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Discussions specific to trading the stock market.
j2sailor
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ETFs

Post by j2sailor » Tue Mar 02, 2004 6:06 am

Hello. Just wondering if anyone has experience trading ETFs. I have yet to get into this market - I have limited experience trading some Mutuals. I am looking for entry/exit rules and indicators. Thanks... :D

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Re: emulating an index

Post by ecritt » Sun Aug 29, 2004 12:06 am

[quote="lperepol"][quote="mrscott"][quote="yuri"]I have to agree with Gerry, I've been looking into trading stocks mechanically for years. But my experience also dictates that trading many stocks together..begins to emulate an index. :?

Would like to hear other view on this.


What is wrong with emulating an index that is comprised exclusively of stocks that have broken out to new highs? How is this a bad thing?

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Re: emulating an index

Post by ecritt » Sun Aug 29, 2004 12:15 am

I do not see a strong correlation between ETFs and trend following a large number of stocks on the stock market. :shock:

Here is what I see as correlations for the period of 21-Dec-00 to 9-Feb-04

<TABLE border=1><TR><TD> </TD><TD>TF</TD><TD>DJI</TD><TD>GSPC</TD><TD>IXIC</TD><TD>TMW</TD></TR><TR><TD>TF</TD><TD>1.00000000</TD><TD>0.2793499</TD><TD>0.04953071</TD><TD>0.2083971</TD><TD>0.1887970</TD></TR><TR><TD>DJI</TD><TD>0.27934993</TD><TD>1.0000000</TD><TD>0.95262837</TD><TD>0.8967725</TD><TD>0.9743610</TD></TR><TR><TD>GSPC</TD><TD>0.04953071</TD><TD>0.9526284</TD><TD>1.00000000</TD><TD>0.9378182</TD><TD>0.9885429</TD></TR><TR><TD>IXIC</TD><TD>0.20839709</TD><TD>0.8967725</TD><TD>0.93781822</TD><TD>1.0000000</TD><TD>0.9583489</TD></TR><TR><TD>TMW</TD><TD>0.18879695</TD><TD>0.9743610</TD><TD>0.98854288</TD><TD>0.9583489</TD><TD>1.0000000</TD></TR></TABLE>

TF -> Trend Following
DJI-> Dow Jones
GSPC-> S&P 500
IXIC-> Nasdaq
TMW-> Wilshire 5000 Total

TF is the least correlated of all.[/quote]


This is good work, but I'd be more interested in seeing conditional co-movement. It is not bad to be highly correlated with the equity indexes when they are going up. What's the co-movement with the equity indexes when they are going down? Also, how erratic is this co-movement over time?

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Re: Index emulation

Post by ecritt » Sun Aug 29, 2004 12:43 am

rs wrote:Hi all,

I am a little unclear as to why you would end up emulating an index if you trade many of the strongest stocks out there. If you are picking stocks by a long term trend following methodology then you will stay with the strong stocks and sell the weak ones. Thus concentrating your holdings into the strongest stocks in the index. You would not have exposure to the losers so would not emulate the index.

Perhaps I am missing something but that is my perspective.

rs

I've done quite a bit of work in this area and believe that your observations are correct. From what I can see the performance drivers are 1. The scope of the portfolio 2. Durability and effectiveness of universally applied risk management (your stops) 3. Trade-level money management (position sizing) 4. Degree of aggressiveness in trade-level money management (antimartingale, pyramiding, etc.) 4. Portfolio-level money management (total open risk constraints, VAR, VAR variants, etc.) 5. Accuracy of your historical price database (if not proportionally adjusted for dividends then its worth less than zero)

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Re: Index emulation

Post by tobbe » Sun Aug 29, 2004 8:22 am

ecritt wrote:5. Accuracy of your historical price database (if not proportionally adjusted for dividends then its worth less than zero)
I don't really understand this. Could you please elaborate?

thanks,
tobbe

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Re: Index emulation

Post by ecritt » Mon Aug 30, 2004 12:39 am

tobbe wrote:
ecritt wrote:5. Accuracy of your historical price database (if not proportionally adjusted for dividends then its worth less than zero)
I don't really understand this. Could you please elaborate?

thanks,
tobbe

The vast majority of data providers and charting packages ignore dividends. For certain equities, like utilities and REITs and many NYSE listed stocks, dividends account for the bulk of historical gains. Not accounting for dividends makes the charts of such securities look weaker on a relative basis, since the share prices typically fall by the amount of the dividend around the time the dividend is paid.

