BWolinsky Trading

[bwolinsky]

Before I forget a lot of the details about these historic times in the global financial markets, I wanted to outline what I believe is the most accurate logic behind explaining the past decade, and it's catastrophic collapse.

There are a lot of moving parts to our capitalist system, not the least of which is the Federal Reserve at the core.

I am not going to debate the Federal Reserve with anybody, because it is an independent governmental entity that requires continued autonomy in regulating both growth, inflation, and monetary policy, especially.

The collapse specifically is what I would like to pin-point as to the nature of the cause. I believe this post will be the historic record on which historians should base their judgements about the leading causes of our financial market's collapse.

<i>My background is that I was a Governor's Scholar in a program called GSP in Kentucky. This paid for more than half of my college education in the six figures at Centre College. Now that I've embellished, understanding my approach to historical analysis is rooted in documents related to the perception of news articles from the specific time periods. I am well versed in all of the literature and many of the major events as it relates to my project of analyzing the Vietnam War, and is also the approach I take in analyzing The Great Recession. My conclusion for Vietnam specifically relates to the manner in which it was fought, and to the impact on the American psyche following the Tet Offensive. For Vietnam, my conclusion from the articles I read lead me to believe that 1 of 2 things needed to happen to win Vietnam 1)Invade and conquer North Vietnam. 2) Quell any guerilla fighters left after razing every city in the country, then rebuild. Ironically, in modern times, these wars are more like prolonged occupations in terms of time. But to get to the task at hand of analyzing this recession, requires someone well versed in historical analysis, finance, economics, and knowledge of modern financial instruments that came to be known as financial weapons of mass destruction as coined I believe first by Warren Buffett this decade.

That's enough intro into my ability to lay out the causes of the Great Recession.
</i>
What I believe caused the Great Recession was the government's dual mandate to provide low-cost mortgage financing to previously unqualified borrowers. This mandate dates back to Jimmy Carter, and was revamped historically in late 1990's by Bill Clinton. I think I'm using mandate a bit strongly. Mandate I believe implies a "requirement", but really this mandate was more of an "allowance" to lower lending practices.

So, the people then were able to qualify for both FHA and sub-prime mortgages whereas previously the requirement of at least 10% down with virtually no debt pretty much prior to what I think is 1990. Around late 1990's is when Bill Clinton specifically started to run ads about minorities and other previously unqualifed borrowers obtaining low cost mortgages. I am only going to provide interpretation, and I do not really want to take the time to find any links. We all know these events happened, but figuring out how the puzzle fits requires someone specifically with my credentials to explain to the investing public.

With the "dual mandate" now allowing Fannie Mae and Freddie Mac to finance more risky borrowers, a couple things happened because this I truly believe is misinterpreted by the American public as so-called "Wall Street Greed." (I admit they make a lot of money, but they add value to the shareholder, and in this business, that is all that matters). When Fannie Mae and Freddie Mac would go to lend to these less-than-credit-worthy borrowers, they would "collateralize" mortgages into what is known as CDO's (Collateralized Debt Obligtations), aka,CDS's(Collateralized Debt Securities). Michael Moore could not find anybody that could explain a CDO or CDS because no one he was interviewing was qualified to explain these securities. Investors in these securities admittedly claim to have been lead astray by the ratings agencies Standard and Poor's, Moody's, and Fitch Ratings agencies. You "could say that that was the cause", but it would not be entirely accurate. The process of creating a CDO is the ability to separate specific cash flows such as prinicpal payments and interest payments into wholly separate cash flow streams for the purpose of financing even more mortgages with which to "collateralize" these mortgages. To me, and this is all about what I learned and what I remember in Level II of the CFA Curriculum; you can strip not only interest and principal, but time values of cash flows to create what I describe as synthetic cash flows that we know today as CDO's and CDS's.

I apologize if you find it difficult to understand why this is significant, because what I believe the investing public is missing is that these mortgage obligations specifcally were "guaranteed" essentially de-facto by the FHA GSE institutions known as Fannie Mae and Freddie Mac.

