Experiments in Technical Analysis

[murthymsr]

dear sanjay & friends,

Hello Friends,
Almost all the systems are trend following systems and use some form crossover as a signal (an event in the past, as someone has said ). The back testing shows that the systems work well (especially in trending markets).

our approach has been to identify the trend and follow it. so, the basic issue is trading in a clearly trending markets. but how trending are the markets now? what strategy one shall take when the trend up or down is not clear?

One major concern with these systems is that all of them have quite deep draw downs. Now, what if the folio owner (trader/investor) has to cope with the negative string/series of trades initially?

yes, steep drawdowns are likely but may be reduced to some extent by increasing the number of stocks held to 10 or may be even 20, from the present typical value of 5. the number 'five' is relevant in intraday trading, which calls for multiple entries and exits and a very close monitoring. it may not be prudent to ask 'to keep away from the markets' when the trend is not clear. may be we are getting one of the rare oppurtunities to test the system in turbulant markets.

however, system tester may if he so chooses, reduce the exposure and keep minimally exposed rather than being away from the markets. this will help in evaluating the system performance in turbulant / falling markets also.

For the average results to show up it is necessary to have a big enough sample size. The Money Management rules should ensure that the folio owner will be able to take high number of trades. To protect the folio owner from going bust before that, it is necessary for the system to have position sizing (and risk management) rules such that a single trade will not give more than 1% loss (draw down) on the entire equity. This rule is used as a primary constrain because the first objective is survival.

the MM rules, is one which we could have given enough weightage. 1% loss in trading capital per stock is one that may have to be adopted strictly. but here, as we are basically trading on EOD data, a stock may be sold whenever the EOD price falls to more than 1% capital loss at the next day's open market. is my interpretation of SELL criteria on capital loss correct? sanjay and others amy please clarify.

During a discussion in the chat room AJAY pointed out, that basing a Stop Loss only on MM rules is a sure way to disaster. The system must have a stop based on technical reasons. When the reasons you entered the trade are no more there, it is the time for you to get out of the trade. In my enthusiasm to implement the ideas presented, I glossed over this important consideration. I thank Ajay for his guidance, and request him to continue to do so.

in a narmal trading situation, a trader will go by a few considerations other than the buy / sell signals given by the system, namely MM, market condition and historical gain / loss of his portfolio till date. how can we incorporate them into the system? to the extant, we do not consider these factors, our test will be hypothetical.

we may have a low value of profit target in an uncertain market, even if the system has the potential otherwise.

we may have to have a well defined guidelines for money management, which are near to the best and also common to all system testers.

i have located a MM calculator (freeware) from stator-afm.com. this is very basic, but will sureky throw some light into the MM principles.

Happy Experimenting !

Regards
murthymsr

 

[SGM]

But how trending are the markets now? what strategy one shall take when the trend up or down is not clear?

It may not be prudent to ask 'to keep away from the markets' when the trend is not clear.

May be we are getting one of the rare oppurtunities to test the system in turbulant markets.

Hello Murthy

We couldn't have choosen a better time to test these systems. The real test for the systems would be that they should perform even if we see 10 K or 15 K on Sensex.

Regards
Sanjay

 

[SGM]

Hello


The back testing of the MABIUTS family shows that, having a small SL will result in losses. The bigger the % SL the better is the over all gain. The best performance is when there is NO PRE-FIXED % STOP LOSS and the systems uses reverse CO as Exit.

Ideally we should use only the reversal (cross over in the opposite direction) as a stop and not use any % Stop Loss. The problem in this approach is that we have to calculate the position size to keep the risk at specified level. For this we need to calculate the price at which next CO will be triggered. Once we can do that, the position size can be determined thus managing the risk involved.

Now the question is how to calculate the crossover trigger (Stop Loss Price) for, lets say

EMA(C,13) and EMA(EMA(C,13), 13);


The following post gives a way to find the cross over of 2 EMA's

HI Praveen

You need statistical formula to calculate the price at which the crossovers will happen.
I use 3ema and 5ema. So I give you the formula for the crossover.

r=EMA(C,3);
a=EMA(C,5);
g=(Ref(a,-1)*(1-.3333)-Ref(r,-1)*(1-.5))/(.5-.3333);

here g is the cross over point. if u replace for eg 5 ema with 13 ema then 5 should be repalced with 13 and .3333 shd be replced with 2/14.

Hope the above is clear.
cheers

For clarification for others, .3333 should be replaced with (2/higherVar+1).

If the price point of reversal is know at the time of taking the trade, we can include it in the MM rules.

Regards
Sanjay

 

[karthikmarar]

Hi Sanjay

In a simple moving average cross over system there will be a definite adverse crossover signal (Technical Stop) before the % stoploss is hit unless the stop is too tight. So if your position size is based on the allowed risk which is reflected by the stoploss you will be quite comfortable.

