Dr. Toad's Journey to Bankruptcy or Financial Freedom

This is a discussion on Dr. Toad's Journey to Bankruptcy or Financial Freedom within the Trading Journals forums, part of the Reception category; Originally Posted by timsk Hi paszkman, That's an interesting table you posted - just wondered what your source is? Thanks, ...

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Old Sep 8, 2015, 9:45pm   #33
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Originally Posted by timsk View Post
Hi paszkman,
That's an interesting table you posted - just wondered what your source is?
Thanks,
Tim.
The internets.
First place I saw it was this guy:
https://twitter.com/SJosephBurns

If anyone can prove/disprove/explain the table then I am all ears.
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Old Sep 9, 2015, 12:29am   #34
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The internets.
First place I saw it was this guy:
https://twitter.com/SJosephBurns

If anyone can prove/disprove/explain the table then I am all ears.
I believe you will find this article interesting:
https://courses.cit.cornell.edu/info2950_2012sp/mh.pdf

It goes through a conceptual derivation of how to determine the average number of occurrences needed before the first occurrence of a specific sequence. The basic formula to determine this from the article (equation d2) is as follows:

An = (1 - p^n) / [p^n * (1-p)]

So for instance, in my case I am shooting for a success probability of 65%. If I am interested in finding on average how many trades I would need to make before I had 5 consecutive losses in a row:

A5 = (1 - 0.35^5) / [0.35^5 * (1-0.35)] = 291.

So, I can expect to have 5 consecutive losses in a row about once every 291 trades with such a system. This means my original thinking of this was wrong since my original thinking was this could be derived simply as 1 / 0.35^5 = 190.

The article also indicates there is no good closed form solution for determining the probability of x consecutive occurrences in y trials. It used numerical simulation to determine this for a 50/50 probability situation with 100 trials. The simulation indicates that in this situation, the probability of 5 consecutive occurrences is 81%. For 50 trials I would expect this to be a good amount lower. Your tables indicates this as being 77%...my thinking is this is on the high side although I have not gone through this exercise to conclusively debunk it...yet.

One thing I will say though to justify scrapping the strategy if I have 5 consecutive losses off the bat, is the probability of this occurring is 0.5^5 = 3.1% for a 50/50 system. It would be only marginally higher for a sample size of 10. Yes, still possible, but highly unlikely with a 50/50 system and even less so with something higher than 50/50 probability. Since I am only risking $25 per trade though I may just let it go 6 consecutive losses before scrapping it :P .

I will probably at some point dust of my (quite substantially) lacking matlab programming skills and derive a table similar to this. This is an interesting way of looking at a system, especially in the midst of a loosing streak to help from getting discouraged (or to tell you something is off). I will use this going forward, but I think looking at it from a binomial distribution standpoint is perhaps a bit more useful than this.

See post #12 (page 2) in this thread if you are interested in knowing about that if you don't already. Skip down to the first table I have in that post and then start reading the paragraph before the list of 2 items. You can stop reading the paragraph after the second table. You may find that interesting if you have not already read it. I will give the disclaimer though that my knowledge of probability and statistics is quite limited and it has been a while since I used it, but I do believe what I have posted is correct (dusted off my trusty copy of Kreyszig when I was going through that).



As a final note:
With regards to backtesting. No I have not backtested this one formally yet. I have done a look back with my screener (as far back as 6 months ago) and the majority of the time the stocks that show up in the top 10 continue down for at least some time. Since this system is not purely mechanical I would need to do a monte carlo simulation to properly backtest it...probably allowing it to pick randomly from the top 10. I do not have the software needed to do this. There might be a way to do this in Matlab feeding in data from yahoo finance, but really I am not smart enough to figure that one out. My programming skills are seriously lacking.
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Old Sep 9, 2015, 4:22am   #35
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Dr. Toad started this thread First trade in 2.0 system:

Click the image to open in full size.

A loss (seems to be the norm) - This one came close to dropping 1% before heading back north. I may consider revising my targets so I have a very high percentage chance of hitting the target gain (in excess of 80% instead of the 50% I am going for). I considered doing this at the outset but figured I have two things going for me with this. One being I am going in on ones that have a probability of a down day greater than 65%. Two being I am going in on ones with a R:R close to 1:1 with the probability of the worst case scenario being hit less than about 10% of the time and the probability of the target being hit about 50% of the time.

I will leave the system as is for now, but may consider this even if how I have it proves to be successful. In order to help me determine what is best, I will be tracking what could have been if I went with the second option (very high probability of target hit but reward lower than risk).

