StockFetcher Forums · General Discussion · How To Reduce Drawdowns<< 1 2 3 >>Post Follow-up
230 posts
msg #106852
Ignore wkloss
6/30/2012 12:40:58 PM


I'm happy to disclose the system. It does require ETFREPLAY or some excel programming skills (which I don't have). Several gurus have offered volatility based systems recently with some astounding results. They include Lentz at Optionvue, Lawrence McMillan, Larry Connors and Morales & Kacher. I watched a couple of presentations on the Optionvue system which claims to be up 60 to 80 times the initial investment over the past 3 1/2 years (results depend on the date of the presentation) with minimal switching. Its problem is that it is slow to switch directions. I decided to try to develop a short term system on ETFREPLAY to see if that problem could be solved.

It switches between VIX & XIV weekly. Set Return A to 10 days & 20%; set Return B to 5 days & 30%; set Volatility to 2 days & 50%. My backtest started 12-31-2010 and ran until 6-29-2012. So far it is up 650% but had a 42% drawdown this year because of 4 consecutive losing trades, one of which was over 20%. Other than that bad patch, drawdowns haven't been excessive.

If you aren't subscribed to ETFREPLAY, I can explain the logic. Its probably not difficult to program.

Morales & Kacher developed a volatility indicator and their studies show that it is normal to experience as much as a 19% drawdown between the time is signal is issued and the time the trade starts going in the right direction. Their solution is to use a small portion of your account so that the drawdown doesn't have a major effect on your account balance.

Do I believe or expect any of these systems will continue to produce their backtested gains? No, these sound like ads for trading systems where all you have to do is send the developer a big check and all of your worries will be over. I would be happy with half the gains of any of them. When I see systems from quality names, especially Morales & Kacher, I tend to think there is something of value to be discovered. Uncertainty in the US & world economies makes me think we could be in for a long period of high volatility so there is probably money to be made.

Thanks for your comments.


716 posts
msg #106854
Ignore miketranz
6/30/2012 1:22:04 PM

Novacane,"at the worst possible moment" would be the point where I would be getting out.The best possible moment is where I would be getting in.What I'm saying is,depending on what trading method you're using,lets go with a breakout in price over $10.I would enter +.10 or better on stop as soon as price touches that level I'm filled.I could get filled anywhere from $10.10 to possible $10.20 depending on the stock or if there are buyers at that level.My whole point is 1)I know my entry price is being placed in front of a rising stock,if it does not trigger,no problem 2)I know what my exit price is,right under $10,if it runs against me.3)I know my exit price or stop loss is that close to my entry,that if it's triggered I shouldn't be in the trade at that point.That's where traders lose most of their money.They can't take a loss,so they go into the wishing,hoping,praying mode while their account gets drained.I also use a dollar stop in some cases,again depending on the stock or method.What's the most you want to lose if the stock runs against you? I basically want to trade with a plan that lets me to know exactly where I enter/exit a trade and have those two points close enough so that I know either I'm in the right place or in the wrong place.Hope that helps.Best......

716 posts
msg #106856
Ignore miketranz
6/30/2012 3:42:20 PM

Bill,is the system based on channeling,breakout,volitility,where and when are you entering & exiting?Put it to me in simple terms.Thanks,Mike.......

230 posts
msg #106860
Ignore wkloss
6/30/2012 6:23:40 PM


Relative Strength is simply which of a group of stocks, ETF's etc has gone up the most or lost the least over x amount of time. This is a momentum strategy and assumes that bodies in motion will continue in motion. Let's say you want to trade the strongest of A,B & C and you believe the best lookback period is 3 months and let's assume all 3 were at 100 at the start of the lookback period. At the end of the lookback period A was at 102, B was at 108 and C was at 106. Percentagewise, B is the pick. Since not everything always goes up, let's assume again that all 3 were at 100 at the start of the lookback period. At the end of the lookback period, A was at 90, B was at 99 and C was at 95. Again B was your pick since it has lost the least percentagewise.