Moreover it is not possible to have a stop based on the CO signal mentioned by you. If you plot the CO signal along with the EMAs then you will notice that after a crossover the EMAs and CO signal move in the opposite direction before they converge again. A sample chart enclosed for your quick reference.

But in systems which are not purely based on crossover a technical stop may not appear before the stops are hit. For example in the Mabiuts system which has an additional condition of price crossing above the previous peak , the BUY signal is above the actual crossover point and any adverse CO may occur at points much below your stoploss.

The problem gets a it complicated when we consider positions in Futures. Here we cannot have a position sizing based on % stop loss (like 1% of equity in our exercise) as the position size is in lots. I am enclosing an example where a technical stop makes one lose more than the maximum stoploss. In such cases what we do…

Hope I have not confused you

warm regards

Karthik

 

[AJAY]

Thank you Sanjay for giving consideration to my Spoil Sport .

Dear Murthygaru,

we may have a low value of profit target in an uncertain market, even if the system has the potential otherwise.

Here I'd like to say one thing. Markets are always uncertain. This we all know. And just to remove the confusion arising out of this uncertainity only we try adopting mechanical trading systems. And in such cases, confining ourselves with lower profit targets might not be a correct proposition as it defeats the very purpose of a mechanical trading system. I am sorry I am not fully aware how the system is designed. But in case the system is designed based on this, I suggest to have a relook.

If I understood the system or your post on wrong side, excuse me and ignore this. And if my understanding is right, kindly consider this.

Thanks and Happy Experimenting

AJAYKUMAR

 

[kkseal]

dear sanjay & friends,

our approach has been to identify the trend and follow it. so, the basic issue is trading in a clearly trending markets. but how trending are the markets now? what strategy one shall take when the trend up or down is not clear?

Yes the real challenge is trading ranging mkts when trend following systems (& indicators) do not work.

Regards,
Kalyan.

 

[SGM]

Hello Karthik & friends

In a simple moving average cross over system there will be a definite adverse crossover signal (Technical Stop) before the % stoploss is hit unless the stop is too tight. So if your position size is based on the allowed risk which is reflected by the stoploss you will be quite comfortable.

I agree on that, but what stop would be too tight, is 5% stop too tight? I think yes. In that case do we consider smaller position size with a bigger SL? Maybe that will also not help, since we are trading the same market, the diversification is not really a diversification,

Moreover it is not possible to have a stop based on the CO signal mentioned by you. If you plot the CO signal along with the EMAs then you will notice that after a crossover the EMAs and CO signal move in the opposite direction before they converge again. A sample chart enclosed for your quick reference.

I have also noticed that the CO point moves away from the price (rapidly nearest to the point of entry). Logically (traditional wisdom) the stop should not move down, once it is set.

You would also notice that the CO point seems to be defining the risk. As we initiate the trade, the risk increases, then it becomes flat and then eventually starts to reduce. The question is how to quantify it and use it, maybe it cannot be used, just asking.

But in systems which are not purely based on crossover a technical stop may not appear before the stops are hit. For example in the Mabiuts system which has an additional condition of price crossing above the previous peak, the BUY signal is above the actual crossover point and any adverse CO may occur at points much below your stoploss.

In this case, can we consider the CO as just a filter and crossing of the peak as the trigger? If yes, then the SL would be the peak - noise.

The problem gets a it complicated when we consider positions in Futures. Here we cannot have a position sizing based on % stop loss (like 1% of equity in our exercise) as the position size is in lots.

The problem is not the lot size but the total equity (risk capital). Typically a trader is undercapitalized to trade in futures. Average position size is 3.5 L, so to implement the system with proper MM rules one needs an investment of 15L (so that we can use 5% stop on position size, equating to 1% of equity)

I am enclosing an example where a technical stop makes one lose more than the maximum stoploss. In such cases what we do

Hope I have not confused you

warm regards

Karthik

Confusion is not neccessarly always bad, at times it is good to be confused. Specially when you have friends to clear the confusion and eventually understanding would emerge out of it.

Or may be further confusion


Warm Regards
Sanjay

 

[parvatix]

I had bought few shares of Engineers India Ltd before May 2006. Can anyone forecast its future movements as per technical charts
Thanks

 

[rahulg77]

Hi Karthik,

Since U have knowledge of vast number of indicators, was wondering if u have ever studied KST. Was wondering how useful it is.

Rgds

Rahul

 

[karthikmarar]

Hi Rahul

Yes, I have made some study of KST. Did not find it vey useful but does give some ideas about good moveS tough a little delayed.

I will make a detailed post later as I will be travelling soon. Making a short trip to India . I know there are many things requested by you are pending like combo of Indicators.

Unfortunately too many thing on hand and my work is also keeping me too busy. Please bear with me.

warm regards

Karthik