=Efficient Expectancy Ratio. This is our EDR/Avg. Days in Winning trades. This number is meant to reveal the most efficient use if capital as it calculates expectancy per dollar risk per day in trade. The results are in dollars with .01 representing 1 cent per dollar risk per day in trade.


DDR= Drawdown ratio. This number is calculated by Net Profit/Maximum Drawdown. A higher number is better.


Raw Data of MAs applied to individual stocks


Raw Data of MAs applied to corresponding indexes


Not what you were expecting? The figures highlighted in grey in the raw data charts are the results of the entries and exits without the use of a MA filter. As you can see, the addition of a MA, any MA, does tend improve things a little but any advantage one has over another, or even the advantage of using one at all is minimal at best. The Nasdaq portfolio experienced the best improvement of the three but even that one only had a 5.7% improvement in expectancy using the best-case 90-day over nothing at all. Far from convincing even if that 90-day remained the best moving forward – which it won’t.

You will also note that these results tend to be very “peaky” with relatively wide swings from one value to another and this can generally be taken as a warning sign of curve-fit results. If we had a nice smooth transition from low to high for example, I would be far more willing to conclude that “longer MAs were more effective than shorter MAs” but even that simple of a statement would be a stretch here.

It is very easy to look at a chart of a specific stock and draw the conclusion that only trading it when above some particular MA would have improved things drastically but these tests clearly highlight the flaw in that type of exercise and point out why portfolio and basket testing is important if one is truly interested in robust criteria not fit to specific market, stock, or situation.

I want to make a few points here. There are situations where I feel MAs are useful but one must carefully think through the logic behind them and other criteria of the system being tested with them. I am currently working on mean reversion system with a couple of other bloggers and the use of a MA has been very effective in that particular situation but the goals, logic and objective of the system is completely different than what we have here.

One of the unique things about the breakouts we are testing here is that unlike an N-day high breakout, for example, made famous by the turtles, these breakouts are capable of entering at the very beginning of a trend – the “bottom” if you prefer. The irony of the MAs is that the longer the average, the more reliable it is considered but the longer the lag and the more of a good trend you may miss. The use of medium to long-term MAs in this example can completely wipe out one of the key advantages of this type of entry. Our 20% profit target is also relatively modest for the magnitude of our breakout criteria which really makes this a swing-trade oriented system. If your choice of stops and corresponding time-frame for trades are different, you may or may not derive more benefit from the use of a MA than what we get in these tests. Thorough testing is the only way to know for certain.

The last point I want to make really has more to do with an approach to system development I prescribe to which is commonly referred to as KIS, or Keep It Simple. Often you see a system chocked full of so many rules, you really wonder what components are truly responsible for the majority of the results. By starting simple and layering up criteria component by component, it allows the trader or system developer to understand what each element is actually contributing to the system. Many believe, myself included, that the simpler a system is, the better it will hold up over time. If a rule isn’t doing anything to improve something, be it expectancy, draw-downs, win-rate, etc., it probably shouldn’t be there.

Turnover for week beginning 06/9/08

Only 8% turnover on the IBD100 this week.

06/06/08

Date: 06/06/08
Open: $55.84
High: $57.05
Low: $54.42
Close: $54.97
Volume: 3,355,680
Advances: 22
Advances >=4%: 5
Declines >=4%: 18
Daily Change: -1.726%
Dow: -3.13%
Nasdaq: -2.94%
S&P: -3.26%

Not suprisingly, Friday was also a high volume down day for the IBD100 as well but it did manage to hold up much better than the broader indexes and only gave back about 1/2 of Thursday's big gains. The IBD100 ended nearly flat for the week with 0.2% gain.

06/05/08

Date: 06/05/08
Open: $54.23
High: $56.29
Low: $53.69
Close: $55.94
Volume: 3,525,27
Advances: 94
Advances >=4%: 42
Declines >=4%: 2
Daily Change: 3.573%
Dow: +1.73%
Nasdaq: +1.87%
S&P: +1.87%

Today was the 2nd highest volume day since I've begun tracking the index. The highest was on May 21 at 3,545,450.

06/04/08

Date: 06/04/08
Open: $54.25
High: $55.28
Low: $53.22
Close: $54.01
Volume: 2,925,542
Advances: 34
Advances >=4%: 2
Declines >=4%: 7
Daily Change: -0.942%
Dow: -0.10%
Nasdaq: +0.91%
S&P: -0.03%

06/03/08

Date: 06/03/08
Open: $55.09
High: $56.07
Low: $53.60
Close: $54.52
Volume: 3,220,170
Advances: 28
Advances >=4%: 6
Declines >=4%: 5
Daily Change: -0.619%
Dow: -0.81%
Nasdaq: -0.44%
S&P: -0.58%

06/02/08

Date: 06/02/08
Open: $54.58
High: $55.89
Low: $53.56
Close: $54.86
Volume: 2,413,015
Advances: 52
Advances >=4%: 8
Declines >=4%: 5
Daily Change: 0.303%
Dow: -1.06%
Nasdaq: -1.23%
S&P: -1.05%