Trade loosely correlated WealthSignals systems for stable growth

Trade loosely correlated WealthSignals systems for stable growth

Even the best system experiences drawdowns, and as traders we’re worried about the irregularity of our returns. It’s tempting to cancel subscription when the fortune turns away from us but it may end up displeasing to see the missed profits when the system returns with a vengeance. And if has a solid mathematical expectation, chances are in its favor.

We touched this subject in another article, When a mechanical trading system is having a drawdown what do you do? This time let’s approach it from a different perspective. Portfolio diversification comes to help here as the natural tool of risk reduction. The idea is to add another, carefully chosen system to trade to smoothen our equity curve.

When properly applying this technique you can benefit from different systems responding differently to different market conditions or from trading different assets. Like with a portfolio of stocks, the idea is to choose another system that rises or falls at different times from your “primary” subscription.

Suppose you’re subscribed to ETF Pairs Arbitrage whose equity curve is underwater after making an all-time high in May:

ETF Pairs Arbitrage - Mechanical Strategy

A quick inspection of other systems’ equity curves on the “Find a Strategy” page suggests that there are other candidate systems still making money. Take Saltamontes, for instance. Its equity curve has been on a steady rise, with ups and downs spreaded differently from the “EPA”:

saltamontes - Mechanical Stock Trading System

A choice of systems like this makes sense because they tend to support each other. What you have to care about is to avoid systems having a perfect negative correlation or it would be a zero sum game. If one system goes up 5% while the other loses 5%, there’s no benefit from diversification.

In this article there’s no room for discussion of complex concepts like correlation coefficients, covariance or efficient frontier. It’s a simple trading idea and should stay so. The takeaway is that it may be possible to achieve diversification through subscribing to loosely correlated systems to smooth out our returns.

Which performance metrics are important to me?

Which performance metrics are important to me?

At my never-to-be-revealed age I’m more risk-adverse than I was 30 years ago (oops! I may have just inadvertently dated myself) and the metrics that are most important to me may not be the same as yours.  With that in mind, let’s talk performance.

Percent profit per trade

Beware of too little percent profit per trade (%P/T) so that any slippage and commissions would wipe out all your gains. Strategies that trade more frequently (like dip buyers that enter and exit positions after 1 or 2 days) tend to have lower values for %P/T, perhaps 0.6% or less. That strategy trading $10K position sizes would then make an average of $60 profit per trade.

But imagine you traded it with an account allocation of only one-fifth that size, i.e., $2,000 positions.  Your average profit would be only $12. Add in $2 to $20 of commissions (depending on your broker) and a probable negative effect of trade slippage, your expected gain may even be negative!  While strategies with low $P/T are often able to generate significant profit due to many trade opportunities, they may not be a profitable endeavor for smaller allocations.

Win/loss ratio of trades (or Winning Trades Percent)

While it’s not required for profitable strategy, trading is easier, and it just plain feels better if you have more winning trades than losers. You can take this with a grain a salt though.  What’s important is that the percent profit of winning trades is [significantly] greater than that of trade losers. That’s the first bit of evidence that a strategy author allows winners to run and more quickly cuts losses.  In the end, higher ratios of both add to the robustness of a strategy.

Equity and Drawdown curves

Equity and drawdown curves are interrelated in the following way: Drawdown is the value, expressed in either a dollar or percentage amount, that your portfolio has fallen since achieving the last peak equity value.  The max drawdown (Max DD) then is the greatest negative value of one of these “dips”. It’s typical to find strategies with the best overall profit metrics with a Max DD in excess of -40%.  Don’t forget that you need to gain +67% to recover from a -40% drop and +100% to recover from a -50% drawdown! You may be different, but these are not the kind of strategies that I can stick with while trading.

Warren Buffett has written (and spoken) several times that he prefers “a lumpy 15 percent return over time than a smooth 12 percent.” Everyone who trades wants to end up with more money; that just makes sense.  But if you’re watching your account value daily – and maybe even count on some returns to “keep the lights on” – it may not be too sensical.  (I do not advocate that you trade with money that you cannot affort to lose.  Trading stocks is one of the riskiest things you can do with your money.)  It’s not as easy to stay the course while experiencing lumpy -30% and -40% drawdowns as it is with an account that has a smoother, upwardly sloping equity curve.  And, if you can’t stay the course, you’re likely to quit precisely at the wrong time.