My system does a lookback every Friday and switches to the strongest of XIV or VIX based on weighted lookbacks of 10, 5 & 2 days. In trying to explain this, I tested my system just using a 2 day lookback period and got the same results that I got with my harder to calculate 10, 5 & 2 day lookback.

So to keep it simple, after the close on Friday, find the open for VIX & XIV on Thursday and compare that to the closing numbers on Friday. Your pick for the next week is the one that has gone up the most or lost the least (percentagewise). On most but not all of the ETFREPLAY systems I have tested, entering the trade on the last day of the period (in this case Friday before the close) gives better results than waiting to enter on the 1st day of the next period (in this case, Monday). So what you probably want to do is run your calculations perhaps 30 minutes before the close on Friday and if the system says to switch, sell the one you are in and buy the pick for the next period.

Kevin did some great work on relative strength systems and I believe that at least one of the systems he trades uses it. I think it was the system he uses for his 401K. Whether you use my system or not, relative strength is worth investigating.


273 posts
msg #106861
Ignore novacane32000
6/30/2012 11:31:44 PM

Mike -With a buy stop on a breakout and a tight stop loss I would think the winning percentage is not very high but you would make up for it with big winners vs many small losses.

I have never used a buy stop for fear of getting wipsawed right away. What type of patterns do you use a buy stop on?

716 posts
msg #106863
Ignore miketranz
7/1/2012 12:17:49 PM

Novacane,getting stopped out is just part of the game.I'd rather get stopped out than knocked out.That's just the way I trade and its kept me in the game.Babe Ruth who is considered by most as one of baseballs greatest hitters,had a batting avg of .378 in his best year.He averaged .342 lifetime.Point being,your profits from winning trades must excede your losses from losing trades.I "buy on stop" only on momentum trades.I want to move with the market,step in front of it,validate direction and jump on for the ride.The key to "buying on stop" is you commit to the trade.Buying with a market order you can find yourself "chasing the stock up",if you're not decisive.Hope that helps.Best....

4,659 posts
msg #106877
Ignore Eman93
7/3/2012 9:05:15 PM

Do you ever go to stocktiger they have great watch list.

They way I think he explains the way he does it ... he buys a truck full and sells half or more in the first surge and lets the rest ride.

3,998 posts
msg #107051
Ignore four
7/15/2012 12:39:36 AM

Perhaps some ideas from here...

The first goal is surviving in short term in order to be able to make gains
in the long run.
ĒIf you donít bet, you canít win. If you lose all your chips, you canít bet.Ē
Larry Hite
A loss of 2% requires a gain of ca: 3% on remaining capital in order to
break even.
A loss of 30% requires a gain of ca: 43% on remaining capital in order to
break even.
A loss of 50% requires a gain of ca: 100% on remaining capital in order
to break even.
A loss of 90% requires a gain of ca: 1000% on remaining capital in order
to break even.
The importance of cutting losses short is obvious. Large losses can be
avoided if the trader only risk a small amount of capital in each and every
trade and not letting a streak of losses compound into a big portion of
initial capital.

----------- ---------------- ------------ ----------- ------------

More discussion here...

716 posts
msg #107064
Ignore miketranz
7/15/2012 10:21:23 PM

It's all about money management,staying alive in the game long enough to develope the competency to trade profitably.Money management goes beyond pure mathematics.Emotions are a huge part of the equation.Greed and fear set the center stage.These are the things you can't get out of a book,can't be taught,but must be experienced with ones own capitol on the line,in real time.How you control your capitol will determine how long you'll survive in the market.Too much risk or loss on the down side,you won't be around long.One must be willing to except small losses,while waiting for a large gain.When you get your emotions in control,your account will be under control...

68 posts
msg #107281
Ignore miko
7/27/2012 6:37:41 PM

Maybe a dumb question, but how exactly do you trade VIX? AFAIK, it is a calculated value and not directly traded.

StockFetcher Forums · General Discussion · How To Reduce Drawdowns<< 1 2 3 >>Post Follow-up

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