For the week, [[SPY]] was down -1.88% while the Power Dip gained 0.22%.
Despite beating the S&P500, it was a tough week for the system. The gap-down on Friday morning resulted in 3 positions getting stopped out: Resource Capital Corp. [[RSO]] , Republic Airways Holdings Inc. [[RJET]] , and [[VVTV]] .
It was very difficult to buy the gap-down, but most who did were rewarded. For example, [[KERX]] was picked up on the open and closed Friday with a 11.4% gain. ZHONGPIN INC. [[HOGS]] was purchased as well, and the position closed up 2.4%. (Can we just ignore [[CHIP]] , also purchased Friday morning but closed down 2.4%, effectively canceling out HOGS?)
The system will start Monday will 6 positions, and will add the following 4 positions on the open.
Gray Television, Inc. [[GTN]]
Macquarie Infrastructure Company LLC [[MIC]]
Pier 1 Imports, Inc. [[PIR]]
Advanced Energy Industries, Inc. [[AEIS]]
And below is the egregiously long spreadsheet. Note that the average trade has been cut in half over the past several weeks. This fluctuation should be within a normal range. As more trades are made and closed, the fluctuations will stay within a tighter range across the key metrics. This behavior is best described by the probability theorem, the Law of Large Numbers.
I’m realizing as I try to publish the spreadsheet that it has gotten so large that WordPress doesn’t seem to like it. Therefore, I can only post the most recent part of it, along with top part that calculates the metrics.
Power Dip looks to be KILLIN it today.
I wasn’t aware others were trading RSO. Out of curiousity, did you include the ability to go through your system and make exemptions, or are you of the mind to let the math lead the way all of the time?
No exemptions, except that I filter to ensure for adequate volume and liquidity as well as price above 1 dollar, and no OTCBB stocks. Other than that, the math leads the way, all of the time.
I just assumed the filtering under the algorithm category. However, let me throw a hypothetical question at you:
GM shares, for a duration after the bankruptcy, had ample volume and even, for a spell, a value over $1 (probably because of system traders). Under such a scenario, would your system trade GM, or would it be thrown out?
GM would have been traded. Keep in mind the average trade lasts 5 days. Barring overnight Armageddon gap downs (which of course are a reality), the 10% stop helps a lot when trading crap like GM.
The fact of the matter is you never know which trade will be a huge winner.
For example, the system picked MRNA, in late May. I didn’t take the pick due to volume/liquidity concerns. MRNA was bought out, and would have made me 150% in a day. Now I have increased the volume/liquidity requirement such that MRNA does not show up in the backtest results, but I think you get the picture that one never knows what will happen, and that the majority of the volatility with this system comes to the upside.
Mr. Woodshedder,
Sir, excuse me for asking but, by tightening up your stops, would your results not be vastly improved?
Your 10% stop is costing you a fortune. If the 6 trades you were stopped out on had a stop loss of 5% your return would have been 9.8% not 6.8%.
That’s a 50% overall improvement.
I dare say, you should take some advice from Archie Bell and the Drells and…”Do the Tighten’ Up”.
Snap, that’s a good observation. However, the system uses percent-risk position sizing. So a 5% stop would lose just as much money as a 10% stop. It would just get stopped out more often.
So the answer is no, the results would not be vastly improved.
If you do not understand this and want to know why, and how it works, I will be happy to flesh it out for you.
Mr. Woodshedder,
Your list of position value (10-11K) is similar to a series of paper trades I’m doing as a learning process for handling my own investments.
I realized very quickly that I was keeping my stops way too tight (.8-2%) when I was stopped out of 14 of 19 positions. So I loosened up to a 3.5-5% level and was only stopped out on 2 of my next 10 positions.
I must admit I don’t understand you percentage-risk sizing.Your position values are very similiar, is your percentage -risk for these all around the 10% level? You sound incredibly busy, and if time allows for an explanation I’d be thankful, but spending time with the family guarantees a great return on that investment.
A great part of making the most is taken up with losing the least.
Snap, I will be glad to help. I’ll try and get a quick explanation up this a.m. and then you can shoot me some questions.
Percent risk position sizing means that you decide to risk a certain percentage of total capital on each trade.
An example:
100K account, 1% of account value risked on each trade.
Stops: Regardless of whether you use a 5% or 20% stop, only 1K is risked (1%).
Say we will purchase a 20.00 stock.
We want a 5% stop. Then we multiply .05*20.00 to get 1.00. This then is our stop.
Now we divide our risked amount, 1,000, by our stop to get our number of shares, In this case, it would be 1,000 shares.
Let say we want a 15% stop. .15*20.00=3.00 Our stop will be 3 bucks beneath the entry.
1000/3.00 =333 shares (I would round that down and buy 330 shares).
Let that sink in, and consider the implications, and then shoot me back some questions.
By the way, I use 1% risk and 10% stops with the power dip. On a 10.00 stock, that will equal a stop at 9.00, purchasing 1000 shares (assuming a 100K account).
Mr. Woodshedder,
Or should I say Mr. Buckshedder? Thanks for the explanation. I did a quick calculation on what my risk % is compared to yours. Mine averages around .5% of total account.
When I look at your figures and see a whole bunch of winning trades suddenly wiped out by one or two positions, I can’t help but think your overexposed to the downside.
A slight adjustment of your risk percentage might correct the imbalance. And make a big difference to the upside.
Thanks again for your explanations. I appreciate the dialogue.
Snap, take a look at the post below, if you haven’t already. There is a chart there that shows the trade distributions. It might help you visualize a little more about what is going on.
http://ibankcoin.com/woodshedderblog/2009/09/19/backtested-historical-results-power-dip-system/
The percent risk position sizing hasn’t had a chance to sink in yet…and I’m not saying that to be an arse. Keep in mind, it doesn’t matter whether I use a 5% or 15% stop. I will lose 1% each time the stop hits. My exposure to the downside does not change, regardless of where my stop is.
To reduce exposure to the downside, my percent risk would have to change. I could go from say 1% to .5%. However, then ALL of my positions would be smaller, both the winners and the losers. In effect, nothing would be changed, except I would be trading smaller positions.
Once this sinks in, I think you’ll realize that in order to normalize performance and results across many many trades, you need to be risking the same amount on each trade. The amount of your risk determines how large or small your positions are. Your stop just determines how far the stock can move against you. Your stop does not determine your risk.
Hope this helps, keep the questions coming…