So, trade 1 summary:
Date: 9/8/15
Stock: ARMH
Outcome: -0.23% (no commission)
"could have been" outcome: -0.23% (no commission)

Tomorrow is the same play for me. One more up day on this one though and it will have broken through the down trend so I will be trading a different play Thursday. If it is a down day tomorrow, I will likely have the same play Thursday.
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Old Sep 9, 2015, 8:29am   #36
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A bad batch of trades has the same effect on account as a series of consecutive losses , ie one step forward 2 steps backwards or 8 losses with 2 winnings in between . The calculation above is for consecutive losses but it doesn't give you the odds for a bad batch .
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Old Sep 9, 2015, 11:59am   #37
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A bad batch of trades has the same effect on account as a series of consecutive losses , ie one step forward 2 steps backwards or 8 losses with 2 winnings in between . The calculation above is for consecutive losses but it doesn't give you the odds for a bad batch .
Which is exactly why I feel looking at it from a binomial distribution standpoint is more useful. You might also find post 12 interesting if you don't already know how to do this.
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Old Sep 9, 2015, 12:07pm   #38
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Which is exactly why I feel looking at it from a binomial distribution standpoint is more useful. You might also find post 12 interesting if you don't already know how to do this.
Its all hypothetical , if my win rate now is 60% it doesn't mean it will stay like that , past results are not necessarily indicative of future results.


GL
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Old Sep 10, 2015, 12:44am   #39
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Its all hypothetical , if my win rate now is 60% it doesn't mean it will stay like that , past results are not necessarily indicative of future results.
Right, but if you don't have an idea of your expected wins and losses for a certain period of time, how will you know when something is going wrong? Also, I feel that a good system will not fluctuate much during different market cycles. In the case of this one, it can be done long or short. Even in a ranging market I would imagine there are sectors that are in up trends as well as down trends which is what this strategy seeks out. But then again...maybe I am just dreaming, heck, I don't even have one thing that works decent yet.


A bittersweet victory today for my system. Bittersweet because I was unable to make the play (was on a job site in the morning at market open). I am still considering it as a trade in the system.

Click the image to open in full size.

Trade 2 summary:
Date: 9/9/15
Stock: ARMH
Outcome: +1.50%
"could have been" outcome: +1.00%

I am switching it up for tomorrow since a better opportunity has presented itself. ARMH still looks like a good play and is right at the trend line. My play for tomorrow is:

Click the image to open in full size.

Click the image to open in full size.

Click the image to open in full size.

Click the image to open in full size.

Stock is TCO, target is 1% decrease, stop loss is 1% increase. Both the stock and sector are currently in a downtrend. I will be setting a market order for the open from now on with this one. This strategy lends itself nicely to that, and by doing this, there is less chance I will "screw it up" by trying to get a better entry. It will also allow me to enter if I am otherwise unable to right at the market open.

Anyone have thoughts on market orders at open? I have avoided them to this point since I always think I will get screwed over doing it, but now I am thinking most of the time I will get filled close to the open price. I would imagine I will get better fills as often as I get worse fills doing this. Anyone with experience care to comment?
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Old Sep 10, 2015, 9:29am   #40
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Stock is TCO, target is 1% decrease, stop loss is 1% increase. Both the stock and sector are currently in a downtrend. I will be setting a market order for the open from now on with this one. This strategy lends itself nicely to that, and by doing this, there is less chance I will "screw it up" by trying to get a better entry. It will also allow me to enter if I am otherwise unable to right at the market open.

Anyone have thoughts on market orders at open? I have avoided them to this point since I always think I will get screwed over doing it, but now I am thinking most of the time I will get filled close to the open price. I would imagine I will get better fills as often as I get worse fills doing this. Anyone with experience care to comment?
Hi Dr. Toad,
I've not swing traded a great deal and I'm certainly not any good at it, largely because - whenever I've tried - I've struggled to make the kinds of decisions you're making here because you're not able to screen watch. However, for what it's worth, if I was going down the route you propose, I'd make sure that the volatility of the stock and my stop loss (SL) and profit targets are aligned.

TCO is trending down and you're short (or will be at market open) so, in theory at least, probability is on your side and your profit target will be hit before the SL. However, if you look at the volatility of TCO (adding the standard 14 period ATR is as good a way as any that I know of), then you'll see that the stock could easily move almost $1.50 on the day. Current price is around $67.00 and, with a target of 1%, you're aiming for $0.67 per share traded. One thing's for sure, with an ATR at well over two times your stop loss and profit target - the probability of one or other of them being hit during the day is very high indeed. I'd happily bet on that - and heavily. As to which one gets hit first is anyone's guess!

tco.png

So, what to do? If it were me, I'd have a much wider stop - say at least 2 x ATR above the current price. (This would put your SL at around the resistance level of $70.00 which, needless to say, is technically where some traders may try to go short!) Also, I wouldn't set a profit target - at least not one that's percent based. If you feel the need for a target, I'd suggest looking at something that's TA based and has some logic behind it, rather than an arbitrary number. That's not to say what you're doing is wrong and, if it works for you, that's all that matters. Also, while you're at work, if you're able to, take a gander at what the S&P futures are doing half an hour or so before market open. If they're trending up, then cancel your pending short order - especially if you're sticking with the 1% SL and profit targets. If you have pending orders to the long and the short side, then you could use the futures as a guide as to which to leave in place and which to cancel. Just a thought.
Tim.
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