I liken the game of having a mortgage broker sell a mortgage to somebody, just to send the actual cash flow stream to a third party entity so they can collateralize each mortgage into 100's to 1000's of separate cash flow streams, as a financial game of musical chairs. It is not important specifically where these cash flows came from, more than that they were assumed to perform with slightly more default rates given the lowering of the lending standards. Always with financial catastrophes is the element of mispricing risk, and while the investors, namely institutions, claim it was the rating agencies responsibility to asses the credit worthiness, just taking an agencies word for it is inexcusable given that almost every investor was managed by some institution absolutely capable of performing their own independent audit and due dilligence on every security. Anybody able to buy CDO's, knew what they were getting. Caveat Emptor. I don't know of any "individuals" buying into these CDO's. I believe mostly this process was controlled by institutions that really have no excuse for not utilizing their own resources in performing financial analysis on these securities. So with the rating agency argument out the window, there are still some other causes that need to be debunked, as below.What I think of the process of writing a mortgage, selling to an institution to create a CDO, so that the writing institution has money to write more mortgages, is, more or less to me, a financial game of musical chairs. More on this after an explanation of credit markets.
When we say credit markets, professionals only see quotes as to yields, time to maturity, and a price. The credit markets are what enables a writer of a mortgage to find a willing buyer that will then "collateralize" the mortgage obligation. If this "credit market" locks up due to paranoia, then whoever is left holding the bag on a non-performing asset essentially has lost their entire investment. We all hear credit markets, but what is the credit market? It is the market for any quantifiable cash flow stream in the United States, or, at least, as I will only interpret domestic issues. Cash flow streams can be parsed into more infintesimally small cash flows. Cash flow streams include loans on homes, commercial real estate, credit cards, auto loans, streams of payments from these troublesome CDO's, as well as any other "loan" that can be made into a contractual agreement between the lender and the borrower of a "promise to pay." And that covers everything.

 

[bwolinsky]

<b><i>The Financial Game of Musical Chairs </b></i>
Now, we're at the heart of the issue. What caused the Great Recession. Overleverage, and holding non-performing securities as more than 20 to 1 debt to capital. What happened to cause the collapse is essentially the scenario I described more than a year and half ago. I have $50,000. I lend $1,000,000 to make what I believe is a kind-of sure thing at 7%, so that I make $70,000/$50,000= 1.4 or 140% return on equity. It is not actually that borrowers began to default on their loans, more than it was about the fact that institutions, as part of the dual mandate and lack of regulation though they were still compliant, lost more than they should have if they were not allowed to have such large debt to capital ratios. Not even 25% of the mortgage obligations in this country have defaulted, yet many of our banks and institutions are having trouble climbing out of the hole they dug.
What happens when you're unable to sell your mortgage to someone? You cannot finance further mortgages until this security is off your books, and your only option would be to sell at much lower prices. Not only did the lender in the example above lend 20 times more than his capital to the borrower, he got stuck holding what collateralized obligation their was that had decreased 30 and in some case 60% of their value.
The only difference I see in this story, is a paramount shift in the attitude towards home ownership. When these home owners realized they could not afford the mortgage, nor was it worth as much as they paid, they "chose" to default, and declare bankruptcy. Now, I acknowledge that in most cases people simply lost their jobs or whatever sort of income they had, but, in the end, this goes back to the writer of the mortgage understanding who they were lending to, rather than committ DK, aka Didn't Know.
The game of musical chairs I see falls directly onto the responsibility and duties accompanying the "dual mandate" of Fannie Mae and Freddie Mac. When the GSE's became unable to offload their CDO's for the purpose of creating synthetic securities, they quickly went bankrupt. Now a GSE bankruptcy is debateable as to whether it has an actual economic effect beyond the company, but what sunk these two was the sudden freezing of credit markets taking place outside of the GSE's. Everyone essentially got caught standing up holding both non-performing, and less valuable collateral not just because of the economy, but because institutions suddenly realized what they had invested in was worthless essentially. (Some debate worth, while their was "some value" left, if you cannot sell something that you're not being paid to hold, I consider that worthless, and that's my financial analyst opinion).

