Hey, Techies......Reality Check

[ducati998]

Ammended results;

When we examine the unleveraged returns we see that;
Technicals;
..................6mths average (actual)..................1year average (proj).........................3yrs(projected)
1............................2.90%.....................................................5.80%...............................17.40%
2............................2.90%..................................................5.80%...............................16.81(actual)
3..........................43.50%..................................................87%..................................261%
4..........................16.13%.................................................32.26%..............................96.78
5.........................dr(-3%).................................................dr(-6%)..........................strat. discont.
6..........................15.5%..................................................31.0%..................................93%
7..........................0.5%.....................................................1%.......................................3%
Average.............11.20%..................................................22.41%..............................81.33%

Fundamentals
............6mths average (actual).....................1year average (proj)...................3yrs (projected)
1........................36.5%........................................................73%.....................................219%
2........................15.6%........................................................31.20%...............................108.60%
3........................18.18%.....................................................36.36%................................109.08%
4........................20.9%.......................................................41.8%...................................134.40%
5........................22.4%.......................................................44.8%...................................134.40%
6.........................5.33%......................................................10.66%.................................31.98%
Average...........19.82%.....................................................39.64%.................................118.92%

...........................................................................................1year.............................3year
Technicals stability ratio...........................................dr(-23%)............................4%
Fundamentals stability ratio...........................................27%.............................27%
Technical Expectancy ratio.............................................57.50%........................57.5%
Fundamental Expectancy ratio......................................85.45%........................85.45%

To a certain extent this normalises the results, and removes the drag on the technicals, however, with only one "actualised" set of results out to the three year period, we shall just have to see how reality pans out.

cheers d998

 

[LION63]

Supposing I were to throw a spanner in the works and say that the sample of 164 trades that I provided would then be compounded for the following 6 months; what would that do to the rates of return and comparisons?

The rationale would be that due to the high expectancy ratio and leverage involved it would not be a risky approach and the rewards far outweigh the risks.

 

[ducati998]

LION

Let he who casteth the spanner..........doeth the calculations!!
cheers d998

 

[LION63]

Did I mention that it was time for bed?

 

[ducati998]

But actually this is the area that we are trying to get to.........viz. leverage, and the use thereof With the wrong strategy, it can be very dangerous to your account, with the right strategy, it will supercharge your return on equity.

cheers d998

 

[marketsurfer]

Yes, great story Socrates.

Hey Surfer, You can use your own Nick. :cheesy:

I note your statement: "merely question the validity of something that can not be tested objectively and relies on the past to make decisions into the future." Much of business is done on exactly this basis --- why should it be any less successful in trading?

hi kiwi,

reason being one is dealing with ever changing psycles in trading, unlike business which is generally based on more concrete and easily replicated stimuli.

best,

surfer

 

[ducati998]

Leverage

Types of leverage available;
Margin accounts, normally 4 times your available balance
Futures contracts
Options contracts
FX contracts
Low price leverage.(relies on the principal of $2 to $4 is easier than $200 to $400)

But lets look at the power of compounding returns (notice LION has gone to bed)
Taking the Fundamentals first.
We have a 6mths average of 18.18% unleveraged, which we average to 3.03% per month
Then, we take the 6mths return at 18.18% and compound at 3.03% per month for 6mths

Compounded return = 21.25% at 6mths multiplied at 20 times for leverage = 435% ROE.

What is of great import is that if you are going to use leverage that your expectancy is high.
With a low expectancy, you run the risk of blowing up your account.

The second very important component, is of course a high % return on equity before leverage If your profit targets are low, then you must have a higher expectancy to compensate. High profitability, combined with a high expectancy, and the cash will just flow in.

So from a fundamentals point of view, with a high expectancy, 4 forms of leverage are distinct possibilities.
1.......Low price leverage
2.......Margin account leverage
3.......Options leverage
4.......Futures leverage (Single stock futures)

The least attractive, in a directional strategy would be "Margin account" leverage.
Obviously, if price drops below your purchase price, you will be subjected to a margin call.

