This Popular Belief Can Hold You Back

Quant trading

Original films are always the best…

Jaws, Grease, Crocodile Dundee, and The Blues Brothers are classics. They still excite viewers many years (or decades) after first hitting the silver screen.

But the sequels to these movies are another matter. They are some of the most forgettable films ever. You might not even know a few of them exist.

Cynics say sequels are all about the money. They believe the sole purpose is to milk every dollar possible from the initial idea. In the process, they say, the creativity of the original is lost.

But do you know what?

I disagree…

Sure, plenty of sequels flop. But many become classics themselves.

I grew up watching movies like Star Wars, Rocky, and Indiana Jones. The follow-ups to these films were hugely successful — both critically, and financially.

The same can be said for films like Harry Potter, Pirates of the Caribbean, and Terminator. The originals become a springboard for a series of successful films.

So, what’s the connection between movies and trading?

Let me explain…

A mistake to avoid

Quant Trader produces its own sequels. Members know them as signals (or entries) 2s and 3s. But, just like the movies, many people assume the original is the best.

Have a read of this…

I’m loving Quant Trader so far, but something perplexes me.

I notice that you often provide for a signal 2 and 3 entry. Many of these later entries seem to make very little profit (if any). This drags down a perfectly good initial trade.

It seems to me that capital for signal 2s and 3s could be go towards appetising 1st signals.

Just because a stock has been rising nicely does not seem to be a reason why it won’t suddenly reach a peak and slip down the muddy track on the other side.

Perhaps the trick would be to invest more at the 1st entry and make the full gain on that trade.

Member, Boudewijn

I like that Boudewijn is assessing past trades. This is something I encourage you to do with any advisory service you try. It’s also an excellent way to learn how a strategy works.

But there’s a catch. You need to look at results over the market cycle. Only including trades from a certain period could have a big impact on your analysis.

Check this out…


Source: BigCharts
[Click to enlarge]

This is the All Ordinaries since 14 November 2014 (when Quant Trader began live signals). Prices have been within a range for the entire period.

Look closely at the chart. You’ll notice sharp corrections follow each advance. This is a tough environment — especially for signals 2s and 3s. Many trades don’t fulfil their potential.

Now, here’s the thing: the market isn’t always range-bound. There are times when prices move strongly up or down. And this can make a big difference to the strategy’s performance.

I’ll come back to this in a moment. It’s an important concept to understand.

But first, I’m going show you the results from Quant Trader’s live signals. They include every buy signal (1, 2, and 3) since the service began.

Have a look at this…

The other piece of information you need is the success rate.

Success rate and Number of Trade Quant Trader

Let me explain what all this means…

Firstly, this is for closed trades only. It excludes open trades (62% of which are in profit). This is to make comparisons with back-testing easier (you’ll see this in a moment).

The top table shows the average profit and loss for each signal type. You’ll see profits are around twice the size of losses. This sort of ratio can make you a lot of money.

Next is the success rate. This table lists the percentage of profitable signals. You’ll also see a column that shows the number of trades in each category.

At first glance, Boudewijn appears to have a point. Signal 2s and 3s have a low success rate. I can understand his preference for signal 1s.

But remember what I said before: You need to look at results over the market cycle. Only focusing on a bullish, bearish, or sideways periods could skew your analysis.

Check this out…


Source: BigCharts
[Click to enlarge]

This is the All Ordinaries since January 1993. It covers nearly a quarter of a century, and includes many market cycles (bull, bear, and sideways).

Now, look at the square at the top of the graph. This is the period you saw before. It represents only part of the cycle. There hasn’t been a strong bullish phase for several years.

Take a moment to consider this chart…

Now, ask yourself this: when do you think running your winners would be most successful?

I think you’ll agree that it’s during the market’s up phases. This is when a stock is most likely to go from strength to strength.

Signal 2s and 3s aren’t reaching their potential for a simple reason: The market is not trending higher. This means many trades run a relatively short distance before falling back.

But, as I said, it isn’t always this way. Signal 2s and 3s can (and do) produce some outstanding results. Overlooking them could be a big mistake.

Let me show you why…

Trading the cycle

One of great things about systems trading is back-testing. This is where you use historical data to ‘road test’ a strategy. The results are hypothetical. But they show you what’s possible.

The previous tables gave you two and a half years of results. This is a useful start. But it’s merely a snapshot in time. You’re now going to see two decades worth of trades.

Have a look at this…

Average Profit/loss graph

To be clear, these numbers are from back-testing — they are not live signals. It covers the period between 1 January 1993 and 31 October 2014 (just prior to Quant Trader’s launch).

Here’s how the strike rates stack up…

Success rate/number of trades Quant Trader

There’s a clear link between live signals and back-testing. But the live results are generally lower.

Now, there’s a simple reason for this: The back-testing contains multiple bull markets. Live signals, on the other hand, are during a period of sideways trading.

I believe the results from the live signals are exciting. They are making profits despite a range-bound market. Imagine the possibilities when the All Ordinaries accelerates higher.

The key, as always, is to spread your capital widely. This increases the odds of buying a few stocks that become ‘blockbusters’. These are the trades that could make your year.

Until next week,
Jason

Editor’s note: Are you struggling to consistently make good profits? If so, you should check out Jason McIntosh’s Quant Trader advisory service. It’s a fully algorithmic trading system for ASX stocks. Quant Trader scans practically every company. I can just about guarantee you’ve never heard of many of these unique ideas.

If you’re not familiar with Jason, he was a trader at one of the world’s biggest investment banks for nearly a decade. He’s seen dozens of market cycles. This experience is hard coded into Quant Trader’s algorithms. And the results speak for themselves.

So, if you’re not sure when to buy or sell…I strongly suggest you consider Quant Trader now.

Try it. See if it makes sense to you. It could change the way you trade forever.

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