 

[bwolinsky]

Now that I have blamed "government" for the cause of the collapse, there is another side to this story that nobody will let me leave out. I've provided hard economic logic as to the direct cause and effect. But what was going on beyond these financial transactions is where more historical analysis is needed.
At the dawn of the new millenium, the twentieth century was the United States without question. Not only had we defeated communism in Russia, we proved that we would not waiver in our resolve to spread freedom to countries with oppressed people. 9/11 was a culmination of what I call "great experimentation" into what you could smuggle onto an airplane for the purposes of hijacking and suicide bombing the World Trade Towers.
This single event sparked an enormous up-tick in government spending on defense never before seen as a percent of GDP since WWII. This increase in government spending created deficits whereas Clinton had left a wake of surplus through taxation on illegitimate short term capital gains, and was in no way a true reflection of the economic viability of the securities in the Dot Com bust. Luck is about the only thing I can give Clinton credit for, but we are only talking about the last 10 years, and clinton was not in the picture for 70% of what happened after that.
With the sudden shock of a financial capital, the ramifications were enormous, creating investor gitters, and other seeds of a lack of confidence in our capitalist system. Inheriting the poor economy there are two events between 2000 and 2003 that shaped the next 7 years. One of those events was the lowering of tax rates by Bush, which I know for a fact got the economy going again, but not without the proverbial "Go out and Spend" line following it.
Now, I know this will be debated most likely beyond my lifetime, but I don't hold Allan Greenspan at fault for creating a bubble in domestic real estate. As the manager of money in our capitalist system, there is also a mandate for growth and inflation. When the economy took a turn for the worse early in the decade, Greenspan lowered rates to what I think was 1% from about 6%. Now, those institutions holding bonds suddenly made hundreds of billions of dollars overnight on their current holdings, which only made them seek out more CDO's. The Federal Reserve in this move, I believe helped us escape the economy. It is not the responsibility of the Federal Reserve to manage, create, stop or even controll investable assets that may be in a bubble. Historically, the Fed was reacting to the decades of study as to the causes and cures to financial underperfomance in the macroeconomy. Arguably, then, this created too much "liquidity" in our capitalist system, and that money found it's way through the GSE's into highly risky, speculative borrowers who paid enormous premiums in hindsight for their properties. I don't exactly blame the borrower, because at the time, based on supply and demand, the prices of real estate absolutely had to be appraised at the prices being financed by the lending instiution. Only afterward did this wave of liquidity cease, and the easy going, no-proof, liar loans continued until the credit freeze that most peg to December of 2007.
The last two years have seen great changes in the landscape of our financial institutions behaviours. You might notice the comment in my sign off, but the question was never asked by anyone.
I'm not going to go into specifically the cause of Bear Stearns collapse, because I have already studied the first source document called The Street Fighters on my blog. To summarize that book, Bear Stearn's got left "holding the bag" of unsellable CDO's, creating what was only a liquidity problem when other institutions realized the ability to pay by Bear Stearns had become extremely questionable. Through to the end, till Paulson allowed Bear to be sold for $10 to JP Morgan, Bear was never a worthless company. Book value was about $70-$80, but the nature of the balance is what made Bear worthless. The inability to finance daily operations because there were securities they normally would sell periodically to raise cash to continue operations became impossible. Ace Greenberg used to always sell even if it was a marginally small loss. Bear Stearn's management disregarded that axiom, and lost the equivalent of 20 years of earnings in less than a quarter. Lehman collapsed for the same reasons. No liquidity, and no willing buyer. Lehman's savior B of A was stolen in a massively obvious fraud, and conflict of interest by Merrill Lynch's CEO, John Thain. You can search my blog for that article, too, but we are only now realizing why these institutions failed. B of A, being convinced by Thain after looking at Lehman's books, fell for what I call one of the greatest scams of modern financial markets. John Thain essentially sold a worthless company for $29 per share. I recall examining Merrill Lynch's balance sheet, and stating that the merger would be a catastrophic loss to B of A, because Merrill Lynch had no net asset value to speak of. It held so many worthless investments on it's balance, that when I was commissioned by a client to analyze B of A, and all of the other banks in the KBW ETF, I found B of A's texas ratio to be 96%. I know you will need to look up the Texas Ratio, and what it means, but after analyzing this value, it implies that 96% of B of A's balance sheet was worthless, and is what lead the stock price to collapse ultimately. I can only recall that B of A prior to that had an acceptable, to excellent balance sheet when I looked at it prior to the merger. The "Fair Value" opinion, given for $10 million, was given mainly based on book value and possible "growth in earnings." While I acknowledge there is always some unknown ability to generate future cash flows, what is not quite so clear is that this masked the "off-balance sheet" CDO's.
Every institution in this country having a debt to capital ratio over 1 is worthless in my opinion. As in trading, would you hold a position overnight at 20:1 leverage? Probably not, but while times were good, of course you're going to get stellar results, but when they go bad the downside volatility creates an almost unrecoverable loss that surpasses even the owner's entity ability to pay, which lead to "Wall Street Bailouts."
The bailouts have kept our most prized institutions afloat. TARP has greatly increased the liquidity in our credit markets. Coupled with the new Fed Chairman lowering rates to zero, I must conclude that they can't go any lower.
This wouldn't be a complete historical analysis without a mention of what I believe is the cause of our election of our first African American President. I think a lot of blame had been misplaced on the two term president who ran two wars, and created jobs while in office. "Anybody but Bush" was practically a household word to some people, especially moderates and independents.
I have identified the government's dual mandate as the cause of our collapse. Clinton's "allowance" of lower lending practices created a link between risky borrowers, and almost limitless funds of Wall Street. The process of collateralization is not what caused our collapse, it was the overleveraging of our institutions allowed, once again, by the government. You could say that was the Federal Reserve's job, but if nobody's complaining, it was too late to do anything about it.
Obama has now doubled our national debt to $12 trillion total with our approximate $14 trillion economy. I find examining other countries debt to GDP ratios reveals that there is only financial distress when we approach greater than 150% of GDP, and we're not there. In fact, another reason I don't mind the spending is because it is financed through the lowest rates in modern financial history. 3 month notes, yield close 0.01%, 2 year a little bit more, and the 30 year, brought back close to the end of the decade, below 4%, essentially. Uncle Sam still remains the world's best credit risk, and I don't believe will ever default on their obligations. If that happens, it will be due to Armageddon, nuclear war, or invasion by a foreign force. None of which are likely, but I do actually think the world will only end through a meteor impact or from nuclear winter, ultimately, whether that is by nature or by man. I hope the game of Brinkmanship will continue to be won as it was in the Cold War by the United States. Militarily, our forces are omnipotent, having a perfect view of both terrain, and enemy locations in every country. I once enlisted into the US Navy as a Nuclear Engineer. I had aced my NAPT test with more than an 80%, which my recruiter said was the highest he had ever seen. I did not enter due to medical reasons, but it was that sense of patriotism sparked by the worst attrocity of the new millenium. I and others would still protect the United States, and I would answer duty calls if there is a draft. I don't anticipate one unless we go to war with China. Economically, this would be catastrophic to both countries, and remains unlikely despite the human and intellectual rights violations of China.
I know you guys want to hear about trading, but I do a lot of thinking about events beyond what you see here. You probably can figure I don't factor events into my trading, but in analyzing for my clients I have to always keep in mind a very big picture requiring an economically gifted mind to understand.

