OPEX Friday - January 20, 2012

The 20 DMF closed slightly negative and signals that large players are not much attracted anymore to buy strength and up gaps in this extended move. Intraday negative divergence with IWM price was one of the most striking since we started monitoring the RT 20 DMF right at the start of this uptrend one month ago. Perhaps it is the illustration that market makers are indeed trying to pin IWM near 79 for options expiration Friday, but institutional participants prefer to wait for a pullback before resuming their buy programs.

This seems to foretell that some kind of selling pressure is brewing at least for a minor retreat. It is comforting the IWM robot short position.

The limit entry for a secondary entry today is rather high (79.85) and above the initial stop of the robot’s position (79.23). But this is simply due to the multi-pivots risk-reward relationships after IWM closed above Monthly R2 (78.05). A close below 78.05 would have kept a short limit entry of 77.50 for today. Hence, trading and closing Friday below MR2 would be another positive signal from a risk-reward perspective for short setups. I already mentioned the other day that MR2 had a 66% probability of marking the high for January.

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GDX had an amazing down move that almost hit our trailing stop (51.06). Only 5% of GDX trades are exited on stop hits so it came close to a worst-case scenario. But the worst may be over judging by the massive large players buy programs into the close. The GDX MF jumped from a low of 0% back up to 0.60% in the last 16 minutes of trading alone.

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These MF zigs and zags leave us wondering if sellers or buyers have the strongest conviction? Or is this another opex pinning exercise? It feels like a bear trap to me. Anyway, the robot is holding its long position but avoids entering new positions for now.
Billy

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[QUOTE=Billy;19955]
GDX had an amazing down move that almost hit our trailing stop (51.06). Only 5% of GDX trades are exited on stop hits so it came close to a worst-case scenario. But the worst may be over judging by the massive large players buy programs into the close. The GDX MF jumped from a low of 0% back up to 0.60% in the last 16 minutes of trading alone.
These MF zigs and zags leave us wondering if sellers or buyers have the strongest conviction? Or is this another opex pinning exercise? It feels like a bear trap to me. Anyway, the robot is holding its long position but avoids entering new positions for now.
Billy
[/QUOTE]

The bottom of the IWM robot page states that exiting on targets seems to be better suited as the position gets "old" (albeit no specific setting has been proven to better exiting on stops). The GDX position opened on 12/31/2011 is likely "old" by now. It "feels" as if profit taking should have commenced some time ago when GDX stats stopped providing an edge, as the market really doesn't "care" when, why and at what price we entered the position. Has that been tested by any chance?

Trader D

All the people I read regularly have and are taking positions for a pullback. In including[URL="http://www.marketanthropology.com/"] this one[/URL] and [URL="http://bbfinance.blogspot.com/2012/01/bend-in-road.html?spref=tw"]this one[/URL].

I have the same thoughts as Trader D about profit taking before our holdings become old and tired.

In the future, when anyone starts thinking about taking profits, I suggest/urge that they start a profits thread in Billy's forum. At least we could air out or ideas between ourselves. On a separate thread, Billy or Pascal could chime in should they wish to-- not in answer to particular questions.

Trader D,
The current GDX robot version is programmed to take profits into strength. The current trade simply never met the requirements for doing so.
Please review Pascal’s document :
[url]http://www.effectivevolume.eu/content/Reports/GDX_Direction_Model_Improvements_of_December_2011.pdf[/url]

Billy

[QUOTE=Billy;19962]Trader D,
The current GDX robot version is programmed to take profits into strength. The current trade simply never met the requirements for doing so.
Please review Pascal’s document :
[url]http://www.effectivevolume.eu/content/Reports/GDX_Direction_Model_Improvements_of_December_2011.pdf[/url]

Billy[/QUOTE]

Indeed, it's the conditions of "selling into strength" that I'm questioning with respect to the anecdotal evidence presented by the current GDX trade. I am not sure what may constitute a better exit condition, merely speculating that somehow factoring the-then prevailing forward-LT/ST stats may prove useful in testing.

As a side note, Figure 3 in the GDX doc shows the vast portion of return (GDX equity curve on a log-Y scale) to be produced between Aug 2008 and April 2009, a rather narrow and unique period of time, which may make judgement of the rest of the ~4yr test period somewhat challenging.

[QUOTE=TraderD;19965]Indeed, it's the conditions of "selling into strength" that I'm questioning with respect to the anecdotal evidence presented by the current GDX trade. I am not sure what may constitute a better exit condition, merely speculating that somehow factoring the-then prevailing forward-LT/ST stats may prove useful in testing.

As a side note, Figure 3 in the GDX doc shows the vast portion of return (GDX equity curve on a log-Y scale) to be produced between Aug 2008 and April 2009, a rather narrow and unique period of time, which may make judgement of the rest of the ~4yr test period somewhat challenging.[/QUOTE]

No system can give 100% satisfaction on 100% of the trades. Building a robust system through thick and thin with a minimal rate of failure is the best we can work for and I let you be judge if we are getting close or not. The current trade is neither a loser nor even exited yet, so any post-trade analysis is premature.
Billy

[QUOTE=Billy;19966]No system can give 100% satisfaction on 100% of the trades. Building a robust system through thick and thin with a minimal rate of failure is the best we can work for and I let you be judge if we are getting close or not. The current trade is neither a loser nor even exited yet, so any post-trade analysis is premature.
Billy[/QUOTE]

(The current trade is neither a loser nor even exited yet, so any post-trade analysis is premature.)

Not for those of us who acted, perhaps prematurely, on Pascals early comments on the MF yesterday and sold GDX, but I understand that this is work in progress.

