Random Entry & Perception

[bevok]

Time for another thread - can MACD be a profitable entry signal?

 

[montmorencyt2w]

It might lose for 3 years in a row before kicking into life. I can't imagine anyone being happy with using random entry and losing for 3 years on the spin, so it's never going to be applied by a real person. Doesn't mean it won't make money over time tho!

Yes, what would be the difference in principle be between that and someone like Medbs holding on to a losing FX position for ever until it came back?

 

[DionysusToast]

Ok, I ran some tests. The "proper" system enters on a break of the 20 day high/low and scales in up to a max of 2 pyramids as the trade goes further onside. A moving average trend filter determines whether to trade or not. The exit is if the 20 day high/low is breached (for a short/long position).

I used 9 markets (mixture of FX and commodities), maximum of 7 positions at any one time, and ran the tests over the last 10 years. Amibroker is the software.

The "random" system decides to enter on a coin flip (heads it trades, tails it doesn't) but the sizing and exits are identical to the proper system. For one run I applied a trend filter to the random system, on another run I didn't.

The "proper" system returned a CAGR of 37.19 pct per annum. The results I got for the random system were as follows -

1. With trend filter
34.46, 40.86, 38.21, 27.88, 27.78, 39.23, 30.63, 44.30, 41.42, 29.38; average = 35.42

2. Without trend filter
21.89, 21.53, 14.39, 31.62, 15.99, 20.89, 12.26, 20.86, 13.48, 12.19; average = 18.51

Two things of note here

a) All runs for the random system are positive, irrespective of filter
b) The random system with filter sometimes outperformed the non-random system, BUT on average is less profitable (one would hope this is the case).

How do you think your system would fare in the following circumstances:

1 - we create 9 new markets
2 - we give 50,000 people the ability to trade those markets
3 - we give each of the 50,000 people the system you wrote
4 - we give each of the 50,000 people $100,000 to trade - they can trade when they want and they can trade any of the 9 markets at any time

At the end of 1 year, would you expect the average return of each of the 50,000 people to be 18% in line with your system ?

If so - can you explain where the money would come from ?

If not - perhaps we can look at the system and see what specific market conditions it takes advantage of. In my opinion, you have created a system that takes advantage of market conditions in the 9 markets you tested.

As an aside and in all seriousness. Your 35% return on your 'simple' system is better than most hedge funds. If you can just poop those out at random, I know someone with $30 million at his disposal that would be intersted in talking to you.

 

[Shakone]

Imagine a market that could only go up, and you apply the heads/tails R:R = 1 strategy to it. You are still only going to get a win:loss ratio of 50:50 because you will be long 50% of the time and short 50% of the time. 100% of your long trades will be winners and 100% of your short trades will be losers.

Now change your r:r to 2:1. In a market that is only going up, you will still be long 50% of the time and short 50% of the time, except when you are long you make double what you lose.

My no arbitrage argument takes portfolio A and uses R:R=1, and hedges it with portfolio B of 2:1 R:R. The result of this two portfolio strategy would be profitable all the time, which is what you might expect in a market that could only go up.

Now introduce a down element to the market... Of all your Long positions, not all 100% will be profitable, but this is mirrored in your short positions which are no longer 100% losers. You could construct the same two portfolio's and expect the same results, over time you will always end up with a profit. That profit, however, cannot exceed that which the market offers, otherwise an arbitrage opportunity exists.

Hi MrGecko, if we have a market which just goes up, then we borrow money from the bank and invest it and we already have an arbitrage, because that market allows arbitrage. But suppose we look at the two portfolio's example you suggested. Then as an example (if i have understood you correctly)

I go long from 100 with stop 90 and target 115 and i go
short from 100 with stop 110 target 90.

If market goes to 90, we stop out and hit our target, end result is 0 minus transaction costs. If we go to 115 we make 5. But if we go to 110 then back down to 90 without ever hitting 115, we lose 20. Depending on the probabilities, we can win small or lose big, but there is no arbitrage there.

 

[MrGecko]

Hi MrGecko, if we have a market which just goes up, then we borrow money from the bank and invest it and we already have an arbitrage, because that market allows arbitrage.

In this scenario, the bank would lend at the risk-free rate, which is infinity percent, no? And the arb I mean is between a short position in the market and investing the proceeds in the portfolio...

But suppose we look at the two portfolio's example you suggested. Then as an example (if i have understood you correctly)

I go long from 100 with stop 90 and target 115 and i go
short from 100 with stop 110 target 90.

If market goes to 90, we stop out and hit our target, end result is 0 minus transaction costs. If we go to 115 we make 5. But if we go to 110 then back down to 90 without ever hitting 115, we lose 20. Depending on the probabilities, we can win small or lose big, but there is no arbitrage there.