 

[talontrading]

BoWo,

Please post in excel format the complete trade list from your system backtest. The only stat needed is the percent profit or loss from each individual trade.

There are some errors in your understanding of basic statistics. If you will supply this information I requested, I will see if we can fill in some of those gaps in your education.

Quote from bwolinsky:


I have done some research on the profit percent distribution of the trades and find the average profit accross all trades is 2.575%, with a standard deviation of 5.7665%.

This implies that 95% of the trades will be 2.575+/-5.7665*1.96=13.87734% or -5.53%. I believe it's good that 95% of the trades approximately already fall into this distribution, and especially the low value is a little beyond my stop of 5 and an 8th percent.

I also examined the kurtosis of the distribution and found that it is a less peaked distribution as evidenced by it's value being less than 1 at exactly .749182809. Many people would then conclude that that would imply there are fat tails possible in my system, but, you would have to look at the "skewness" to determine where those tails are, and, based on the skew of 0.927014752, I can conclude that negative values are quite limited compared to the huge profits on the right, positive side of the distribution. This is a good thing, and one day I hope somebody will realize just how good of a distribution that is.

 

[talontrading]

Wow.... I didn't realize he had posted his complete trade set already. FYI I am going to cross post this in my thread because I hope to give some valuable information on how we look at distribution of system returns... and I know the little turd deletes my posts from his thread so I can't count on it staying here. C'est la vie, ne c'est pas?