Low price leverage is a safe form of leverage, as you owe no money, but it does not really charge the returns, as it is a pseudo-leverage, and at the end of the day, not as effective as alternate choices.

Options, provide an interesting form of leverage, in that they also offer an inbuilt stoploss, if you want to go that route. In addition, the time element can be manipulated, and, as a value player, you will only be paying for time value, nothing for intrinsic value.(the same is not true of single stock futures)

So, assuming a 50% vanilla return on equity, with an option, the same return becomes 1000% return.

Therefore, as an example only, we shall utilise an "Option" form of leverage, and a "Directional" strategy to illustrate the possibilities and pitfalls of leverage.

Expectancy ratio.............85%
100 positions over 1year
Average Return (profitability) ....................39.64% leveraged returns 792.8% on capital employed.
85 trades win
15 trades lose
Average capital employed per trade.............$1000.00
$85,000 * 792.8% ...........................................$673,880.00
$15,000............................................................dr(-$15000)
Total...................................................................$758,880.00

Technicals Expectancy ratio.............57.5%
100 positions over 1 year
Average Return (profitability) ...................22.14% leveraged returns 442.8% on capital employed
58 trades win
42 trades lose
Average capital employed per trade $1000
$58,000...........................................................$256,842.00
$42,000...........................................................dr(-$42,000)
Total..................................................................$314,842.00

From the above, we can see that overall, the profit in dollar terms, the technicals lag the fundamentals by 59%.

This differential is accounted for by the differential in the two components.
In the "expectancy" the technicals lag by 32%, and in profitability, by 44% giving an average of 62%, which accounts for the cash differential of 59%

These are not compounded returns. With low expectancies, and or low profitability, at some point, leverage will work against you, and accelerate your exit from the game, and possibly your house as well.

Cheers d998

 

[ducati998]

Developing some further ratios.
Time was mentioned by roguetrader some time back, and we need to start looking at this area, technicals have always claimed a superiority in this area. Is it true?

Technicals;
..................6mths average (actual)..................1year average (proj).........................3yrs(projected)
1............................2.90%.....................................................5.80%...............................17.40%
2............................2.90%..................................................5.80%...............................16.81(actual)
3..........................43.50%..................................................87%..................................261%
4..........................16.13%.................................................32.26%..............................96.78
5.........................dr(-3%).................................................dr(-6%)..........................strat. discont.
6..........................15.5%..................................................31.0%..................................93%
7..........................0.5%.....................................................1%.......................................3%
Average.............11.20%..................................................22.41%..............................81.33%

Fundamentals
............6mths average (actual).....................1year average (proj)...................3yrs (projected)
1........................36.5%........................................................73%.....................................219%
2........................15.6%........................................................31.20%...............................108.60%
3........................18.18%.....................................................36.36%................................109.08%
4........................20.9%.......................................................41.8%...................................134.40%
5........................22.4%.......................................................44.8%...................................134.40%
6.........................5.33%......................................................10.66%.................................31.98%
Average...........19.82%.....................................................39.64%.................................118.92%

...........................................................................................1year.............................3year
Technicals stability ratio...........................................dr(-23%)............................4%
Fundamentals stability ratio...........................................27%.............................27%
Technical Expectancy ratio.............................................57.50%........................57.5%
Fundamental Expectancy ratio......................................85.45%........................85.45%

Expectancy ratio.............85%
100 positions over 1year
Average Return (profitability) ....................39.64% leveraged returns 792.8% on capital employed.
85 trades win
15 trades lose
Average capital employed per trade.............$1000.00
$85,000 * 792.8% ...........................................$673,880.00
$15,000............................................................dr(-$15000)
Total...................................................................$758,880.00

Technicals Expectancy ratio.............57.5%
100 positions over 1 year
Average Return (profitability) ...................22.14% leveraged returns 442.8% on capital employed
58 trades win
42 trades lose
Average capital employed per trade $1000
$58,000...........................................................$256,842.00
$42,000...........................................................dr(-$42,000)
Total..................................................................$314,842.00

All calculations are based on the same hypothetical $100,000.00 base figure for capital employed.

