Improving Market Structure - December 12, 2011

[TraderD]

The robot needs sustained up or down trends to make its largest returns. I don’t really care if we are heading into apocalypse or into a new 1982 secular bull market. I am confident that the 20 DMF and the robot will capture such trends early. I would even prefer the apocalypse and take a small loss in this choppy sideways mean-reverting environment before cashing big in a crash.
Billy

If I understand correctly, you're implying that an extended choppy environment will inevitably drag the robot into a losing territory, yet in the long run, the mix of trends vs chops is such that the robot cannot afford to be left out of a position when the big swings materialize. It strikes me that the most recent trade could have been quite profitable already (rather than criss-cross above and below the entry price) if it were to have taken multiple ATR-size profits off the entry limits (e.g. 73.14->75.00 =~ +2.5%) but that would have required the robot to change its plan (it simply doesn't know the stats associated with that scenario). As you say, statistically there's that big swing chance awaiting that will dwarf all these small losses to chop so sticking to the robot plan, as tested, is the best course of trading action.

Trader D

[Pascal]

If I understand correctly, you're implying that an extended choppy environment will inevitably drag the robot into a losing territory, yet in the long run, the mix of trends vs chops is such that the robot cannot afford to be left out of a position when the big swings materialize. It strikes me that the most recent trade could have been quite profitable already (rather than criss-cross above and below the entry price) if it were to have taken multiple ATR-size profits off the entry limits (e.g. 73.14->75.00 =~ +2.5%) but that would have required the robot to change its plan (it simply doesn't know the stats associated with that scenario). As you say, statistically there's that big swing chance awaiting that will dwarf all these small losses to chop so sticking to the robot plan, as tested, is the best course of trading action.

Trader D

The IWM Robot's trade record is below.
You can see that after the string of small losses during the summer, we changed the robot settings to avoid trading weak signals. We are up 18.38% since March, while with the new model, we would be up 27.51%. This means that the new model can handle choppy environments.

One last point concerning the current trade: we entered the trade on December 1. However, the IWM Robot had been searching for a long position since the 20DMF issued a buy signal and its entry point of 68.74 was almost hit on 11/28, as the low of the day was 68.91. To me, this means that the current settings are "in tune" with the market.


Pascal

[TraderD]

The IWM Robot's trade record is below.
You can see that after the string of small losses during the summer, we changed the robot settings to avoid trading weak signals. We are up 18.38% since March, while with the new model, we would be up 27.51%. This means that the new model can handle choppy environments.
Pascal

Pascal, many thanks for the clarifications. It may well be that skipping the weak signals altogether is the best decision for the robot. However, I'm still pondering whether an alternative trade mgmt plan (e.g. taking volatility-based profits) would have been able to address the chop (presuming it coincides with the weak signals) and provide for competitive returns.

[manucastle]

Trev,

This is my concern, too. Let me list them all in random order:

1. How could something so wonderful/good happen to me? (OK, some psychological set up that allows for child-like pleasure should it succeed).

2. I'm sure no matter what, I've missed the boat. (This is a clear anxiety that a lot of post-boomers feel. I got to Taiwan/Asia too late for the biggest growth but too early for "China", 1989).

3. If an investing system really allowed us only 20% per year, we'd probably own the stock market via compounding returns in 30 years or so. Think about that!?

4. Look at all those failing hedge funds, wouldn't they love to realize returns similar to those posted on the front of the website?

5. Morales and Kacher are setting up managed accounts. Now I know we operate in a different time frames, but aren't we filling up one side of the boat or acting like the apocryphal lemmings herding ourselves into sea?

6. The stock market is....Attachment 11852

Truly, having been an academic for years, who saved pennies and dimes under the mattress, the stock market has always seemed like one of the above. In fact, as an anthropologist I can assure everyone that belief holds up the entire edifice. For these reasons, I am a predisposed bear.

7. My spouse will run out of patience with me, and something like following will occur:

Attachment 11851


Fears. Petty fears. Nightmares even.

Perhaps all these fears stem from a simple and undeniable fact: the entire edifice is so enormous I cannot imagine it. I cannot reconcile Brussels, London, New York, Shanghai, Tokyo, New Dehli, Dubai etc... with the comfortable downstairs office where I operate. Trillions of dollars, billions of people, jillions of dreams/desires/diseases...Yet here we are.

Pascal and Billy have made this available to us. A gift to people. As Pascal writes in the book:

...the stock market provides people with a simple way to take part in ...high growth sectors by investing in companies that offer solutions to...problems

This is a beautiful vision, and it sustains my hope.

Hi Nickola,

I don't quite understand your point 3. Can you elaborate a bit please.

3. If an investing system really allowed us only 20% per year, we'd probably own the stock market via compounding returns in 30 years or so. Think about that!?

Trev

[nickola.pazderic]

I exaggerated the time needed and the result by half, but here is the analysis I recalled, Pragmatic Capitalism. The message is the same. Such returns will tilt the market.

I listed this point as a fear. I also noted that my fears are a little, well, like ghosts; and ghosts are not quite rational, are they? That said, I emphasize that the system developed and deployed by our leaders is a well thought out system. As Billy noted, the fear factor has been calculated into the mix, so has the max draw down.

Nonetheless, no one and no thing can last and multiply without change forever.

[roberto.giusto]

I exaggerated the time needed and the result by half, but here is the analysis I recalled, Pragmatic Capitalism. The message is the same.

I don't think such a return is absurd, but I guess that one cannot totally reinvest the earned money forever, for the basic reason that there is not infinite money in the markets.

At some point "size" must become an issue. I base this thought on intuition, because I unfortunately have no way to know based on experience.

Maybe someone here has an idea of the treshold beyond which the size of the money invested in a trade becomes a matter.