Anyway... first things first. There aren't enough trades here to analyze properly. If we have a system that trades this infrequently, we must be very convinced of two things to put money behind it. 1) it's fundamental validity and 2) the development process. Let's accept those at face value here even though this particular approach is profoundly flawed and I have reason to believe the development process involved a fair degree of optimization. We will proceed as if this is were not true though.

So... One at a time... BoWo's quotes in bold and my answers below. Sorry to do this to him, but I honestly think there is a valuable lesson for everyone here... a reminder of basic statistics and approach... and hopefully for him a lesson on hubris:

Quote from bwolinsky:


I have done some research on the profit percent distribution of the trades and find the average profit accross all trades is 2.575%, with a standard deviation of 5.7665%.

This implies that 95% of the trades will be 2.575+/-5.7665*1.96=13.87734% or -5.53%. I believe it's good that 95% of the trades approximately already fall into this distribution, and especially the low value is a little beyond my stop of 5 and an 8th percent.

Well... um... no. Your simple rule of thumb is correct if and only if the data are distributed normally. In market data and trade returns, pretty much nothing is normally distributed. This is a rookie mistake. However, let's take a look at the data. See attached file. The bars are the returns of your actual trades, the red line is a "what if" the returns were normally distributed, and the dark green line is the empirical distribution of your sample. As you can see from the shape of the graph, these returns arent even close to being normally distributed. (This in itself is fine... exactly what we would expect from real market generated information.) However, the "eyeball" test isn't a good one.. there are a number of other tests we can run:

Without boring you with the details, running Shapiro Wilk test on this data set gives a probability of <.00000 for the data being normally distributed. A formality, but one we should be in the habit of conducting.

Going back to the old eyeball test though, I see a problem. The "left tail" of your distribution is severely truncated. This is a problem... This is a characteristic I have seen time and time again in system development that is either done on an incomplete data set or without enough trades. In simple English, a distribution like this assumes you'll always be able to get out at your stop... and you won't. So in actual practice you can expect worse losses than your system results predict. How big of a problem this is depends on a number of factors... I can't give a good rule of thumb without knowing the system intimately.

So... be careful of your standard deviation assumption... it is not correct... your returns are likely to be much wilder than your system development leads you to believe. This is a problem.


I also examined the kurtosis of the distribution and found that it is a less peaked distribution as evidenced by it's value being less than 1 at exactly .749182809. Many people would then conclude that that would imply there are fat tails possible in my system, but, you would have to look at the "skewness" to determine where those tails are, and, based on the skew of 0.927014752, I can conclude that negative values are quite limited compared to the huge profits on the right, positive side of the distribution. This is a good thing, and one day I hope somebody will realize just how good of a distribution that is.

I also, at some point, hope others would share their distributions with me, as I have, to compare. I believe there are tons of systems who may be exhibit lagging kurtosis with negatively skewed distributions that imply the system has "hidden risks" inherent in the system. A kurtosis below one, as I have said, means the distribution is "less peaked", and the step most forget then is to examine the skewness to determine "where the fat tails are at." In this case, if you had found a system with kurtosis below 1, and resoundingly positive skewness, you may conclude that the so-called "fat tails" are actually benefiting you in that they are "positively skewed, fat tails."


No. No. No. No. and NO! I am sorry, I cannot be polite here... this guy claims to be the "best system developer" and then makes such a fundamental error... it has to be pointed out.

First of all, let's deal with your math. You can't use Excel for analysis because the statistics in Excel are wrong. Here are the actual results from Excel's Data Analysis module:
Mean 2.575227273
Median 1.71
Standard Deviation 5.766540423
Sample Variance 33.25298845
Skewness 0.927014752
Kurtosis 0.749182809

And here are the correct results from another piece of software:
Mean 2.575227
Median 1.71
Std. Dev. 5.76654
Variance 33.25299
Skewness 0.9111379
Kurtosis 3.639872

Note that Excel gives incorrect values for Kurtosis and Skewness. In this case, not fatal, but there is an important lesson here. DO NOT USE EXCEL FOR DATA ANALYSIS.

Now, on to your analysis of kurtosis. "Positive excess" kurtosis (Excel gives .75 vs Stata's .64... both are positive at least) may be generalized to mean that the tails are heavier, shoulders lighter, and more values cluster around the mean. So you are exactly wrong when you say "I also examined the kurtosis of the distribution and found that it is a less peaked distribution as evidenced by it's value being less than 1" Leptokurtic (excess kurtosis > 0 (not 1)) distributions are MORE PEAKED and have FATTER TAILS. What you mean to say is that this distribution has fat tails.

