All is not lost

I thought I would just also post my results for 2012 for a completely separate portfolio that I have been trading for a few years.
One of my beliefs is that a systematic tested and logical system will prevail over most discretionary based managers. I also believe that fundamentals have some merit when assessing returns of stocks. Of course my Australian trend following system doesn't use fundamentals at all.
Given this, I have used www.portfolio123.com to develop a quant based system that combines fundamental and technical factors combined with some market timing to manage one of my portfolios.
If any readers are interested in using P123, which is an absolutely amazing resource, just be mindful that it is very easy to be seduced with some of the public sims. Most of these are data mined traps. I have used the site for over four years and only feel in the last year that I am comfortable with the system I am trading. You need to start with a concept that makes sense and then develop from that point. It also helps if you understand accounting concepts as well as TA.
This model would be somewhat like what some equity hedge funds use in their quant portfolios, except I don't use any short positions except for some hedging. However, I am unable to simulate the high returns of someone like Renaissance Technologies, when I take stock liquidity into account. I have no idea how they can trade such huge amounts and not move the market, but then again I can't employ a couple of hundred PhD's

Below is the returns graph. I hold up to 50 positions, mainly small and micro caps. Red is the portfolio and blue is S&P500

2012 Year

The year has just about concluded, so I have updated my performance spreadsheet in all of it's ugly glory. I guess overall it doesn't look too bad, but it has been very difficult going and certainly not a 'trend follower's' market.
I do like like all of the negative market commentary. The talking heads are usually wrong and I know that eventually some trends will develop.

I am still here!

Just a quick update for anyone visiting. A few buys starting to kick in after a long slow period. It has been hard to be enthusiastic about this market, but I'll take the signals and hope I don't get hammered. It will turnaround sometime, and no one knows if this is it or not.

Performance Update

Last year was difficult and a little frustrating. The overall market was down, but the worst part was that it was very volatile in the second half, due to the European panic. For my system, this meant that quite a lot of buy signals were generated and then stopped out - in trader's lingo I was whipsawed.

2012 has started better but the ASX is really trailing the US. Perhaps we now have more correlation to the Shanghai Index than to the S&P500?

METEORITE Simulated Trades

The image shows three trades in ABY. The first two are winning trades and the last is a losing trade. The system wins about 50% of the time over the long run. Notice in the last trade how the exit was signalled before the price closed below the trailing stop, due to a loss of price momentum.

What to do about this Market?

Anyone remotely interested in the Australian share market will know that 2011 has been a very difficult period. In terms of 'trading strategies' , it is perhaps equally as difficult as 2008. The reasons for this are the lack of direction, high volatility and high correlation of stocks. Currently, for example, the correlation of all US stocks is over 0.8. This means that most stocks move up and down together. This makes it hard to add alpha (value) with most strategies.

I would describe the market is particularly manic, obsessed with dire predictions for Europe. Consequently, trends don't tend to persist. Many stocks are valued at very low levels. However, the markets are no different than they always are, in the sense that the markets always change. The fact is periods like this have existed before and will exist again.

Does this suit my medium term trend following strategies? Obviously not. But I do have a market timing mechanism to keep me out of most of it. Being impatient ( huge understatement according to my family), I decided to break out Amibroker and see if I could invent a system that was a bit shorter term and more reactive to these shorter trends.

The result is a new system - METEORITE. It is a weekly system ( based on weekly price bars). I didn't attempt to look at daily bars. I am busy and travel travel a lot and I am just not interested in having signals to act on everyday. Entry is on confirmed minimum 12 week highs with a couple of other rules. Quite simple and non- optimized. In fact, I didn't use the power of Amibroker to optimize any rules. Exit is a trailing chandelier type ATR stop plus another exit ( which is the magic ingredient). The system also has a simple market filter based on the index being above a moving average.

How did it perform in 2011 so far? See results below, from a single backtest run.

And the results for the last 4 years are shown below . This period from October 2007 to now represents a loss for the general market of 37% excluding dividends, as measured by the XAO index.

Performance Update

It has been a difficult year to date, but not a great deal of damage done to the account. Until a few weeks ago I still had a couple of open positions ( RRL and CFU). Both were stopped out for losses. The system is not broken - it is just a period where trend following doesn't work that well.

End of Financial Year Update

Well, for all of you who may be following my blog, you may think I have given up. The way the market has been for the last six months it could have been a good idea. Actually I have been very busy renovating my house (never again!) plus having a month's holiday in Europe. Since March, I have really only had a couple of open positions that haven't been stopped out. The account is down about 4% from the absolute equity high in January, so no real harm done.

The last two weeks has seen a couple of buy signals appear, so perhaps we may get a small bullish period running into Xmas again. The signals for this week are CFU, RRL and FRS .

Jan to March Update

Three months work and a small amount of anguish for a zero return.