Something that I really like and is unique about WealthSignals is the ability to see a backtest/research equity curve connected to the WealthSignals out-of-sample equity curve.  You can easily get a feel if a strategy is continuing to perform in a way expected or “observed” in the past.  If performance isn’t par with the observations in the past, there’s a fair chance that the strategy has been over-optimized, or possibly the market conditions have changed so much that the strategy is just no longer effective.

Equity Curve: In and Out of Sample Test

Monthly performance table

How many months in the year [or in a row] did I make money? How many months [in a row] did I lose money?  A monthly performance report, especially when graphed as a histogram, it lets you see in a glance how constant (or variable) returns are over time and how often you can expect no or negative returns – a measure that may not be obvious in an apparent ever-increasing equity curve that spans a decade or two.

I like to compare the backtested (research) numbers and the WealthSignals out-of-sample numbers. If the discrepancy is too high, I would like to find out why it is and contact the system author.

Feel free to post your questions!

self-directed investing

Online Brokerage Step-by-step

How to open an online brokerage account. You’ve decided to open an online brokerage account and start your investing journey. Good decision!
Any Questions?
Our Support Team is here for you. Feel free to use our live chat or contact us via email.
Disclaimer
WealthSignals™ information is based on hypothetical performance results which have certain limitations. They do not represent actual trading and therefore do not have financial risk. Any interpretation of data presented that leads to an investment is at your own risk and WealthSignals™ or its affiliates will not be responsible for any losses that occur from such investments. Past performance is no guarantee of future returns.

Interview with BWO – ETF Pairs Arbitrage – Mechanical Trading System

BWO is an author of one of the leading strategies on WealthSignals.

His strategy “ETF Pairs Arbitrage” is around for over 4 years by now

and has gained over 500% during this time.

Beau, your strategy ETF Pairs Arbitrage (EPA) has been one of the top performers on WealthSignals.com for several years now. Congratulations on this achievement! How did you get started as a quant, and how long have you been developing trading systems?

 Hi, WealthSignals, I have been a quantitative developer and analyst since May 2003. At that time, I was taking a Course called Theory of Investments at Centre College in my Financial Economics Bachelor of Science Mathematics Minor.. And, then my family decided to compete in the financial markets with me as General Partner of what we called The Nexial Investment Club Partnership, split equally amongst the immediate members of my family.

 

What is the history of EPA?

I realized that I was going to inherit some money that could become a fantastic fortune within 10-15 years and so six to eight months after QID and QLD began trading around July 2006 on March 21st 2007 I perfected Pairs Trading QID QLD Scalper. I was already looking for algorithms to use and found them at an undisclosed location on the web long since gone are its explanations and histories… however, since my Majors in High School were Mathematics, Science, and Computer Programming, I knew that either of these two strategies would deliver significant wealth to me and my family when deployed accurately. After a spat with my broker/dealer about offering these types of strategies, I went to what I believed was a more compliant web service through Interactive Brokers called Covestor. Then I went to World Cup to be an Advisor and CTA and was a trade leader at both. Although I had an outstanding record there, when I made the decision to join WealthSignals I had to terminate that relationship and that is why I am here earning way more than I did on any other site offering the types of mechanical and statistical strategies that are like what WealthSignals offers, just EOD for now, but that will likely change to RT in the near future..

If EPA fully mechanical in nature, or do you allow any of your own intuition in the signals?

There is no intuition to the Primary Alpha, which is my WealthSignal to trade. It uses Chebyshev’s Theorem of 1865 and the 1895 Empirical Rule of Statistics to compute either of the three possible ranges of values for the market:
  1. Fair Value Question: When does fair value happen? The answer is after Normalization so this is a Normalized Volatility Based Overbought Oversold Threshold,
  2. Overvalued and our favorite,
  3. Undervalued. The only intuition I really have is to take Armageddon Events seriously.. and, if one were to open I have a failsafe overlay to just exit the position and wait for Normalysis to take its power over the market once again. Emotion plays no part in my WealthSignals.

I tend to approach trading system development in a scientific fashion, starting out with a hypothesis such as “piggyback a strong breakout” or “prices revert to the mean”. What assumption did you intend to validate when developing EPA?