Trev

[QUOTE=Billy;19966]No system can give 100% satisfaction on 100% of the trades. Building a robust system through thick and thin with a minimal rate of failure is the best we can work for and I let you be judge if we are getting close or not. The current trade is neither a loser nor even exited yet, so any post-trade analysis is premature.
Billy[/QUOTE]

I agree with you. Just to make sure I'm not misunderstood - it's fairly common to generate ideas for rigorous testing from anecdotal evidence (preferably, more than one or two examples). Ultimately, this is a marathon, not a sprint, granted, so I wouldn't be remotely tempted to render judgement on the system based on a single trade (especially if it's still in the green and not exited), alas you can always trust me to come up with more ideas for you to test :)

Trader D

[QUOTE=manucastle;19968](The current trade is neither a loser nor even exited yet, so any post-trade analysis is premature.)

Not for those of us who acted, perhaps prematurely, on Pascals early comments on the MF yesterday and sold GDX, but I understand that this is work in progress.

Trev[/QUOTE]

Trev, I feel really sorry, but you should have been able to exit with a small gain above 51.62 anyway. Under strong demand pressure, we made a mistake in trying to help members with the RT indicators before the end of the beta testing. We will refrain from doing so from now on.
Note that this incident doesn’t put the GDX robot official rules in question.
Billy

[QUOTE=Billy;19971]Trev, I feel really sorry, but you should have been able to exit with a small gain above 51.62 anyway. Under strong demand pressure, we made a mistake in trying to help members with the RT indicators before the end of the beta testing. We will refrain from doing so from now on.
Note that this incident doesn’t put the GDX robot official rules in question.
Billy[/QUOTE]

Thanks Billy, keep up the good work :O)

Trev

[QUOTE=TraderD;19965]Indeed, it's the conditions of "selling into strength" that I'm questioning with respect to the anecdotal evidence presented by the current GDX trade. I am not sure what may constitute a better exit condition, merely speculating that somehow factoring the-then prevailing forward-LT/ST stats may prove useful in testing.

As a side note, Figure 3 in the GDX doc shows the vast portion of return (GDX equity curve on a log-Y scale) to be produced between Aug 2008 and April 2009, a rather narrow and unique period of time, which may make judgment of the rest of the ~4yr test period somewhat challenging.[/QUOTE]

You are right about the 2008-2009 period. I copied below the figure that is in the original GDX reference document.

In blue, you can see the returns of the previous version of the model. These returns were negative in 2011. It is more critical, because it means that the earlier version of the model was good for trend following, but not that good in a choppy market such as last year. Hence, the new version, in which we introduced a sell-in-strength rule, is showing good results in the two types of markets.

However, you are right: we will not have again the same sort of results as in 2008-2009.
However, I am pretty confident that the model is now robust enough to sustain any type of market.

There are two other aspects that are important (to my eyes) about this model:

1. At each stage, we can measure in real time the distance to the next signal and issue an e-mail alert (at least we are/will be testing these features.) This means "user's freedom". We (you) will be able to walk around with an iphone, get alerts on line in real-time and act if necessary. The heavy work is done by the model and the computers. We'd issue about two alerts per months/per model, which are easy to handle.
2. I was able to extract from the model the parameters that are sector dependent: Stop level, overbought and oversold levels, ATR level, porosity. These parameters are depending only on the volatility of a specific sector. This means that it should be possible to test the same model on different sectors without the need to redevelop the whole logic: only sector specific parameters would be adapted. This means that we will be able to easily run models on different ETFs.

In conclusion, what we will be offering here is
- number crunching capabilities that few hedge funds can get
- back tested/safe trading models
- the freedom NOT to have to stay close to the computer.

In a broad sense, this is our goal.


Pascal

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[QUOTE=Pascal;19974]You are right about the 2008-2009 period. I copied below the figure that is in the original GDX reference document.

In blue, you can see the returns of the previous version of the model. These returns were negative in 2011. It is more critical, because it means that the earlier version of the model was good for trend following, but not that good in a choppy market such as last year. Hence, the new version, in which we introduced a sell-in-strength rule, is showing good results in the two types of markets.

However, you are right: we will not have again the same sort of results as in 2008-2009.
However, I am pretty confident that the model is now robust enough to sustain any type of market.

There are two other aspects that are important (to my eyes) about this model:

1. At each stage, we can measure in real time the distance to the next signal and issue an e-mail alert (at least we are/will be testing these features.) This means "user's freedom". We (you) will be able to walk around with an iphone, get alerts on line in real-time and act if necessary. The heavy work is done by the model and the computers. We'd issue about two alerts per months/per model, which are easy to handle.
2. I was able to extract from the model the parameters that are sector dependent: Stop level, overbought and oversold levels, ATR level, porosity. These parameters are depending only on the volatility of a specific sector. This means that it should be possible to test the same model on different sectors without the need to redevelop the whole logic: only sector specific parameters would be adapted. This means that we will be able to easily run models on different ETFs.

In conclusion, what we will be offering here is
- number crunching capabilities that few hedge funds can get
- back tested/safe trading models
- the freedom NOT to have to stay close to the computer.

In a broad sense, this is our goal.

Pascal
[/QUOTE]

A big part of the challenge in developing quantitative trading models is reducing the number of parameters used (aka the dimensionality curse) in order to avoid model overfitting to available (and often limited) data while maximizing model accuracy. I find the notion of a single model that can apply to multiple sectors particularly promising since it provides for a more diverse test data set while minimizing parameter inflation through a consistent approach to parameter values selection for each sector.

Trader D