The markets have actually been pretty resilient considering what has happened in the world lately. Plus, we are into the second year of the upswing in the economic cycle, which typically last about 5 years , so better times ahead possibly.

2010 in Review

2010 was a fairly difficult year for trend following strategies on Australian equities. The first six months was characterized by uncertainty in the world economy and this was reflected in the way markets behaved with no clear direction and a number of short and sharp reversals. However, eventually some trends developed on the back of improving economic fundamentals.
With mechanical systems trading, you grade yourself not on the analysis of each trade but on how well you executed your trading system. So on this basis I feel I have been successful.

October 2010 Performance

It is quite nice to be in the black for the YTD, when the All Ords Index is still negative for the year. It has only been the last couple of months that some trends have developed and these have been mainly in the small resources and companies servicing this sector. This does re-inforce the 2 speed economy that is the new catch phrase in the press. I'm also holding FLT & WEB - both travel and undoubtedly helped by the soaring AUD making overseas holidays very attractive. Graincorp(GNC) also is looking promising - I'm guessing on the back of all of the rain we have had.

I will also explain my performance table. VAMI is an acronym for 'value added monthly index'. Basically it records the movement in the account from the change in value of investment. In trading terms this means total equity, both open and closed trades. VAMI is the accepted method used by hedge funds for recording performance.

September 2010 Performance

It is surprising how fast things can turnaround when the market starts to move - both up and down. These results are my SMSF which trades 100% Australian equities.

IAU Trade - Still Open

The IAU trade contibuted most of August's performance. The coloured band along the bottom of the chart is a graphical view showing whether the market is bullish (green) or bearish (red). Note the surge in volume which occurred before and after good news about their gold reserves. IAU is yet to make a profit.

August Performance

Thought I would update the performance figures, now that I have a few open trades. However, July and August performance was driven by a couple of gold stocks (IAU & LYC). The market is at a key inflection point at the moment. Hopefully we have a break above resistance levels and move higher into Xmas. For me, it is quite postive that indexes have pushed higher the first half of September with so much talk of bearish sentiment, head shoulder bearish patterns, European economic woes, double dips and anything else people can dream up. Another positive is the large number of buy signals my systems have generated over the last few weeks. There is a chance though that I could get chewed up and spat out by the bears who are still lurking - we are a long way off a bull market yet. I think I will just keep tagging along .......

June/July

Not much to report as results are basically flat and mostly in cash. Market still really crappy for trend following and looks set to continue a while yet. Perhaps a little rally into Xmas.

That said, I like this quote from Ray Dalio, founder of Bridgewater, the world's largest hedge fund in 2009($40billion) .."I never know anything really - everything is a pobability". They have a 20 year track record of 15% pa in the pure Alpha fund.

May Performance Update

I thought I would start to post my performance figures in a format similar to Nick Radge. Nick's Growth Portfolio system trades the same market using a trend following philospophy. You can subscribe to Nick's system at www.thechartist.com.au .

The market over the last 9 months has been the worst conditions for my systems - lots of whipsaw type trades i.e the market takes off and triggers trades and then just as quickly reverses. It looks like to XJO may be finding a bit of support around current levels, with a long kangaroo tail on tthe 21/5 with huge volume. If 2300 holds over the next few weeks we may see a bit of a rally. But, again every time I give a prediction it seems to fail - the exact reason I trade systems with a postive edge.

I've been busy

It has been a very busy time for me - but not with the trading. The last 4 months has seen the end of a project I have been working on for 7 years! I can finally see my way clear to increase the size of my two portfolios and use fixed size accounts. I have added funds to the SMSF portfolio and have started up a second portfolio in a family trust. Impeccable timing - just in time for another market meltdown! Although I am very lightly invested and so the start drawdown will be very small in percentage terms. The market filter has turned off and so I will not being placing any new trades for a while, by the look of it.
I have received emails from a couple of market gurus over the past year or two with their view of the market. The first one (surname begins with H) has advised his readers/clients to totally keep out of the market until just recently, based on his view of the world economy - and I know he normally just uses technicals and has actually written a book on his system/s. He advised to start buying when the market broke 5000 a few weeks ago.
The other guru 'L'(although at least he has stuck to his very good system, and not guessed) advised his clients to be basically all cash from Nov 07 to Nov 09.
I ran my system over this period to see if I would have been better just collecting 3% interest. You needed a lot of patience and the ability withstand a start drawdown of over 10%, but it certainly was better to just follow the signals, as can be seen from the equity graph. This is actually a walk forward test, as the system was designed prior to this period

STAR backtest Nov 07 to Nov 09

The green areas indicate the amount of cash held, with red being drawdown.

February 2010

Not much happening in February - results are basically flat again. I have been holding only 2 positions as the market tracked sideways. These are RPX and RMS.
Typical long term systems can spend a lot of time in drawdowns from equity highs. In 2008/2009 this period was over a year. This was an extreme market environment, so I am looking for a faster climb this time.