 Mathematics from my Associates equivalent at Centre College explained that these two Theorems named above (Tchebychev 1865 and Empirical Rule of 1895), show the percentage of data above and below the mean.. This would only be intuitive to someone like myself, but, not to be glib, it was not exactly “prices revert to the mean” or “mean reversion” but it was “mean reversion through Normalization”or “Prices Revert to the Mean by Normalysis” so that was what I was trying to prove along with my Linear Regression Analysis Tricks.

We noticed that often in WealthSignals.com, a publisher will submit backtest performance for their trading system, but then over time the actual performance will not live up to the backtest results. This could be due to overoptimization, survivorship bias, or other reasons. EPA, on the other hand, has actually shown a higher out-of-sample performance.

Do you have any insights into why?

Yes, I do! It’s from incorrect data pulls and the amount of data involved in each simulation an Author submits to WealthSignals. The only reason it takes tens of seconds for me to issue the EPA WealthSignal Strategy Orders is because I have to make sure the data is correct before I submit my decision to WealthSignals, and for me it comes down to whether the prices are the same as my Terminal in Active Trader Pro. Every trading day I have to check data before submitting signals and on days when I have signals to issue orders to WealthSignals I use the Order Entry Publisher from WealthSignals at 97% of equity and then a numeric value to sell and/or reverse.

 

Do you optimize or tweak EPA periodically, or has it remained “as is” since its inception?

Basically syntax only, no logic changes in 5 degrees of freedom out of 6500 bars when combining QID with QLD and some Linear Regression Analysis similar to that used in every one of my publications. I used to be nexial_1002002 on the old wl4.w-l site and it was on there that I found fame through my Presentation to the Kentucky Math Association in May 2005 at my Alma Matre as a Junior entitled Dip Buying using Bollinger Bands. Regretfully, until about one month ago, I had to declare that the strategy could not be implemented due to technological infeasibility. (This has changed with the advent of Quantacula). And this infeasibility declaration was also true for many years of people who counted my algo out as I was watching it accumulate massive 30% quarters nearly every quarter which is what it feels like to me when I see my TQQQ and SQQQ Returns.

 

ETF Pairs Arbitrage, as its name implies, is traded on a pair of ETFs. Have you tested the logic on any other assets, different ETFs, international ETFs, stocks, futures? If so, how did it perform?

Yes, They have to be perfectly negatively correlated instruments to be pairs first off, and second, if you were to use these models on SSO/SDS. MVV/MZZ. DDM/DDZ…etc… Yes! I’ve tested on all of them from wl4 but not the current .Net version and they were very good performers. It’s just that S&P500 was always dip buying mostly due to oil and very correlated with the Dollar Index so after simulating a hypothetical $1600 backprice on QID and a $1 starting price on QLD the system does have validity back to 1985 and that’s as far as I can see CBOE’s NDX when these instruments became possible to simulate.
Are you developing any new trading systems that you’d like to mention?
Only one, and one of my favorite achievements: SUPERBANDS: I’d like you guys to visit my Facebook Algo Shop at KCCMBWO’s Page So You can compare the two algorithms my Family Trades and Plans to Trade and offer forever as these will have the backtested equity curve that can now be followed through WeathSignals.

I was instrumental in the development of the Quantacula Studio WealthSignals Broker Adapter which I think is a magnificent step forward for the industry I’m a part of.. 

 

Finally, do you have any advice to EU residents who want to trade “EPA” but cannot due to trading restrictions on U.S. Exchange Trades Products?

Guys, Double Leverage Just Means 2x Leverage. And 3x Leverage to convert from 2x leverage is the 2x return raised to the three halves (3/2) power and you can go up to 5.63 to 1 to get the returns that I get in Futures Markets if you remember these procedures:
  1. Compute your Delta Hedge Leveraged Factor:
    • Q: What is a Delta Hedged Leveraged Factor?
    • A: Say you have $140,000 and NQ Is trading at 7,000. These are equivalent and so when NQ loses 70 points your equity will drop by $1400 because 70 points times $20 per point is that value and is equivalent to 1%. So by Dividing $140,000 if NQ is at 7,000 will require you to divide $140,000 by 5.63 as the amount per contract you can trade in futures.
      NEWS FLASH: CME is going to begin offering Micro Contracts on NASDAQ-100 and this same process can be used on them with even smaller amounts of capital required for margin!!
  2. Place Trade at the right time which is 9:30 AM EST for EPA and I will only buy in SuperBands during the day and just sell at market the next day on the open, too.

