Thursday, 2 December 2010

Yet another major trading innovation

Another idea has come from re-reading Sweeney's Campaign Trading, this time the idea of reversing into stop losses. i.e. to examine all cases where a stop is hit and assess the stop's effectiveness. Afterall, if a stop is effective, it is because it saves you money. So if you reverse at a stop point, you should make the money that is saved.

So I have been looking at some of the recent results on days when our equity stop loss point is reached. What if we reversed at such points and became trend followers? The answer is that we would improve the profitability of the overall trading by quite a substantial amount. This Wednesday's result would have been a massive extra gain. So now testing is in full swing on this regime-switching model. In theory, this would mean that we would no longer fear the really big move which causes us so much grief at the moment

One other question is praying on my mind, namely how many more big ideas can we generate that have such huge effects? This is about the 8th!!

Recent reading has been focused on Ed Thorp's long paper, The Kelly Criterion in Blackjack, Sports Betting, and the Stock Market. This is pretty complex, but does have some extensions of other results which I am keen to pursue - so far, the 42 page paper has taken me 3 days of study to get through.

I have also ordered Ralph Vince's book on Optimal f - I used to own this years ago and am not sure that it is actually any good, but we'll see.

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