Power Dip System May Performance- Updated with Stats and Chart Porn

I’ve noted before that when the market just goes up and up in a near straight line, the Power Dip System will have hard time outperforming. This is because the Power Dip needs some volatility. It needs some dips to buy and spikes to sell. That volatility came in May, and the Power Dip System was able to profit from it while the broader markets were punished.

Surprisingly, the fixed risk model of 1% risk and 10% stop outperformed the 3ATR position-sizing model which adapts to volatility. The 3ATR model started taking smaller positions as volatility ramped up during the flash-crash and the days after. Remember, with volatility position sizing, more volatility means smaller positions.

The 1% risk with 10% stop kept taking fixed-size positions meaning that its positions became larger relative to the volatility-based position-sizing. Simply put, larger positions mean larger profits (or losses), and so the 1% model outperformed. Even with 2% risk (double the 1%, duh), the ATR based model was taking smaller positions than the 1% risk model. Looking closely at the equity curves, this battle between fixed and volatility-based position-sizing was very close and so my analysis may be a tad over-simplified.

The question then becomes should we be switching between fixed and volatility-based position-sizing? In historical backtesting, the volatility-based position-sizing outperformed fixed position-sizing over almost 20 years. However, there may be a method developed that tells us when to consider switching. This may be as easy as using the ATR measures of SPY, and using volatility-based sizing when the market is not volatile and then switching to fixed-sizing when the market becomes volatile. Or maybe we use varying levels of volatility sizing based on the broader market volatility- switching between 1, 2, and 3 ATR sizing.

These are considerations that I think could make the Power Dip System even better and so I will be running tests over the next month or so.

1% Risk and 10% Stop

2% Risk and 10% Stop

2% Risk and 3ATR Position-sizing and Stop

Questions? Feel free to leave a comment or email me: woodshedder73 at gmail.

If you enjoy the content at iBankCoin, please follow us on Twitter