Technicals Total # of trades
Total..................................................260
Wins.................................................149
Losses.............................................111
Total Capital employed................$400,000.00

Efficiency ratios
Capital Turn...........................................................................................0.65 (as adjusted)
Time in days.....................................................................................56.3 (as adjusted)
Average capital employed per trade............................................ $1000.00
$149,000.00......................................................................................$659,772.00
$111,000.00......................................................................................dr(-$111,000.00)
Total.....................................................................................................$808,772.00
Pre-loss depreciation.......................................................................2.30
Post-loss depreciation.....................................................................2.02
% decline.............................................................................................28%

Fundamentals total # of trades
Total.................................................................................................197
Wins.................................................................................................163
Losses.............................................................................................34
Total capital employed..................................................................$400,000.00

Efficiency ratios
Capital Turn....................................................................................0.49 (as adjusted)
Time (in days)................................................................................74.0 (as adjusted)
Average capital employed per trade..........................................$1000
163,000.00.....................................................................................$1,292,264.00
34,000.00.......................................................................................dr(-$34,000.00)
Total................................................................................................$1,455,264.00
Pre-loss depreciation..................................................................3.72
Post-loss depreciation................................................................3.64
% decline........................................................................................8%

If, as commonly is asserted, trading is a business then these calculations should interest you.

What is shown is;
1.....technical traders turn over their capital faster, should be no surprise there, but surprisingly, only about 20% faster on the data available (this will reflect the inclusion of the mechanical & swing trading methods, as opposed to pure daytraders)

2.....# of days, represents the time to profit, 54 days as opposed to 74 days.Again this reflects the inclusion of systems other than pure daytrading systems.

3....The drag of losses on earnings...........this is where the technicals get killed. And this goes back to the profitability & expectancy ratios. The techies give back 28% in lost earning power through losses, while the Fundies, only reduce our earning power by 8%

That is the difference in the $$ earned.
Total.....................................................................................................$808,772.00
Total..................................................................................................$1,455,264.00

That 28% in losses, results in a 44% differential at the bank.
Cheers d998

 

[marketsurfer]

hey ducatti,

nice research. what is the source of the figures?

surfer

 

[LION63]

Ducati,

Very good research and analysis of the data. I will definitely need to spend some time going through the whole lot again. One thing it does show is that a disciplined fundamental trader will make steady progress and build a reasonable sized portfolio or bank balance.

 

[ducati998]

LION & Surfer

Just need to make a couple of clarifications, always notice some additions later.

Technicals Total # of trades
Total..................................................260
Wins.................................................149
Losses.............................................111
Total Capital...................................$400,000.00
Total Capital Employed...............$260,000.00

Efficiency ratios
Capital Turn.......................................................................................0.65 (as adjusted)
Time in days......................................................................................56.3 (as adjusted)
Average capital employed per trade............................................ $1000.00
$149,000.00......................................................................................$659,772.00
$111,000.00......................................................................................dr(-$111,000.00)
Total.....................................................................................................$808,772.00
Pre-depreciation capital...................................................................2.30
Post-depreciation capital.................................................................2.02
% decline.............................................................................................28%

Fundamentals total # of trades
Total.................................................................................................197
Wins.................................................................................................163
Losses.............................................................................................34
Total capital....................................................................................$400,000.00
Total Capital employed................................................................$197,000.00

Efficiency ratios
Capital Turn....................................................................................0.49 (as adjusted)
Time (in days)................................................................................74.0 (as adjusted)
Average capital employed per trade..........................................$1000
163,000.00.....................................................................................$1,292,264.00
34,000.00.......................................................................................dr(-$34,000.00)
Total................................................................................................$1,455,264.00
Pre-depreciation capital..............................................................3.72
Post-depreciation capital............................................................3.64
% decline........................................................................................8%

If, as commonly is asserted, trading is a business then these calculations should interest you.

