A VWAP system simulated performance

A little while back I develped a simulation framework and used it to develop a system loosely based on grey1's VWAP pairs trading model. The results, forward tested are to say the least interesting. I'm posting some details here, in the hope that it might generate some discussion.

Some system details:

A universe of about 100 large cap, moderate volatility stocks, mostly NYSE stocks and including all DOW stocks.

Entry:

Short if price >= MPDT + some fraction of the daily range over the last 7 or so trading days

Long: As for short but MPDB minus fraction of daily range

Exit at VWAP or at 15:55

No stops

No requiement to be hedged, although frequently holds both long and short positions.

Enter trades only between 10:15 AM and 3:00 PM US EST

Use a volatility measure on daily time series to prescreen stocks. Do not trade against stocks with extreme DMI on daily.

A maximum of 2 positions short and 2 positions long.

30% intraday margin

Compounding

System parametes have not been changed since the start of the forward test

Some figures:

Annualized return: 530%
Profit factor 2.2
Sharpe > 5

While these look good, I think it needs more work but is surely indicative of real potential with the VWAP stuff.

Is MPDT= MPD high, MPDB= MPD low ?

What's the largest drawdown?

MPD = maximum permissible deviation and is calculated as follows:

(High of day - Low of day ) x 0.5 and this is then added to VWAP to give the upper MPD band and also subtracted from VWAP to give the lower MPD


Paul

There is also a time segment factor in the VWAP strategy which will greatly enhance the performance of the strategy if added. The intra day trading is divided in 3 time segments.. zone 1 ( Open till 1 hour into the trade) Zone B ( trade till 6PM Uk time ) Zone 3( the last few hours)


VWAP strategy used during time zone 3 is the most efficient way of trading and extremely profitable. My own vwap engine uses the VWAP strategy during the last zone , while using other methodologies to scalp the open and trade the consolidation .

We can only tell people what is right and wrong which could potentially save them years and years of research and loads of money ,,

lets have an exercise here,,, around 6 PM UK time choose 3 stocks that are in positive territory and up by say 5% and 3 stocks that are below by 5% .. now short the strong ones (those which are above by 5% ) and long the weak ones ( excuse me about using the word WEAK and STRONG as there is more to this phrase in TA ) ,, Do this for 5 days and some one post the results here, NO excuse NO emotion just post the results and surprise me if i was wrong ,,, remember statistical approach to day trading might not work in very short period but I feel 5 days is good enough )

Grey1

Grey1

Iraj,

Wont the success of this depend on whether the Dow is trending or range bound ? Also I remember you advising against shorting strong stocks in the past.


Paul

Trader333 said:

Iraj,

Wont the success of this depend on whether the Dow is trending or range bound ? Also I remember you advising against shorting strong stocks in the past.


Paul

Click to expand...

Paul,

This is a vwap strategy we outlined few years back,, In VWap strategy market direction is not matter at all also we shorting a stock that has ran out of monetum in zone 3 and now it is time to pull back to VWAP level. If you are not pair trading then it would not be correct to short a strong stock...


I just thought to define weak and strong stocks as this is vital to trading assuming you are an intra day trader .

For an intra day trader a strong stock is defined as a stock which is in strong up trend on daily chart,,
A better definition is ,,, a stock with a regression line slope of Greater than 30 degree starting 13 weeks ago ( some use 26 weeks as they look at a longer cycle in the stock )
An even better definiton is same as above but with volatility of not exceeding than 2SD during the last past 13 weeks.

Now I am going to give you a list of stocks and i am going to ask you which one is a WEAK AND STRONG STOCK intra day


Group 1 Lets say MEE, DCEL,SAI are 10% down to day ( please look at their daily chart)
Group 2 Lets say MTG,CFC,RDN,WM are 10 % up to day ( please look at their daily chart)


which group is strong and which group is weak ?

if you was to take a 3 days swing trade which group would you short?
If you was to scalp an ATR short trade which group would you short?
if you was to use VWAP strategy which stock group would you short and which one long ?


I invite members for their views as this is very important.