Thats my point - long 50% short 50%* (what we would expect from a non-biased coin) run over a long enough period of time to encapsulate all market conditions, the expectancy of each portfolio will converge - it doesn't matter what your R:R are - or even that they are static - one is not inherently more profitable than the other.

So what is true for stop=target=1% is also true for stop = trailing 3*ATR or anything else..??

 

[Shakone]

it doesn't matter what your R:R are - or even that they are static - one is not inherently more profitable than the other.

You've made a hidden assumption there, right? If it is a random walk then I would agree with you.

But suppose I again enter long at 100, stop at 90, target at 130. Now, if it goes from 100 to 110 and price is sitting on 110. Is it more likely to go up another 20 points than down 20 points? If you think they are equally likely, then you believe it is acting like a random walk. If you think there is a trending element to markets, then the getting to 130 from 110 has higher probability. This higher probability would mean that having larger targets than stops can lead to a positive expectation on their own.

 

[Tryer66]

As a newbie -

I think he is trying to say that as long as you manage your risk well you can stay in the game longer?

He must be a very rich man from the price of those courses. Does he actually trade?

 

[montmorencyt2w]

Mike said

Markus,

How about (probably in another thread) you doing a little test:

See if you can grow some arbitrary starting amount sixfold using only entries and exits based on MACD.

You can choose the starting amount, but it should be a real money account.
Fair enough?

Can provide you with that right away here:

"Wer die Signale dieses Indikators konsequent umsetzte,
konnte in den vergangenen 13 Jahren mehr als das Sechs-
fache*aus seinem Geld machen."
http://www.comdirect.de/pbl/static/pdf/corp0075.pdf

That's a Commerzbank fund btw, Germanys second largest bank after Deutsche.

Oh and no I wouldn't trade using only the MACD, most importantly because I believe that it only works on long aka daily time frames and above.

That's not what I asked for as I think you very well know. As you are flying the virtual German flag, I assume your German is a lot better than mine. I have studied German to a reasonable level as it happens, although never financial/business/trading German, but I think I get the gist. No question they are an impressive outfit. I used to know a German guy who went to work for them in Frankfurt, although I have lost touch with him; he was pretty clever. Nevertheless they are selling a product here, and not explaining a trading system. Just supposing this particular fund really does only use MACD for both entry and exit with no other inputs (which I do not believe for one second), why on Earth would it be in their interests to reveal this fact in front of customers and competitors (or indeed anything about their actual trading strategy as opposed to the published outline one)?
The limitations on my German mean I'm not certain if they say exactly how they use it, but I don't think they do. (I could translate it ok given enough time with leo.org, and may do so as a "homework exercise", but haven't done so far).


[Later] OK, I've read a bit further and there is a bit more detail. So in essence, it's a glorified MA crossover system isn't it? They are tracking the DAX, and say they are outperforming it, by roughly double, in the years they quote.


Hm, well, I would still be utterly amazed if there wasn't an awful lot more to this fund than that. I therefore think that my "challenge" to you is justified, given the faith you expressed in it.

By the way, 524% isn't "mehr als sechsfach" is it? It's just a bit "mehr als fünffach" and a bit less actually than twice 288% which is what the DAX grew by in the same period.


So, let's see; you said:

http://www.comdirect.de/pbl/static/pdf/corp0075.pdf

Grew your money six-fold over the last 13 years which ain't bad for a public fund.

Well, it seems it was more like five-fold actually, but let's not quibble.

We don't have 13 years to spare, so let's make it a shorter period, and not specify the growth. How about six months, any starting amount, any instrument (but perhaps DAX would be good in this case), and just see how it grows or shrinks over that period, at which time we agree to carry on or scrap the experiment? Has to be real money. I don't know what you think of spread-betting (I suspect you are agin it), but that would be the cheapest way of doing it, perhaps only with 10p/point. (There is a new outfit that say they have this as a permanent starting rate). I would even give you the money if it didn't conjure up Wasp-like images. I just want to see you trade it, since you said or implied that it could be done.

You said:

Oh and no I wouldn't trade using only the MACD, most importantly because I believe that it only works on long aka daily time frames and above.

But you asserted by implication that it does work on its own, and cited the Commerzbank fund as proof. They were trading the DAX over 13 years. Isn't that a long enough time frame? I'm only suggesting six months, but that should be long enough to see how it's going shouldn't it?

If you would not trade using only the MACD, then perhaps you don't have quite as much faith in this Commerzbank fund as you seemed to have (or faith in what they said about it), or you don't have quite as much faith in the MACD as you seemed to, since you threw it in DT's face.