What is shown is;
1.....technical traders turn over their capital faster, should be no surprise there, but surprisingly, only about 20% faster on the data available (this will reflect the inclusion of the mechanical & swing trading methods, as opposed to pure daytraders) This is represented in the ratio by the "Total Capital employed" This advantage, the commonly cited "efficiency" of capital, cannot overcome the drag of lower profitability.

2.....# of days, represents the time to profit, 54 days as opposed to 74 days.Again this reflects the inclusion of systems other than pure daytrading systems. The 23% advantage, is again nullified by the lower profitability. It is not how fast you make money, but how much money you make, that is the salutory warning displayed

3....The drag of losses on earnings...........this is where the technicals get killed. And this goes back to the profitability & expectancy ratios. The techies give back 28% in lost earning power through losses, while the Fundies, only reduce our earning power by 8%

That is the difference in the $$ earned.
Total.....................................................................................................$808,772.00
Total..................................................................................................$1,455,264.00

That 28% in losses, results in a 44% differential at the bank.
Now, just to clarify, this represents per position traded, 1% of the total capital per trader.
Therefore, for a daytrading system that runs a stoploss tighter than 1% as I did myself, the figures will modify, dependant on how tight they are run.

What this means in practical terms is this.
You would need to test your positioning of the stoploss against your expectancy & profitability you would be making an error if you assumed that it would simply reduce your losses and have no effect on the other two parametres.

However, for all practical purposes, a 1% stoploss, is for these results accurate, as we are looking at the average of a variety of systems and methodologies.

Cheers d998..........
__________________
Quis custodiet ipsos custodes

 

[ducati998]

Surfer

what is the source of the figures?

They are live trades that have been posted via a number of different people.
Two sets, are figures contributed by roguetrader, and LION

I have been considering putting names to the trades, so people can go and have a look at the posted trades, and examine the methodologies used, as some have links to the methodologies, and or charts, or some other form of analysis. Most, are posted live, so there would be no shyness involved.....................

cheers d998

 

[LION63]

Ducati,

This thread was started 7 days ago and in that time it has lived up to its title, for that you have to be commended. Some might view the arguments and data as leaning to one side but they have refused to put up any data or information that might disprove the argument. Worse still, as the proof has been revealed, the contributors have decreased markedly.

Could it be that the Reality Check was a bit too much? For those that are aspiring to be independent traders, it should prove that understanding methodologies is the key to success and survival in the financial markets. Simply adopting or employing a method because everyone else seems to be doing it is the logic of a fool and a sure road to disaster.

The evidence is clear that the TA traders execute more trades and churn their positions at a quicker pace but the price they pay is the success rate. It also goes without saying that TA is much more speculative in nature, hence the reason for stop losses being an integral part of the equation.

Nevertheless, the evidence contained in this thread shows that without a doubt, the longer the time frame and the larger the sampling, the wider the gap becomes between the use of both methodologies. I would go as far as to say that those of us who might feel that we have an edge are wrong, it is a myth; what we really possess is the ability to do a better job with the same tools because we put them to better use and believe in what we are doing.

 

[Spam Man]

They are live trades that have been posted via a number of different people.

You've based all your work, which must have taken hours, on some trades you found posted on the internet? The mind boggles.

I hope that you achieved your goals, whatever they were.

as the proof has been revealed, the contributors have decreased markedly

They may have slipped into a coma.

 

[roguetrader]

This thread was started 7 days ago and in that time it has lived up to its title, for that you have to be commended. Some might view the arguments and data as leaning to one side but they have refused to put up any data or information that might disprove the argument. Worse still, as the proof has been revealed, the contributors have decreased markedly.

