The "Flipper" strategy

To all contributing to the thead:

Thanks for the input so far. There are quite a number of questions that are being asked and theories being presented and I appreciate all of them. I have put my next (long) post on hold to address a few of these questions. I will try to address these in some kind of logical order so if I don't get to yours right away, please be patient.


Thanks
JB
 
Hey Simstim,

Thanks for your contributions to the discussion and I don't consider anything you are doing to be "usurping" in any way. Keep the thoughts coming.

You mention a disagreement and that is fine. Before I address that particular, let me comment on your (second) spreadsheet that you posted. I think I understand what you are doing there and I believe there is a significant flaw. Let me demonstrate using your assumptions (6 cent delta/spread/commish, 0.60 target)

Let's start with a $60 stock for discussion. Your targets are $60.60 long and $59.40 short, agreed?

We will arbitrarily say that we go long first and we buy 1000 shares @ 50.06. Agreed?

For the sake of this discussion the stock immediately turns and heads down. Our trigger to go short will occur with a sell price of 40.94, agreed?

Buy 1000 @ 50.06
Sell 1000 @ 40.94

Loss = 0.12 per share

So, on that first trade (and also all subsequent trades) the loss is exactly DOUBLE of what you have in your calcs.

Agreed?

With the double losses, the multiplier must be higher and the shares get bigger and the losses get bigger and on and on.

JB
 
Ok, I'm going to see if I can steer this conversation back to the actual testing and away from the assumptions that we have been making the last few posts. I know we have been using nice round numbers for the sake of discussion, but part of the problem is that those numbers often look better than my testing revealed.

Here are some hard numbers from my 100,000,000 records of KLAC data.

Average spread (difference between smoothed bid/ask) at time of trades: $0.036

Most profitable delta: $0.06

Average trade price: $57.01

Profit target % (using abogdan's formula) 0.65%

You guys are wondering where the big multipliers come from? Well, run some numbers and it's not hard to see.

$57.00 stock * 1.0065 = 57.37 (long target)
$57.00 stock / 1.0065 = 56.63 (short target)

Ok, there is 37 cents to play with in profit. (notice it isn't 60 anymore like in SimStims example)

We can't negotiate the spread...it's there in the data for all to see. We already negotiated the delta to it's most profitable point. We can negotiate commission, but if the system won't stand up to a penny a share I'm not interested.

So for each flip we have a "fixed" cost of delta + (spread*2) + commissions.

That's 6 + 7.2 + 2 or 15cents rounded off.

So out of each aborted attempt (flip) at 37 cents we lose 15 of it to those costs. That's over 40% right there. So perhaps now you can see why the average multplier is ~1.45


JB
 
SimStim:
>my reason for saying capitals and balls is that
>if someone wanted to, they could raise this
>multiplier (say to 1.4),

Well, if you were to do that you would be trading a different system that isn't being tested here. This system clearly as set out by abogdan uses a formula to determine the size of the multiple as opposed to an arbitrary number.

(I know this is actually a bit confusing because abogdan occasionally uses a number of 1.1 for discussions sake, but if you read his posts you will easily see that the multiplier is not fixed but rather moves with the situation at hand.)

JB
 
SimStim
>however, you were saying that out of 400 days,
>there were only 12 days that it didnt reach its
>target, so this seems ok to me

Does it? I'm not sure how you can say that without determining what happens on a day that the target isn't reached.

If you decide to stop at 11 flips (as abogdan says he does) then take a look at where your losses are at 11 flips on the spreadsheet. Are you prepared to take 20k losses for each of those 12 days in exchange for the $3-400 days?

JB
 
Ok, is anyone taking any issue with the example used in this post?

http://www.elitetrader.com/vb/showthread.php?s=&postid=424142#post424142

If not I will assume that that is the correct formula for determining the proper number of shares to get the desired profit per day.

Just so you all know why my confidence is high on that formula, my first round of testing did not include a trailing stop...it just bailed at the target. No matter how many flips we took and no matter how the spreads moved around, we always ended up within a few bucks of the ~$370 profit target per day.

The trailing stop code makes it impossible to see this result (but did increase the systems profitability significantly) but I can assure you that it is spot on. (and I'll prove it with a data run if I have to)

Any questions?