Next you say "you would have to look at the "skewness" to determine where those tails are, and, based on the skew of 0.927014752, I can conclude that negative values are quite limited compared to the huge profits on the right, positive side of the distribution." This is not what the skew tells you... and you're still trying to incorrectly apply rules that apply only to the normal distribution here. I won't go on with the math lesson, but this is simply incorrect... there are number of books on descriptive statistics that can help.


I encourage anyone to examine this distribution, and provide their current system for analysis.


Done BoWo. Attached find a txt file of actual percentage returns from an intraday system one of our trainee traders developed. I'll leave you to do the analysis (and, ahem, encourage you to not use Excel.) Point being, these are actual returns not theoretical backtest... and 1 year ago this person couldn't even tell you what a bid/ask spread was. This is a testament to the power of doing the right thing, learning the right things, and focus focus focus.


The point I'm making about "fat tails" is the proverbial "Black Swan" argument that really denies basic statistics. Certainly there are always outliers, but they don't happen very often. Once in a 1000 years even for some calculations of financial events, so the probability you hold it on that day is not even something to consider in your approach, and the "Black Swan" theory really has no basis in my opinion, because all it says is that <b>if there's always the possibility of a large move, you must not ever take risk</b>, which is a false assumption. Given that the probability of such events is so unlikely then if it does happen to you, you shouldn't change anything with what you were previously doing, as it can be considered economically and essentially a "sunk cost" so that it does not enter your strategic investment decisions.


You're obviously referring to Taleb's book and the joke my friend is on you. The whole point of Taleb's writing is that people who have an elementary understanding of statistics don't understand Black Swans. You have proven that here. I sure wouldn't want you managing my money since your answer seems to basically be dont worry about the big tail risks... I mean... yeah sure... these black swans only happen about once every 10 years and they almost bring down the whole financial system. Why try to understand these risks when they are so trivial, right?

Obviously that was an unkind joke, but the real point is that we never understand our risks. They are always FAR worse than we expect them to be... In your case you might consider the risks involved in these leveraged products in terms of counterparty risks, etc... So called Black Swans, and respect for the risks and possibilities inherent in these events, are one of the central problems in trading. I'm sorry you have chosen to ignore the possible lessons here so completely.

I hope I wasn't too big of a d*ck to BoWo here... I was partially responding to him but also hoping to correct some misinformation.

 

[talontrading]

Oops... I couldn't attach two files to that post. Here are the returns from that intraday system. This system rarely holds overnight, is mostly in the AM and out in the PM... BoWo, please compare this to your Pairs System and let me know what you think.

 

[Mike805]

Finally!

Thank you talon for pointing out in detail what many here have attempted to point out over the last couple of years. Bwol has several gaps and inconsistencies in his development process, yet, because his head is so far up his own ---, he won't step back to re-assess and retool his process.

Last year Bwol and I had a similar exchange, however it was not nearly as professional and well thought out as you have just presented - thank you for that. Suffice to say, "The best system developer in the world" told me the I was "too hung-up on sample size"...

Sample size ehh... Bwol is convinced that size doesn't matter.

Anyhow, since we're sharing distributions, attached are real-life returns for a medium frequency intraday reversion system for the last 3 years. Please dissect/dessimate as necessary. I do not have R installed on this machine so excuse the Excel format, it the quickest export mechanism I have at the moment.

Again - thanks talon, I appreciate your efforts here.

Regards,
Mike

 

[bwolinsky]

Quote from Mike805:

Finally!

Thank you talon for pointing out in detail what many here have attempted to point out over the last couple of years. Bwol has several gaps and inconsistencies in his development process, yet, because his head is so far up his own ---, he won't step back to re-assess and retool his process.

Last year Bwol and I had a similar exchange, however it was not nearly as professional and well thought out as you have just presented - thank you for that. Suffice to say, "The best system developer in the world" told me the I was "too hung-up on sample size"...

Sample size ehh... Bwol is convinced that size doesn't matter.

Anyhow, since we're sharing distributions, attached are real-life returns for a medium frequency intraday reversion system for the last 3 years. Please dissect/dessimate as necessary. I do not have R installed on this machine so excuse the Excel format, it the quickest export mechanism I have at the moment.