My point is that a trend-following program applied to non-dividend adjusted data will yield incorrect simulated results. The degree of error is a direct function of the dividend yield.

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Dividend Adjustment Lag?

Post by lperepol » Mon May 28, 2007 8:09 am

ecritt

How many days lag are there in CSI data when they adjust for dividends?

You raise a good point!! HMMM I may be acting on a few false sell siganls when dividends are being paid out.

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Post by TrendMonkey » Mon May 28, 2007 1:49 pm

It's not just dividends either - most data providers do not account for the situation such as last January when Alcan spun Novelis off into its own company. Alcan shares dropped many dollars that day, but of course nobody actually lost any money.

I think accurate price history data for stocks is pretty much out of reach for normal people. I believe the gentleman commenting above developed the data himself, probably at a cost that could only be justified if you are running a fund. Correct me if I'm wrong.

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Post by TrendMonkey » Mon May 28, 2007 1:51 pm

By the way, lperepol - ecritt posted an extremely interesting paper on this web site a year or so ago about LTTF and stocks. It's one of the best things I ever got off this site. If you haven't read it, you should track it down. (Sorry, I am too lazy to find it myself). Cheers.

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Re: Dividend Adjustment Lag?

Post by ecritt » Mon May 28, 2007 7:12 pm

lperepol wrote:ecritt

How many days lag are there in CSI data when they adjust for dividends?

You raise a good point!! HMMM I may be acting on a few false sell siganls when dividends are being paid out.
There is no lag. The ex-dividend dates are well known in advance. The adjustments are automatically processed during CSI's daily distribution (if you set the program up correctly). In over 3 years of real time use I've had no cause for complaint.

There is more going on than simply false sell signals. Read the appendix on Data Integrity: http://www.blackstarfunds.com/files/Doe ... stocks.pdf

Take care,

ec

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How did this trend following on stocks program fare in 2008?

Post by SteveF » Mon Apr 06, 2009 5:09 pm

Wondering how Blackstar and trend following stocks systems did in 2008, on a risk-adjusted basis, compared to the S&P 500 and some of the hedge fund indexes?

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Post by ecritt » Mon Apr 06, 2009 5:36 pm

Blackstar converted to long/short in February of 2008. So now we are net short every stock in the Russell 3000 that we do not own in the long portfolio. Despite this we still lost approx 20% in 2008. The max drawdown (end of day) was approx 25%. 2008 was very much like 1974, brutal.

The long-only program would have lost approx 25% with a max drawdown of approx 35% in 2008.

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Post by utrading » Thu Apr 09, 2009 4:52 pm

Eric,
Nice to see your posts here. I read your paper "Does Trend Following Work on Stocks?" a few months ago. I remember I had quite a few thoughts but I forgot where the printout was. Here are some of my thoughts from memory. Very interesting paper. Btw, I am also working on applying trending following on stocks. My approach involves technical analysis + pattern recognition. I also apply William O'Neil's CANSLIM when it comes to personal investment.
Realistic investable universe (2500~3000 stocks)
Too much diversification will hurt portfolio’s performance. One way to improve performance might be buying leaders only in each industry. This is easier said than done though.
Winning trades are only reduced to alleviate risk concentrations
This is counter intuitive to trending following believers (but I understand from risk control perspective). To me pyramiding is another way to help improve performance. If done properly, this can
dramatically improve the overall performance. Again, this is also easier said than done.
Short Selling
limited downside expectancy is overcome by the fact that stocks tend to fall much faster than they rise. So overall it is still beneficial to short stocks, especially in years like second half of 2008.
Entry & Exit:
I see this is the area where some improvement can be made. For entry, if you only buy new highs, you will miss a lot of stocks who make multi-year high (but not all time high) after a big bear market correction. For example, Amazon (AMZN) made all time high around $110 in November 1999, made its all time low around $6 in October 2002. Today it is trading around $76. So instead of all time high, lets set entry at multi-year high. The optimal number of years for entry can be obtained via backtest.

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Post by ecritt » Thu Apr 09, 2009 10:36 pm

Utrading:
“My approach involves technical analysis + pattern recognition. I also apply William O'Neil's CANSLIM when it comes to personal investment.â€

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Post by AFJ Garner » Fri Apr 10, 2009 6:22 am

A most interesting contribution from ecritt as usual. I have found it necessary and/or desirable to re-think and re-work my trading over the past decade; I think in practice everybody does. Slowly and calmly and un-dramatically; but change nonetheless.

Back testing almost inevitably involves some sort of curve fitting, even if it is only semi conscious. Trading day to day, engaging with all manner of different market environments hones ones opinion, opens ones eye to new possibilities, new dangers, new opportunities.