WealthSignals.com at https://www.wealthsignals.com/Strategy/Detail/ETFPairsArbitrage-9IP7Vx

That’s my Whole Algo Shop with Equity Curves Shown again, at https://www.facebook.com/pg/KCCMBWO/shop

See My YouTube Channel at https://www.youtube.com/channel/UCA_6TkmtuUo71Gpp3pjmnvQ
And My Companies Youtube Channel KCCMBWO at https://www.youtube.com/channel/UC5eGEhOS1CiE1jNapjU-tOA

Also see my twitter at https://www.twitter.com/BWorldOmnimedia
And my CV on LinkedIn at https://www.linkedin.com/in/kccmbwo
And My Company’s LinkedIn Page at https://www.linkedin.com/company/890241/

Your Best Market Place Trading Systems Provider of 2018 & 2019 by Wealth and Finance International Magazine:

Beau Wolinsky

President and SRO CEO, SEC Exempt IA, CFTC Exempt CTA, CPO
KCCMBWO
KC Capital Management Beau World Omnimedia KCSE
Kansas City Stock Exchange

MLGP
Master Limited General Partner Energy Farms US Partners MLP
MLGP

Check out your next mechanical Strategy's Performance Details

What is drawdown?

What is drawdown?

The largest drawdown is calculated by keeping track of your built up equity. When losing trades begin to subtract from this equity, drawdown occurs. This is a very important statistic to consider when analyzing a trading strategy. You will never follow a trading strategy which has a strong propensity toward diminishing your equity. There are two most popular ways to calculate drawdown. One is calculated from closed trades only. You can also use the unrealized equity including which includes the proceeds from open trades.

What is a drawdown?Why is it so important?

When backtesting it is very important to research a strategy over as much data as possible. For example, applying a strategy in US stocks to the datar range from 2008 until 2018 can be deceptive. It was a major bull market and the general market indices seldom experienced a considerable drawdown deeper than -15%. So if your strategy had little drawdown it has no predictive value because you didn’t test it on a volatile market 1998-2008, with some solid drawdowns.

Having a strategy which hasn’t been backtested is equal to not having a strategy. Anyone can have a runup for one two or even three years – especially in the past decade. On the other hand, you might still want to take the risk and accept that drawdowns happen.

The old saying “double the drawdown and half the profit” for out of sample trading is not quite true if you have used the right data and method.

When researching a strategy on futures you should always consider and not underestimate the cost of rollovers (and the effect of the long term price chart). When testing on stocks you need to consider the quality of data and survivorship bias. You can read more about it here: Why you should test without survivorship bias

The odds on having an upturn are increasing every day!

When a mechanical trading system is having a drawdown what do you do?

When a mechanical trading system is having a drawdown what do you do?

Suppose you’ve subscribed to a “star” system and one day find your broker account losing money as the system has entered a drawdown. Volatile markets expose trend-following systems to a higher chance of false moves which lead to losing trades. You’re tempted to unsubscribe. Ironically, it’s when we give up on such system it frequently comes back with a big winning trade that pulls it out of its drawdown.

So should you pull the plug now or perhaps there might be a smarter option?

Sophisticated money managers use methods which seek to extract extra profits during a system’s down phase. For example, moving averages can be applied to a system’s equity curve. Called trading the equity curve, this technique marks the system out of sync with market conditions when its short-term average of the equity curve gets below above a longer-term average. “Paper trading” during this phase increases your odds of not taking trades which are likely to turn out losers.

ETF Pairs Aribitrage mechanical trading system

If you’re a WealthSignals subscriber, staying on the sidelines is not your only choice. As the odds of the winner trade appearing soon are increasing, the trade size can be added to each time a losing trade occurs. While this sounds counter-intuitive, backtesting suggests that variations of this Martingale money management may actually improve performance:

Losing streaks: After each losing trade, slightly increase the next trade’s position size step by step until some upper limit is reached. Stop the increase if the losing streak gets too big, and get back to original size after a winning trade.

Reverse trade: When the next trade has a higher chance of failure, be it a losing streak or system’s equity staying “under water”, don’t suspend trading. Instead, execute the signal in reverse — go short when a buy signal occurs and vice versa. Those with appetite for risk may increase the trade size.