Night all.

JB
 
Quote from Turok:

Average spread (difference between smoothed bid/ask) at time of trades: $0.036

So for each flip we have a "fixed" cost of delta + (spread*2) + commissions.

That's 6 + 7.2 + 2 or 15cents rounded off.

So out of each aborted attempt (flip) at 37 cents we lose 15 of it to those costs. That's over 40% right there. So perhaps now you can see why the average multplier is ~1.45

JB
More...

I believe you are overstating your 'fixed' cost of each flip. You should include the cost of the spread, but not double the cost of the spread. One trade (a buy at the ask, subsequently followed by a sell at the bid) will cost you a single spread.

-Eric
 
Thanks all for the efforts, lurking and learning here. Personally I am from the outset sceptical about a double up (albeit by multiplier) strategy as it gets really hard to mentally execute on those days when flipping losses add up and you need to put on a bigger and bigger position just to "make-back" the amount lost. Quite the opposite of the old advice of "never add to a losing position".

Although I conceede that screening for ideal stocks should help this strategy by a certain amount.

Best

J
 
Hey SimStim, I just notice that I screwed the numbers all up in a post that I left for you...not enough Red Bull I guess. The principle remained the same but I just was writing what now looks like random numbers. My apologies and following are the corrected numbers.

*************************
Hey Simstim,

Thanks for your contributions to the discussion and I don't consider anything you are doing to be "usurping" in any way. Keep the thoughts coming.

You mention a disagreement and that is fine. Before I address that particular, let me comment on your (second) spreadsheet that you posted. I think I understand what you are doing there and I believe there is a significant flaw. Let me demonstrate using your assumptions (6 cent delta/spread/commish, 0.60 target)

Let's start with a $60 stock for discussion. Your targets are $60.60 long and $59.40 short, agreed?

We will arbitrarily say that we go long first and we buy 1000 shares @ 60.06. Agreed?

For the sake of this discussion the stock immediately turns and heads down. Our trigger to go short will occur with a sell price of 59.94, agreed?

Buy 1000 @ 60.06
Sell 1000 @ 59.94

Loss = 0.12 per share

So, on that first trade (and also all subsequent trades) the loss is exactly DOUBLE of what you have in your calcs.

Agreed?

With the double losses, the multiplier must be higher and the shares get bigger and the losses get bigger and on and on.

***************************

I'm sure that is a lot easier to agree with than the gibberish that is previously posted. LOL

JB
 
Quote from abogdan:
Roughly, after 11 flips your shares are at app. = (1.1^11)*InitialShares = 2.9*initialshares. Your loss is about 0.06*11*2.9*InitialShares = $1800 on 1000 initial shares. Your target was 1000*0.6 = $600.
More...
correct, but i assumed turok's multiplier (about 1.45, according to him), as your suggestion was targeted towards improving his system. anyhow, i don't want to get in the way here -- so please ignore my remark and continue discussing the "multiplier issue" directly with turok. oh, and thanks for a great thread!

Quote from EricP:
I believe you are overstating your 'fixed' cost of each flip. You should include the cost of the spread, but not double the cost of the spread.
More...
no, eric, i think turok's correct. for example, a "flipped long" trade unfolds as follows: 1) go long at the ask, 2) wait until the ask drops the "delta" *plus* the spread, 3) cover/go short at the bid. so, effectively, you pay an additional spread in step 2.

---

finally, allow me a short comment on this system from "philosophical" point of view. clearly, if the underlying instrument followed a random walk, this system would have a negative expectancy (because of the spread and commissions). so the system would not work on *any* instrument. but what are the requirements then?

i think the system's assumption is that the underlying instrument is trending. or, more precisely, the system assumes that every time the price has penetrated the "delta+spread" band, the probability of the move continuing in that direction is sufficiently bigger than the probability of reversal. here "sufficiently" basically means "sufficient to cover the spread, commish, and capital costs".

so, effectively, the system is just a breakout system in disguise. which means that whenever the underlying instrument is not "trendy enough", it will lose money.

- jaan
 
You must log in or register to reply here.
Back
Top