Now, I just want to see if it can be done. Not back-testing, but real trades (or spread-betting), real-money (even if not much), and not marketing-talk.


Anyway, I promise not to post any more about this in this thread, but don't promise not to start a new thread. Let's not call it a "challenge" as that sounds too aggressive. Let's say an "invitation".

 

[MrGecko]

You've made a hidden assumption there, right? If it is a random walk then I would agree with you.

But suppose I again enter long at 100, stop at 90, target at 130. Now, if it goes from 100 to 110 and price is sitting on 110. Is it more likely to go up another 20 points than down 20 points? If you think they are equally likely, then you believe it is acting like a random walk. If you think there is a trending element to markets, then the getting to 130 from 110 has higher probability. This higher probability would mean that having larger targets than stops can lead to a positive expectation on their own.

In the short term, one can be more likely than the other sure - but if you were to aggregate the whole time series, uptrends would be just as likely as downtrends and long positions just as likely as short - the whole series would sum to nil, if you catch my drift.

(of course there are things that give asset prices upward trends outside this discussion such as inflation, interest rates, lognormal etc... my argument is that a strategy of this type can't outperform these factors)

 

[MrGecko]

Not that anybody cares but I have been thinking about my last post and might have to reverse my position on this...

 

[BSD]

That's not what I asked for as I think you very well know. As you are flying the virtual German flag, I assume your German is a lot better than mine. I have studied German to a reasonable level as it happens, although never financial/business/trading German, but I think I get the gist. No question they are an impressive outfit. I used to know a German guy who went to work for them in Frankfurt, although I have lost touch with him; he was pretty clever. Nevertheless they are selling a product here, and not explaining a trading system. Just supposing this particular fund really does only use MACD for both entry and exit with no other inputs (which I do not believe for one second), why on Earth would it be in their interests to reveal this fact in front of customers and competitors (or indeed anything about their actual trading strategy as opposed to the published outline one)?

Now, I just want to see if it can be done. Not back-testing, but real trades (or spread-betting), real-money (even if not much), and not marketing-talk.

Anyway, I promise not to post any more about this in this thread, but don't promise not to start a new thread. Let's not call it a "challenge" as that sounds too aggressive. Let's say an "invitation".

Lol I sure as heck aren't gonna waste my time trading a long term daily or weekly or whatever it is system to assuage your belief or disbelief in a fund being marketed by Germanys second bank, you have gotta be joking !

And that IS the kinda time frame you need to get a classic trend following system to work.

Intraday one just gets chopped up with such systems, do you really not know that ?!?

No offense, but are there only two people on here who have ever backtested anything, or any more than 4 or 5 who actually make a living from this ?

This thread with all it's nonsense and that is predicated on nothing but a ludicrous lie that Tom Basso fiddled with data on a fact finding mission intended only for him is really the best example of why I'm getting bored more and more with boards.

Anyway, Commerzbanks system was widely reported in the media, and MACD is ALL that drives it.

Lol have you ever heard of the Turtles and their incredibly simple system and the unbelievable money it made them ?

Bill Dunn by his admission, another great trend following CTA with a decades long long history is another trend follower employing all of two parameters driving his fund. (Trader Daily, june / july issue 2006)

Trend following ain't about complex methods lol, it's about catching trends and riding em until they bend.

 

[meanreversion]

How do you think your system would fare in the following circumstances:

1 - we create 9 new markets
2 - we give 50,000 people the ability to trade those markets
3 - we give each of the 50,000 people the system you wrote
4 - we give each of the 50,000 people $100,000 to trade - they can trade when they want and they can trade any of the 9 markets at any time

At the end of 1 year, would you expect the average return of each of the 50,000 people to be 18% in line with your system ?

If so - can you explain where the money would come from ?

If not - perhaps we can look at the system and see what specific market conditions it takes advantage of. In my opinion, you have created a system that takes advantage of market conditions in the 9 markets you tested.

As an aside and in all seriousness. Your 35% return on your 'simple' system is better than most hedge funds. If you can just poop those out at random, I know someone with $30 million at his disposal that would be intersted in talking to you.

Hold on there cowboy.

First of all, I said nothing about drawdown or Sharpe ratio. Max drawdown can be at least as much as the CAGR, which most investors would find off-putting. Secondly, the Sharpe ratio is either zero or negative..... again, this is a real hedge fund turn off (it's due to the outsize positive returns). It's for these two reasons that trend following is not as popular as one might imagine.

Second, I spent the best part of six months developing my system, during which time I coded up the random entry system (after having read the Basso story).. I didn't just "poop" it out (nice turn of phrase!!)

