Cost of Production
Posted: Sun Aug 22, 2004 10:38 pm
The best LTTF systems it is often said are ones that trade the same rules for long and short markets and the same rules for each market and keep the rules for entry and exits to a minimum say 5 at most.
My testing agrees with this logic. The overall conclusion is, simple is good.
However there is one issue I have with this simple logic.
When talking about commodities particularily grains, metals etc. there is a base cost of production or bottom price at which you would no longer want to sell your goods for. Each market has a minimum cost of production below that figure you pack up and go find something else to do with your money. I am not going to get into the fundamentals of what happens about supply and demand. My interest is LTTF system rules.
Many LTTF systems tend to trade on a breakout or use a moving average of some sort. The upside on long trades can be in theory, infinite. The short side of the market is a different story. On the short side if the system gets a new low it fires and places a short trade. It doesn't concern itself about the 'price' as such of the commodity just the relative price to some figure generated by a previous low or a moving average. So the systems fires all the way down looking for the elusive trend if it already isn't in a trade.
The problem I see is that below a certain price point the risk vs the reward on the short side is very limited in each commodity. That's becuse the price will only go to the cost of production. The downside potential of taking a short trade is limited depending on where the system takes a trade. The risk vs the reward on the long side is a different story.
But my systems are dumb, they do as they are told and hunt for new lows or whatever until the market turns and long trades are presented. I know myself that a quick scan of the screen over 20 years would not have me trying to enter a trade at certain prices on the short side for a LTTF system. I know the trade won't last long enough to provide a suffcient reward to overcome losses on average before the market is forced to reverse as it gets close to the COP which about 80% of the time will be short lived by a suddenly rally busting out your stop.
My system has to generate x number of points profit to overcome average losses. LTTF systems need a good dose of profit to overocme the losses so it requires a good size trend to do that. Theres a good chance that once the price gets below a certain point near the cost of production it has a much greater chance of going north or simply whip sawing along the bottom looking for an upside breakout.
Now, if I were to take all these special rules for each market into consideration I would be breaking the system 'design code' i.e don't have to many rules. This could extend the system rules to easily above a dozen or more. Actually I am not even sure I could put these per market rules in my platform not easily anyway.
To look at this objectively I would assume I take my own advice and work out from a certain price point what the reward would be on the downside and decide not to take a short signal i.e overide them. The other alternative is to have a short term system of counter trend system kick in below a certain price point again requiring rules on a market by market basis.
Do we just live with this shortcoming? Have I got this wrong? What do our panel of experts say?
Stephen
My testing agrees with this logic. The overall conclusion is, simple is good.
However there is one issue I have with this simple logic.
When talking about commodities particularily grains, metals etc. there is a base cost of production or bottom price at which you would no longer want to sell your goods for. Each market has a minimum cost of production below that figure you pack up and go find something else to do with your money. I am not going to get into the fundamentals of what happens about supply and demand. My interest is LTTF system rules.
Many LTTF systems tend to trade on a breakout or use a moving average of some sort. The upside on long trades can be in theory, infinite. The short side of the market is a different story. On the short side if the system gets a new low it fires and places a short trade. It doesn't concern itself about the 'price' as such of the commodity just the relative price to some figure generated by a previous low or a moving average. So the systems fires all the way down looking for the elusive trend if it already isn't in a trade.
The problem I see is that below a certain price point the risk vs the reward on the short side is very limited in each commodity. That's becuse the price will only go to the cost of production. The downside potential of taking a short trade is limited depending on where the system takes a trade. The risk vs the reward on the long side is a different story.
But my systems are dumb, they do as they are told and hunt for new lows or whatever until the market turns and long trades are presented. I know myself that a quick scan of the screen over 20 years would not have me trying to enter a trade at certain prices on the short side for a LTTF system. I know the trade won't last long enough to provide a suffcient reward to overcome losses on average before the market is forced to reverse as it gets close to the COP which about 80% of the time will be short lived by a suddenly rally busting out your stop.
My system has to generate x number of points profit to overcome average losses. LTTF systems need a good dose of profit to overocme the losses so it requires a good size trend to do that. Theres a good chance that once the price gets below a certain point near the cost of production it has a much greater chance of going north or simply whip sawing along the bottom looking for an upside breakout.
Now, if I were to take all these special rules for each market into consideration I would be breaking the system 'design code' i.e don't have to many rules. This could extend the system rules to easily above a dozen or more. Actually I am not even sure I could put these per market rules in my platform not easily anyway.
To look at this objectively I would assume I take my own advice and work out from a certain price point what the reward would be on the downside and decide not to take a short signal i.e overide them. The other alternative is to have a short term system of counter trend system kick in below a certain price point again requiring rules on a market by market basis.
Do we just live with this shortcoming? Have I got this wrong? What do our panel of experts say?
Stephen