Test Technical
Test Technical
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Test Technical
Confused ............................?
I've spoken to quite a few fund managers that say triple digit ROIs are unachievable, traders may do well for a couple years before getting killed in the following year, etc.
When i back-test technical indicators on certain underlyings for example..
I generally find very quick trades (off a 2-minute chart, intraday) or very long trades (trends on weekly charts) tend to work.
Based on simulations, it's easy making XXX% per annum trading intraday.
I'm not saying that it's going to play out that way (I haven't tried), but based on rigorous back-testing, it wouldn't seem that difficult doing it.
So what actually happens that 95%+ of day traders end up losing their pants?
I mean if you just stick to the plan and not deviate from it, it shouldn't be a problem right?
* I have traded before, but I was pretty undisciplined about it and didn't do any back-testing. I tried stupidly to force-fit indicators i thought were "the bomb" onto everything i could find.
In the world of large portfolios, triple digit returns are unheard of, and when reported, are the object of intense investigation and skepticism. Bernie Madoff-with-my-money reported 10% per year, year after year, which was ridiculous, and he gathered together 65 billion. How much money could I raise if I could deliver 100% a year, year in and year out?
In the world of small-time, individual "traders," it really doesn't matter, because no one is listening to what they say anyway. They mostly lose their shirts within a few years and go back to selling used cars or resort time shares.
However, let's look at some facts.
1. If there were a way to make 100%+ a year, don't you think that the big boys, like Goldman, Quantum, etc., would have uncovered it long ago with all their computer power? The boys at LTCM, a reasonably smart bunch, with a lot of computer power at their disposal, couldn't do it. What was Julian Robertson's record? He was one of the most successful investors of all time. What is Bill Gross doing? Arguing from analogy isn't always a good way to approach a problem, but it might work here.
2. You may have found a few relationships that made money in the past, but what you have to do is a forward-looking simulation. Take the signal that you think works in period 1 and trade on it in period 2. Then build in some commissions, execution slippage, etc., and see how it does.
3. Your use of 2 minute charts is interesting. You will find that you will quickly get eaten up by the difference between bid and ask and the general problem of not being able to execute at the "price" indicated by the model.
Your model may have said the buy at 32.30, but when you get to the market, you find the spread is 32.29-32.33, 100X400. So you will buy, maybe, 400 shares at 32.33. Already, you are 3 cents out of the money on the model. Then you have to pay, probably, some commissions and other fees, and you add another penny or so to the price. All-in cost 32.34.
Based on that spread, you have to have the market go to 32.36-32.39, 400X something to break even.
If you are operating on an intraday trading horizon, it's going to be very hard to follow more than two or three positions, and the spreads, slippages and costs will make it very difficult to make money at the rate of 100% a year, or 6% a month.
You may be able to do it. You may have found the golden indicator. But I doubt it.
4. I question how rigorous your backtesting can be, based on the questions you've been asking here. I realize there are a lot of programs and packages that allow a person to "test" any trading model, but what of all the others using the same packages and programs? If it were that easy, a lot of people would be doing it and making a lot of money doing it. Again, because this isn't happening, I question whether someone could just waltz in and find the magic equation; might happen, but the odds are against it.
5. When I was doing black-box development, I routinely generated back-tests of 100-200% per year with naive assumptions, just first-pass work. Forward testing generally took those returns down some, as did the introduction of slippage, costs, etc. I routinely threw in all sorts of costs, slippages, etc., just to see how robust the model was. I knew that if I could get to 5-10% over the market, I was golden, e specially if the returns were consistent and had a very small maximum draw down.
6. I would bet that your models are some sort of trend-followinig or momentum models, maybe with some sort of option or future overlay. You'll find that these models work until they don't. And when they don't, the exit door gets very small, and leads to a dumpster sitting in the back alley, where you will be expected to deposit all your money. Remember that markets crawl up and crash down. Think of driving up a genntly winding road that ends in a 1000 foot drop.
If, however, against all the odds, you have truly found the magic bullet, don't tell anyone. Keep all your information and methods strictly to yourself and use it to make a bundle of money, then turn up your collar, step quietly into the night fog and disappear, leaving all those still at the bar to ask, "Who was that guy?" And they will all say, "I don't know. He just stopped in for a draft beer, drank it, didn't talk to anyone, left a $5 tip and left."
In the final analysis, I wouldn't worry about huge returns. Try to develop a method of delivering solid returns with very small loss years. The big money is in preservation of investor capital. If you can minimize what I used to call maximum negative excursion, you'll garner a whole lot of money without raising expectations of huge returns, which very few people can deliver on a consistent basis.
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Test Technical

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