Again - thanks talon, I appreciate your efforts here.

Regards,
Mike

This is an interesting distribution, Mike.

Skew 1.181250439
Avg 0.0067
STD Dev 0.039926625
Kurt 13.15065284
3358 Trades

I see that the Kurtosis is much greater than 1 at 13.15, and the skew is positive. The Average profit is only 2/3's percent and the std dev is far too low, meaning this is actually a very short term trading system. I consider any system with more than 30 trades over a 1 year period statistically significant, so at 3,358 trades, absolutely.

This is not a medium term system. The standard deviation is far too low to suggest hold times exceeding days. May be as long as hours, but this system is not medium term. It's very short term, and I believe may be untradeable due to transaction costs.

I have calculated the win percentage at 57.80226% if you want to go by when the system has a marginal gain, but really, any system "profit" less than 0.05% most likely lost on the transaction costs, bringing the win percentage to 56.70042%. Forgive me if you are showing this distribution net of commission, Mike.

Compounded, this system has only showed a net profit at 100% of equity of 25.38%. Mike, can you enlighten us with the time frame involved in the simulation?

Thank you for sharing, Mike. Without seeing the trades chronologically to determine drawdown, and especially without knowing the time frame to get the APR, I can't pass judgement, but I believe has some transaction costs problems due to such short holding times, and the volume of trades.--

Good Trading,

Good Luck,

Beau Wolinsky

 

[Mike805]

Quote from bwolinsky:

This is an interesting distribution, Mike.

Skew 1.181250439
Avg 0.0067
STD Dev 0.039926625
Kurt 13.15065284
3358 Trades

I see that the Kurtosis is much greater than 1 at 13.15, and the skew is positive. The Average profit is only 2/3's percent and the std dev is far too low, meaning this is actually a very short term trading system. I consider any system with more than 30 trades over a 1 year period statistically significant, so at 3,358 trades, absolutely.

This is not a medium term system. The standard deviation is far too low to suggest hold times exceeding days. May be as long as hours, but this system is not medium term. It's very short term, and I believe may be untradeable due to transaction costs.

I have calculated the win percentage at 57.80226% if you want to go by when the system has a marginal gain, but really, any system "profit" less than 0.05% most likely lost on the transaction costs, bringing the win percentage to 56.70042%. Forgive me if you are showing this distribution net of commission, Mike.

Compounded, this system has only showed a net profit at 100% of equity of 25.38%. Mike, can you enlighten us with the time frame involved in the simulation?

Thank you for sharing, Mike. Without seeing the trades chronologically to determine drawdown, and especially without knowing the time frame to get the APR, I can't pass judgement, but I believe has some transaction costs problems due to such short holding times, and the volume of trades.--

Good Trading,

Good Luck,

Beau Wolinsky

Hi Beau,

This trade list shows trade P/L after all costs/fees, i.e. these are actual trades. So what you are seeing is a % P/L that includes commissions and slippage. In real terms, I'm netting about $0.015 per trade with this system. My fees and slippage are significant as this system uses stop orders, I pay about $0.008 pr share total in comms. + slippage. It's a lot (> than half the P/L), but I do get volume rebates to make up for some of that cost.

Also, when I say medium term; for semantics sake my definitions are as follows:

- High Frequency : Minutes
- Medium Frequency : Hours
- Low Frequency : Days

So you nailed it, this particular system holds for 1-4 hours. I consider it a medium frequency intraday system.

Mike

 

[ArmchairTrader9]

Mr Wolinksy,

Hello, Sir! This is my very first post on ET and reading your thread finally convinced me to register and post something.

I have been reading your thread with curiosity and interest for the past few weeks. There are still many things I don't understand here, but I think I am starting to get a better picture of how you think and how you look at systems.

It is not often that I get a chance to have someone with your level of experience to look at my work and offer me suggestions. Would you please be so kind as to take a look at the system I have posted and let me know your thoughts? These are actual trading results (after commissions and all that kind of stuff) from a system I traded last year. The time frame for this system covers a full year of trading.

Some days I think I'm starting to do ok with this trading stuff. I would appreciate your analysis of my system.

Thank you Sir. Do have a nice day in Kansas City. Is it cold there yet?

-AT