Lion, let me see, where should I start? As a self proclaimed technical trader, the thread title would be directed at someone like me. As I pointed out to Ducati earlier in the thread, data from technical traders, particularly daytraders, is going to be very hard to get. As he has often pointed out, dayytraders are in direct competition with other daytraders. A statistic he likes, 95% verses 5%. Now why do you suppose those 5% are in that 5%, because we posess knowledge, skills and experience that the other 95% lack. So are you surprised we aren't queing up to share information specific to what we do? As for contributions I have contributed data from last year that was derived from a trading style I don't use anymore, it was only one month but he is welcome to the rest of the years statistics if he wants, though it would not really contribute much to the discussion as the win / loss rate was more or less consistent with that month, and since the % return for that month was higher than the average I have given him the annual return on that year.
Other than that there is little more I can contribute at this point

Could it be that the Reality Check was a bit too much?

Not really, my reality check is in my bank at the end of the month. What we have so far here is a lot of figures, and possibly a fair bit of work compiling and calculating, congrats to Ducati. Some very interesting figures I must admit, for instance one of the sets you supplied, I would not have imagined it possible to turn over 27 trades month in month out on pure fundamentals, that is impressive. But still all statistics. Of course what we do have are some live fundamental trades, 5 in total if you count XLF, or 4 without, since the 19th April with a realised return of about $7500, doubt I'd get by on that. They're the only statistic I'll be watching. Having wet my appetite with 27 a month I feel a bit let down.

For those that are aspiring to be independent traders, it should prove that understanding methodologies is the key to success and survival in the financial markets. Simply adopting or employing a method because everyone else seems to be doing it is the logic of a fool and a sure road to disaster.

Couldn't argue with that.

I would go as far as to say that those of us who might feel that we have an edge are wrong, it is a myth; what we really possess is the ability to do a better job with the same tools because we put them to better use and believe in what we are doing.

Why Lion, let you into a secret, That's all an edge really is.

I would like to say, in case any of that sounded a bit negative, I still find it a very interesting thread. I have no axe to grind with Fundamental trading, and no interest in selling Technical trading.

 

[LION63]

RogueTrader,

You have consistently posted in this thread and made very vital contributions. You have disagreed with many of the observations and conclusions and stated your opinion(s); this has furthered the debate and enhanced its quality.

I can understand why many would feel that it is not prudent to divulge their techniques in public and find it quite acceptable. You are definitely not being criticised by me in any way whatsoever, if it appears so, my apologies are offered.

You are one of the respected contributors on these boards and I did not imply otherwise, your posts were positive in extracting answers and questioning the basis of assumptions that were made. Can one be faulted for that? Not by me. It is fairly obvious that even a dunce would know that you are an astute chap and I definitely would be foolish to imply otherwise.

 

[LION63]

Not really, my reality check is in my bank at the end of the month. What we have so far here is a lot of figures, and possibly a fair bit of work compiling and calculating, congrats to Ducati. Some very interesting figures I must admit, for instance one of the sets you supplied, I would not have imagined it possible to turn over 27 trades month in month out on pure fundamentals, that is impressive. But still all statistics. Of course what we do have are some live fundamental trades, 5 in total if you count XLF, or 4 without, since the 19th April with a realised return of about $7500, doubt I'd get by on that. They're the only statistic I'll be watching. Having wet my appetite with 27 a month I feel a bit let down.

The breakdown of the 164 trades is as follows -

January 14
February 26
March 29
April 38
May 37
June 20

The reason I am able to do such a relatively high number of trades for an FA based trader comes down to the leverage available. Using a ratio of 20:1 it simply means that a 2.5% move in the share price produces a return of 50% on capital employed (ignoring any adverse interim movement). That makes it quite enticing to do shorter term trades, in some instances it might well be that I will open an close 4 or 5 positions in the same share within a month.

What I have found by doing this is that it might well transpire that during the course of 2 to 3 weeks I have traded in and out of a share twice yet the price is still at the same level. Nothing magical or special about it really, I would go as far as to say it is basic stuff. The major difference is that I am using fundamentals whilst others are using technicals.

An example is British Airways Plc., the shares have hovered around the 270p mark for the last few weeks. However, a closer inspection would show that they have been backwards and forwards by about 10p or so on a regular basis. I do not know what the technicals show but I do know that based on fundamentals they are only worth a fraction of that. On that basis, I am quite happy to short them whenever they hit the 275p (or close) level.