Third, my system is more than capable of handling $30mio, it's the benefit of a mechanical approach. Risk per initial trade is 0.5 pct, which will not disturb the market. I'd be happy to talk to your investor, provided he understands the first two points.

 

[meanreversion]

And apologies for me saying this, but your line of argument is specious ---- taken to the limit, it implies that no system or person can make money over time, because the market will simply alter to take away all edges.

 

[meanreversion]

Lol I sure as heck aren't gonna waste my time trading a long term daily or weekly or whatever it is system to assuage your belief or disbelief in a fund being marketed by Germanys second bank, you have gotta be joking !

And that IS the kinda time frame you need to get a classic trend following system to work.

Intraday one just gets chopped up with such systems, do you really not know that ?!?

No offense, but are there only two people on here who have ever backtested anything, or any more than 4 or 5 who actually make a living from this ?

This thread with all it's nonsense and that is predicated on nothing but a ludicrous lie that Tom Basso fiddled with data on a fact finding mission intended only for him is really the best example of why I'm getting bored more and more with boards.

Anyway, Commerzbanks system was widely reported in the media, and MACD is ALL that drives it.

Lol have you ever heard of the Turtles and their incredibly simple system and the unbelievable money it made them ?

Bill Dunn by his admission, another great trend following CTA with a decades long long history is another trend follower employing all of two parameters driving his fund. (Trader Daily, june / july issue 2006)

Trend following ain't about complex methods lol, it's about catching trends and riding em until they bend.

It fails to capture the imagination for several reasons

1. It does not satisfy human desire to be right, the majority of people are not comfortable with 75 pct losing trades

2. It does not satisfy human desire for excitement. My system runs at 8-10 trades a month. I last traded EUR/USD two months ago, and am still short.

3. It does not fulfill the need to feel clever (selling highs/buying lows). It can never do this, as that would be counter-trend.

4. It requires programming knowledge, C++ is an advantage. It took me a few months to work it out.

5. You will ALWAYS have large, open positions.. some people like to be flat each evening.

For many reasons it doesn't appeal, and there are many times when it's "tough" money. But your emotions are all in the head, the only thing that really matters is positive expectancy (no pictures on a scorecard, as they say in golf).

 

[meanreversion]

Yes, what would be the difference in principle be between that and someone like Medbs holding on to a losing FX position for ever until it came back?

It doesn't work like that. Three years losing in a row would be extremely unlikely (in fact I've never seen that), but if it did it would contain many winning months, but overall yearly P/L of (e.g.) -1, -12, -7.

Medbs blew up in two weeks (-100 pct or more), please never mention his name and mine in the same sentence!

Even if the random system lost for only three months in a row, how many people could justify trading from a coin toss after three months..?

 

[MrGecko]

And apologies for me saying this, but your line of argument is specious ---- taken to the limit, it implies that no system or person can make money over time, because the market will simply alter to take away all edges.

Is this post directed at me?

 

[meanreversion]

Is this post directed at me?

Ah no, I would not call anyone specious twice in a day

It was to DT.. the assertion was that a random system cannot work because if you gave it to 50,000 people and they were all profitable, where would the money come from.

You could apply this to any trader or system.. e.g. Soros/Buffet cannot make money consistently because if they could, they could teach their tricks to 50,000 people and.....

 

[meanreversion]

Housing was a good trade for hundreds of millions of people for decades.. that was about the simplest trend trade imaginable. Where did all the money come from? Fractional reserve banking! But that really is a topic for another thread.

 

[BSD]

As it is, there are 2 major flaws in this study :

1 - The approach taken to the study is flawed
2 - The test itself is NOT proof of random entry, rather they admit to curve fitting as well as omitting key data

The system made money 80% of the time over the data set.

Then they changed the system

Then the system made money 100% of the time over the same data set.

This is curve fitting.

And still nothing but disingenuous fact twisting spin spinning around from Toast.

Lol and still no link from you to your slanderous claim that a CTA curvefit and omitted data either of course !

Apart from the fact that you freely made that up to any normal person who has ever traded for a living all they did was PERFECTLY normal backtesting.

And anyone who honestly believes that including a 1 percent money management stop has curve fit data needs their head examined.

The whole basis of Toasts non-arguments are completely and totally nuts anyway as Basso was NOT trying to prove anything to anyone but himself lol !

How loony must one be to able to carry an argument on the basis of someone trying to fool himself.

Frigging unbelievable.

Can't believe I've wasted two days of my life on this garbage on a level with NT, The Expert and Socrates lol.

 

[meanreversion]

BSD, is your real name Tom Basso??