I will reply later to all above question ,,,



Grey1

is that not great to short weak stocks when maket was up 50 points,, well the market cycle had come to the end on late Friday after noon hence the short Over nights of the weak stocks,,, My trading partner who is also from this BB is making an average of $600-$1000 a day ,, he must be the only one who currently trades like me,,

I am still wating for people to reply to my quiz above


Grey1

hi grey,

I think your trading partner is making money because he see's you in action and probably sits with you while you trade. I would love it if you would give some of us guys the same oppotunity like a seminar where we all cover the costs. I think it makes a big difference to actually see you trading your methods in person. Like most, ive read all your posts but still don't fully understand your methods, you say they are simple but actually there is alot to it i think, or maybe its just me. Anyway i know other traders on here who too are struggling to make money with the vwap pair trading and your other methods. I think it just would be a great idea if one day you could do it as i feel it could make all the difference to some of us. Of course you have already contributed more than enough of your knowledge to this bb, I'm just giving my own story on this.

I keep going round in circles and now given up on learning your methods as there just is not enough people on here willing to help with it, I'm now trying out methods on forex using longer time frames. With forex there are alot of systems posted and they seem a little easier to grasp, also forex traders seem really willing to help out newbies.

I would love to one day trade the way you do as it feels automated and a really professional way of trading.


jason

paper trade only

short
AYI - 38.01
RPI - 25.92
GRP - 49.02

long
FRE - 24.22
FNM - 29.22
ISIL - 25.35

belflan said:

paper trade only

short
AYI - 38.01
RPI - 25.92
GRP - 49.02

long
FRE - 24.22
FNM - 29.22
ISIL - 25.35

Click to expand...

RPI should read RRI

jayjay121 said:

hi grey,

I think your trading partner is making money because he see's you in action and probably sits with you while you trade. I would love it if you would give some of us guys the same oppotunity like a seminar where we all cover the costs. I think it makes a big difference to actually see you trading your methods in person. Like most, ive read all your posts but still don't fully understand your methods, you say they are simple but actually there is alot to it i think, or maybe its just me. Anyway i know other traders on here who too are struggling to make money with the vwap pair trading and your other methods. I think it just would be a great idea if one day you could do it as i feel it could make all the difference to some of us. Of course you have already contributed more than enough of your knowledge to this bb, I'm just giving my own story on this.

I keep going round in circles and now given up on learning your methods as there just is not enough people on here willing to help with it, I'm now trying out methods on forex using longer time frames. With forex there are alot of systems posted and they seem a little easier to grasp, also forex traders seem really willing to help out newbies.

I would love to one day trade the way you do as it feels automated and a really professional way of trading.


jason

Click to expand...

hi

yes my trading partner is in Sweden but we trade over the SKPY . He is now a proficient trader and now planning to become a full time trader,, Unfortunately there is more in trading than choosing weak or strong stocks which people don't realise, . There are that many permutations and senarius changing the market direction which make the task of teaching one to trade profitably very difficult,, After spending over a year with my trading partner now I realise how difficult it can be to pass so much know ledge in a short period . I used to teach in Manchester Poly years ago and could teach a difficult subject in 2 hours but with trading It takes me 2 hours to only set the foundation for every day's trading day .

I suppose what I am trying to say is this,, I can give you an excellent strategy but applying this strategy and adjusting it to so many market conditions is some thing that best can be demonstrated in live interaction over a lONG period of training .

Today market was strong @ open and we decided that that market will collapse and run in negative and even trading below 120 Points and as a result we both took a portfolio of short stocks ( market is only down 93 points as i am writing this ) . The decision about market going down when every body else was so so bullish made the PAY DAY for both of us and it was based more on technical side of trading than gauging the market sentiment but tomorrow it could be another story and other catalysts could over ride the technical side of the trading ,,

I can take 5 people and talk to them about trading if you wish for couple of hours ,, Those member who are interested can email me so i can arrange the time , It probably be on SKYP.


Grey1


ps:__ all pos closed except one short OVER NIGHT RVSN ,, the correct pos size is 1200 so I will add 200 just before the close

belflan said:

paper trade only

short
AYI - 38.01
RPI - 25.92
GRP - 49.02

long
FRE - 24.22
FNM - 29.22
ISIL - 25.35

Click to expand...

All closed at around 20:45 UK time

short
AYI - 38.01 cover @ 37.21 = +80cents
RRI - 25.92 cover @ 25.62 = +30cents
GRP - 49.02 cover @ 48.20 = +82cents

total for shorts = +192cents

long
FRE - 24.22 closed @ 24.21 = -1cent
FNM - 29.22 closed @ 28.99 = -23cents
ISIL - 25.35 closed @ 24.76 = -59cents

total for longs = -83cents

total for night = +109cents

I closed my Over night |RVSN with small gain before close as it did not follow the market direction

belflan said:

All closed at around 20:45 UK time

short
AYI - 38.01 cover @ 37.21 = +80cents
RRI - 25.92 cover @ 25.62 = +30cents
GRP - 49.02 cover @ 48.20 = +82cents

total for shorts = +192cents

long
FRE - 24.22 closed @ 24.21 = -1cent
FNM - 29.22 closed @ 28.99 = -23cents
ISIL - 25.35 closed @ 24.76 = -59cents

total for longs = -83cents

total for night = +109cents

Click to expand...