 

[roguetrader]

Lion, I didn't realise they were your own trading statistics, as I said, impressive, and educational since as I also said I never would have guessed an FA trader could turn over that number of trades in such a short space of time.

An example is British Airways Plc., the shares have hovered around the 270p mark for the last few weeks. However, a closer inspection would show that they have been backwards and forwards by about 10p or so on a regular basis. I do not know what the technicals show but I do know that based on fundamentals they are only worth a fraction of that. On that basis, I am quite happy to short them whenever they hit the 275p (or close) level.

However, is this strictly speaking a purely fundamental trade? In one way, yes because you have analysed the fundamentals and were it not for the fact that the stock is so over-valued you probably wouldn't be shorting it, but by what you have described a technical trader could be making exactly the same trade based on shorting what sounds like 275 resistance., and probably many are. I don't subscribe to UK stocks so I haven't got a chart handy, but what you have described sounds like a fairly well defied resistance level. Of course if I were shorting that along side you where we would differ is. I assume you have no stop, so if it moves against me by an appropriate level I would be stopped out while I am assuming you would hold based on valuation.
It does explain the trade turnover though, and in fairness during the course of this replied I have decided that it would have to be classed as a fundamental trade. Fundamentals are what brought it to your attention and fundamentals are what gives you the confidence to short and keep shorting. Fair play.

 

[LION63]

RogueTrader,

You are spot on that whilst fundamentals are what I have based my trades on, a technical trader may well be doing the same thing. The obvious difference would be that I do not place a stop, that said, there will come a time that I would have to say enough is enough and that is the reason for the 25 losing trades. Another factor that I have to consider is that if bid rumours surface the trade may well move to a level that I can no longer justify and more importantly, I view that as a change in fundamentals and once again, I have to bite the bullet and call it a day.

 

[ducati998]

roguetrader & LION

You have consistently posted in this thread and made very vital contributions. You have disagreed with many of the observations and conclusions and stated your opinion(s); this has furthered the debate and enhanced its quality.

I would second that sentiment, for both of you.

But still all statistics. Of course what we do have are some live fundamental trades, 5 in total if you count XLF, or 4 without, since the 19th April with a realised return of about $7500, doubt I'd get by on that. They're the only statistic I'll be watching.

Now this is where the statistical examination pays dividends so to speak. The $dollar return is important, no doubt, but it can be very misleading, as it is not commonalised.

That is to say, if your bank is $1M, and mine is $10K, then $7,500 is miserable for you, but exciting for myself.

Second, you are now starting to introduce the requirement of living expenses to the equation, which is not quite where we are yet, but definitely moving in that direction. This is a business, and must therefore pay costs and wages

So, lets before moving on just finish up with returns on capital, as this is the underlying earnings that are required to pay all the following.

So, total return on capital = profitability * capital turn

Technicals
65% * 22.14% = 14.39%
Fundamentals
49% * 39.64% = 19.42%

Therefore we can see clearly the areas both need to look at.

The Fundamentals need to raise their capital turn ratio, as currently, 51% of the available cash is sitting idle. The Technicals, also have cash sitting idle, more than might be expected, and they need to raise their profitability if possible (although as a note, both far exceed industrial returns on capital)

The key ratio for both disciplines is the expectancy ratio.
But before we do that, lets just look at some costs.

When I was daytrading, my costs broke down as follows;
Platform & data feed........................................................$500 per month
Trades................................................................................$15 per side
Average # trades per day................................................2
Total Costs per month average....................................$1,700.00

As a Fundamental Trader
Platform & data feed.......................................................$495 per year
Trades...............................................................................$50 per side
Average # of trades per month......................................1
Total Costs per month average....................................$91.25

From a costs perspective, it is far more economical to trade or invest for me. Others will have different costs, but it is an expense that must be paid for from your returns.

cheers d998