I find ecritt's views on shorting very interesting. Admittedly I CAN find ways to trade futures marginally profitably with a long term trend following system and it does smooth the curve (and I do trade short). Nonetheless it goes against the grain to have risk (in terms of market exposure – not necessarily in terms of volatility) and margin increased for a relatively small benefit. I am continually tempted to trade long only – even in the current environment.

Newcomers will always concoct super back testing stats. Those of us who have been around for a while know that these tests are the beginning rather than the end of the story. Mechanical trading will require a great deal of discretionary input over the years, not necessarily as regards trading but certainly in terms of continual re-assessment of one's methods and goals.

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Post by Travelergcp » Sun Feb 21, 2010 10:19 pm

I've been following your research ecritt and it seems sound. Thanks for making your work public.

I would like to implement something like this myself on a long-short basis, but it doesn't seem feasible holding over a thousand positions in accounts under 500k or so. Interactive Brokers's $1 minimum commission would be a hefty drag on the portfolio at .4% roundtrip on 1000 $500 positions.

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Post by ecritt » Mon Feb 22, 2010 7:57 am

Travelergcp wrote:I've been following your research ecritt and it seems sound. Thanks for making your work public.

I would like to implement something like this myself on a long-short basis, but it doesn't seem feasible holding over a thousand positions in accounts under 500k or so. Interactive Brokers's $1 minimum commission would be a hefty drag on the portfolio at .4% roundtrip on 1000 $500 positions.
In your situation I'd probably narrow my universe by picking an index, like the S&P 400 midcap, and sticking with it. That would keep your average number of positions under 200 and you could hedge with SP400 futures. Not perfect, but doable.

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Post by drm7 » Tue Mar 29, 2011 4:38 pm

I was wondering if there are other, "semi-fundamental" filters that can also be used to rationalize the stock universe for a long-only trend-following system.

For example:

Industry/SIC Code - Tech companies, retailers, resource (oil, mining) companies may have more "fuel" to drive those really long 10R/20R moves that make these systems work. Is that a myth?
Age - After allowing some amount of time to "bake," does a breakout from a recently-IPOed company perform better than an all-time high from a 100-year old company? Buying MSFT in the late 80's would have given you a huge move compared to buying its "last hurrah" in 1999/2000.

A recent example would be Opentable (OPEN), which is a tech company that broke out of its post-IPO range and is extremely profitable. Would buying OPEN in 2017 on its 100th all-time high be as rewarding.

CANSLIM has some interesting guidelines, but I don't know if there is 100% overlap between these filters and CANSLIM (edit: and I also read the discussion on another other thread about fundamental filters (EPS, P/E, etc)) This is more of a "type of company" filter than a "performance/fundamental/technical" filter.

I don't have the answers (and don't expect to get any proprietary info). Just something to add to what has been a very good thread.

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Post by Moto moto » Tue Mar 29, 2011 5:45 pm

drm7....
another filter that might be worth it is using the index or sector index; eg; iron ore stocks, oil sector, retail, banks and finance.
If the filter of the index breaks - then breaks in the individual stocks are more likely to occur.
(I have no hard and fast testing of this....but use it well as a discretionary filter, or so it seems)

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Post by M20J » Tue Mar 29, 2011 11:17 pm

I don't trade stocks myself, so these are just a few random thoughts to throw into the mix...

- Market capitalization - possibly it works best with companies that are neither penny stocks at one end, nor big cyclical stocks at the other. Is there a sweet spot or range to aim for?

- Realized volatility. Market volatility and the VIX tend to rise during market falls and declines in volatility often accompany rallies and recoveries. Does the same hold true for actual, realized individual stock volatility? For those stocks which have options, is option implied vol a better measure? Could the realised vol of sector indices be a good indication of which sectors to concentrate on? Or perhaps, rather than actual vol levels, how the vol has changed over recent history - is it higher or lower than the previous week?

- Director purchases and sales - there used to be a service which reported on whether the company directors were purchasing or selling their own company shares. I'm sure the technically adept could devise a way to derive that data themselves from the company news announcements. Or do it manually.

- Stock borrow rates - I believe some brokers provide stock borrow rates and borrow availablity. Can changes be used to signal short selling interest, or lack thereof?

- For companies which have bond issues, can you get either a CDS quote or back out a credit spread history to see whether the bond market participants are regarding this as an improving or declining credit? With a credit spread history you could use an equity-credit model - something like CreditGrades - to calibrate the history and back out an implied fair stock price level.

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