exp system

[exp]

TO ALL:

I have done a very intensive analysis of major aspects of T/A in recent weeks to determine "what works" in order to allow one to exceed market returns. Surprisingly, 90-95% of T/A DOES NOT WORK in any meaningful way IMO. The very few simple things "that work" cannot really be improved upon by any of the more sophisticated techniques of T/A due to inherent randomness of market moves.

Earlier, I had hoped that T/A can provide one with powerful techniques to "beat the market". Lately, I have been very apprehensive that perhaps NO T/A techniques really work and "market beating results" are entirely due to chance. Right now, I have concluded that it is indeed possible to "beat the market" using a few simple T/A ideas. In addition, achieved annual returns can be very large due to the fact that these simple T/A ideas allow one to substantially reduce losses while realizing a good portion of possible gains (both on the long and short side).

This conclusion is consistent with several known facts that I have been unable to reconcile until now:

(1) most academic research in finance found no statistical support for the proposition that market inefficiencies can be exploited to achieve above-market returns

(2) some more recent academic research in finance found that some simple T/A techniques do indeed result in above-market returns

(3) the original Turtle System traders achieved superior results following a well-thought out trading system


So from now on, I will implement these new insights in my trading. These ideas are a further refinement but also a major simplification of the ideas I arrived at early in June.

There is still one issue though that is presently unresolved. It is the optimal risk level one should assume. This issue has two overlapping aspects: leverage and position size. For example, if one uses NDX-based Profunds (or QQQ on full margin) with 2x leverage then a 100% position will result in percentage wins and losses twice that of NDX/QQQ. With futures, leverage may be as much as 5x or more. Normally, in these situations position sizes would proportionally decrease as leverage increases. And yet, higher leverage has the potential to boost the gains. For example, increased leverage may also be achieved by trading "high-volatility" stocks or options.

This issue is really mathematically related to the "Gambler's Ruin" problem which shows that the potential for a total loss of capital exists even when the trading system produces substantial gains on average. So, I intend to carefully monitor my system's performance from the standpoint of possible/likely drawdowns of capital given the system parameters (probability of a win=percentage of winning days, average daily percentage gain, and average daily percentage loss).