Thanks for taking the time to test the strategy. lets see in 5 days time how much profit you will make,,

The Good news is even if you was wrong in your market direction the LONGS would pay as you have eliminated the market direction

Grey1 said:

Thanks for taking the time to test the strategy. lets see in 5 days time how much profit you will make,,

The Good news is even if you was wrong in your market direction the LONGS would pay as you have eliminated the market direction

Click to expand...

Grey1,

i'm here to learn, thank you for sharing your know how,

certainly must 'feel' better hedged ( on both sides of market)

I keep going round in circles and now given up on learning your methods as there just is not enough people on here willing to help with it

Click to expand...

Actually that is not the case. The fact is that no-one else on here knows exactly how Grey1 trades and as such can only give limited help.


Paul

Grey1 said:

Today market was strong @ open and we decided that that market will collapse and run in negative and even trading below 120 Points and as a result we both took a portfolio of short stocks ( market is only down 93 points as i am writing this ) . The decision about market going down when every body else was so so bullish made the PAY DAY for both of us and it was based more on technical side of trading than gauging the market sentiment but tomorrow it could be another story and other catalysts could over ride the technical side of the trading ,,

Grey1

Click to expand...

If i may ask-all the higher timeframes (10,15,30...60) for Dow were indicating 'overbought' in the exhaustion engine at about 1500 hrs- Iraj, (made me avoid long positions but did not enter short positions also as the sentiment seemed so bullish) was this one of the reasons for you to decide to go for a 'short' portfolio?

Raj

Grey1 said:

...

Now I am going to give you a list of stocks and i am going to ask you which one is a WEAK AND STRONG STOCK intra day

Group 1 Lets say MEE, DCEL,SAI are 10% down to day ( please look at their daily chart)
Group 2 Lets say MTG,CFC,RDN,WM are 10 % up to day ( please look at their daily chart)


which group is strong and which group is weak ?

if you was to take a 3 days swing trade which group would you short?
If you was to scalp an ATR short trade which group would you short?
if you was to use VWAP strategy which stock group would you short and which one long ?


I invite members for their views as this is very important.

I will reply later to all above question ,,,

Grey1

Click to expand...

Grey1,
I know this may be a bit 'after the fact' now its Monday night, but based on the little I understand
1 - I would short Group 2 for the 3 day swing trade. This is based on market and sector direction. The daily charts are pointing down and the MACCI is pointing down from oversold levels. The reverse is true of Group1.

2 - do not know the reasoning behind an ATR scalp but as a guess ... Group2 as the 13week regression lines are pointing down so short the weak stocks intraday.

3 - VWAP strategy would be to short Group 1 as at that point in time the intraday chart had price above VWAP. On balance, cos it's not completely obvious to me, Group 2 would therefore be the longs.

I feel I am contradicting myself in my selection and that may be because a little knowledge is a dangerous thing and I am missing the point completeley

Thanks and regards
Jonathan

Paper trades tonight

shorts

SNDK - 37.54
ITU - 23.74
EBay - 32.64

longs

HOC - 45.59
MBI - 30.36
LDK - 27.01

belflan said:

All closed at around 20:45 UK time

short
AYI - 38.01 cover @ 37.21 = +80cents
RRI - 25.92 cover @ 25.62 = +30cents
GRP - 49.02 cover @ 48.20 = +82cents

total for shorts = +192cents

long
FRE - 24.22 closed @ 24.21 = -1cent
FNM - 29.22 closed @ 28.99 = -23cents
ISIL - 25.35 closed @ 24.76 = -59cents

total for longs = -83cents

total for night = +109cents

Click to expand...

If last nights trades were lift overnight and closed about 10mins ago they would have looked like


short
AYI - 38.01 cover @ 37.64 = +37cents
RRI - 25.92 cover @ 25.14 = +78cents
GRP - 49.02 cover @ 46.75 = +227cents

total for shorts = +342cents

long
FRE - 24.22 closed @ 25.28 = +106cent
FNM - 29.22 closed @ 28.96 = -26cents
ISIL - 25.35 closed @ 25.13 = -22cents

total for shorts = +58cents

Total if overnighted and closed tonight around 19:10 uk time = 400cents