Not every type of system can be “reverse traded” like that, and “over managing” is a double edged sword. Professional traders know that for a robust system with positive mathematical expectation, every losing streak or drawdown will eventually end. If a WealthSignals system has a proven track record, an equity dip may give you the edge and offer a lucrative opportunity to subscribe!

The odds on having an upturn are increasing every day!

What is a drawdown?
What is a drawdown?
Drawdowns are important for measuring the historical risk of a mechancial trading strategy, comparing fund performance, or monitoring personal trading performance…
Any Questions?
Our Support Team is here for you. Feel free to use our live chat or contact us via email.
Disclaimer
WealthSignals™ information is based on hypothetical performance results which have certain limitations. They do not represent actual trading and therefore do not have financial risk. Any interpretation of data presented that leads to an investment is at your own risk and WealthSignals™ or its affiliates will not be responsible for any losses that occur from such investments. Past performance is no guarantee of future returns.

Which online stock broker should I use?

Which online stock broker should I use?

If you’re considering subscribing to a WealthSignals strategy, you may be on your way to becoming a self-directed trader (or Do-It-Yourself trader). You will be joining a fast growing trend in stock market trading. The availability of quality online resources from how-to knowledge-bases to point and click stock purchasing, makes becoming a DIY trader the next evolutionary step in stock investment management. In this process, one of the roles WealthSignals plays is robo advisor: You subscribe to a trading strategy that best fits your style and risk profile, and trade the signals the strategy provides – no guesswork on your part.

Which brings us back to the question of which online stock broker should you use. Assuming you intend to follow a WealthSignals strategy and trade its signals, then you wouldn’t require a Full Service Stock Broker. You can take advantage of the low cost or discount broker. A discount broker provides the service of stock buying or selling at a reduce commission rate. As opposed to a Full Service Broker which charges a higher commission but also provides their customers trading advice which, in the case of using WealthSignals, you won’t need.

Self-directed investing stats

How low can the buy and sell order fees go?

This might be hard for you to believe, but if you were a subscriber to ETF Pairs Arbitrage or ETF Gold, you could use an online broker called Robinhood and pay zero fees and zero account setup. This fast growing company provides their ETF, i.e. Exchange-Traded Funds, buying and selling service commission free. Like other internet business models, they believe enough of their members will end up buying their paid services and offset their cost of giving this service away for free.

How easy is it to use a discount broker?

In the case of Robinhood, like many other, it’s as easy as installing an app on your phone. Register, setup and fund your account. A buy or sell order can be place with as little as three or four screen touch gestures. Of course all of these online discount brokers have full websites for their customers which one is the easiest to user is up for debate. Check our our referral links below for comparison and more information.

Who’s the most trusted online discount broker?

Fidelity Investments, founded over 70 years ago, is one of the largest asset managers in the world. Fidelity has a very comparable online discount broker service with stock trade commission at $4.95. If you find yourself in need of assistance you’ll find it. There is no better company for customer service. And, if your account qualifies you can automate your WealthSignals orders or alerts from your own strategies using Fidelity Wealth-Lab Pro! Indeed, most of the strategies on WealthSignals are created and supported using Wealth-Lab.

For more information on online discount broker and DIY trading:

https://trendshare.org/how-to-invest/what-is-self-directed-investing

https://www.investopedia.com/terms/d/discountbroker.asp

https://www.creditdonkey.com/discount-broker.html

Comparison discount brokers

https://www.nerdwallet.com/best/investing/online-discount-brokers

Review of Fidelity as a discount broker

https://www.creditdonkey.com/fidelity-review.html

Wealth-Lab Pro for U.S. Residents: https://www.fidelity.com/wlp

Wealth-Lab Developer for international users: https://www.wealth-lab.com

self-directed investing

Online Brokerage Step-by-step

How to open an online brokerage account. You’ve decided to open an online brokerage account and start your investing journey. Good decision!
Any Questions?
Our Support Team is here for you. Feel free to use our live chat or contact us via email.
Disclaimer
WealthSignals™ information is based on hypothetical performance results which have certain limitations. They do not represent actual trading and therefore do not have financial risk. Any interpretation of data presented that leads to an investment is at your own risk and WealthSignals™ or its affiliates will not be responsible for any losses that occur from such investments. Past performance is no guarantee of future returns.