'SPY Gopher' generated an Entry Signal for Wednesday's Close

'SPY Gopher' has generated an Entry signal for the SPY at yesterday's Close. This is one of my favorite systems. I have been trading this model since about Trade 65 (Equity Curve chart above). Whenever it goes through a drawdown, it has always gone on to ultimately make new Equity Curve highs. And it has just generated another entry signal.

Model Performance Stats:

• Model Tracking Vehicle=SPY
• Start Date=2/2/1993
• Number of Trades=94
• Average Trade Return=1.2%
• Win Rate=69%
• Average Win/Average Loss=1.4
• Profit Factor=3.18

The caveat with this model is its Money Management Stop is very high, currently about 3.5%. Historically, if I can handle risking that much capital on the trade, the performance of the model over the following year has been very good. The model generates 5-6 trades/year, which on average returns 6-7%/year. Each position is modeled to be open for 5 days unless the Money Management Stop closes the position sooner.

Disclosure: Long the ESU09.

Disclosure: The performance results shown above are for Model analysis purpsoses and do not include commission or slippage. The model is built on data from the SPY, but I trade the model with the ES e-mini. Actual trading results from the ES usually differ from the model results of the SPY, with the ES showing somewhat weaker performance data. Nonetheless, I still trade this model with the ES and when executed according to the plan, it has generated consistent profitability for me.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

When my Portfolio is both Long and Short, what direction do I root for?

Right now, my System Trading portfolio is about 10% long the NQU09 (via 'BTD Index': http://stbsmb.blogspot.com/2009/06/btd-index-generates-entry-signal_16.html) and about 60% short the ESU09 (via 'SHOE SPY': http://stbsmb.blogspot.com/2009/06/shoe-spy-generates-short-entry-signal_18.html). I find myself rooting for the long and then rooting for the short and then rooting for the long and then.... Since the ES and NQ are highly correlated, I should expect them to pretty much move in tandem with each other. If I keep on rooting for both, then I will surely make myself crazy, yet I find that I am doing it anyway.

So if I am going to root, then which direction should I root for? On balance I am net short so I should root for the downside.

By why root at all? This is not professional baseball that has me rooting for the home team (Go Red Sox!). However, the very notion of rooting suggests I am too close to the trade emotionally, too involved in its outcome.

If my models are robust, then the winning trades and their profits will come over the next 12 months whether I root for them or not. While the rooting can be fun, perhaps it is a sign of being too tied up in the trades outcome, of too much ego involvement.

Perhaps this dynamic is also related to my tendency to exit winning trades too soon, specifically if they have not reached the price target or the time stop. Going back to the baseball analogy, if my team is winning, and I can call the game early, then I get to book the win and thus improve my record! But somehow I don't think the opposing team, the umpires and MLB would allow such a thing. Since I trade on my own, I am also my own coach, manager and umpire. Whenever I am inclined to exit a trade early, I should consult my coach, manager and umpire to see if it is an acceptable thing to do. Somehow I don't think they will!

This has been an informative post for me to write. I hadn't previously made the connection between rooting and exiting a wining trade early. Perhaps there really isn't a connection and I just went off on a tangent. But perhaps there is. Since it is a pretty human thing to do, I don't know if I can stop rooting for a particular direction (long/short) or a particular sports outcome (go Sox!), but at least I have brought this dynamic to my attention. This in itself is a win.

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Confession: As a boy growing up in New York during the 1970's, I was a New York Yankee's fan. I have been living in Massachusetts since 1986, and became a Red Sox fan in 2003. My wife is a huge Sox fan, and we have watched or listened to nearly every Sox game since 2004. It has been great fun being on both sides of one of the greatest rivalry in professional team sports. I have tremendous respect for the Yankees and their organization, but when it comes to rooting I am all about the Sox. Periodically, I like to remind my wife that I was a Yankee fan. She responds with the usual grimace when I express such blasphemy.

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Disclosure: Short the ESU09, Long the NQU09.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***

'BTD Index' generates a Long Entry Signal

All of my Strategy Trading models have a max holding period of 1-8 days except one, the 'BTD Index' model. This model generated an Entry signal for the EOD yesterday, Monday June 15th. The max holding period is 20 days. This model has the longest max holding period of any of my Strategy Models.

'BTD' stands for 'Buy The Dip'. The concept is simple: while in a Long Term uptrend, buy the Short Term dip. After a Short Term correction, the Longer Term trend should re-exert itself and send the tracking vehicle back up. This is the first Entry Signal generated for this model since December 2007.

What happens if the tracking vehicle (NDX: NASDAQ 100 Index) does not resume its Longer Term uptrend? Well that can suggest a Longer Term trend change (from up to sideways or from sideways to down). How do I protect myself from this scenario? A time based Stop. This is the only model that I have that does not use a price based stop. It's stop is based on Time, and if after 20 trading days the tracking vehicle has not reached my price target, then the Time Stop exits the trade. The price target is the Short Term moving average (middle red line in the charts above).

I believe the key to optimizing the potential profit from the overall concept is in how the 'Long Term' uptrend and the 'Short Term' dip are defined. This is one of the benefits of Systems Trading: all of the variables in the model are specifically defined. The Long Term variable is a longer term moving average (magenta line in the charts above), and the Short Term variable is the lower Standard Deviation band (lower red line on the charts above) derived from a Short Term moving average. The Short Term variable's standard deviation calculation is derived from a Bollinger Band.

The first chart is the current Entry Signal. The second chart shows numerous Entry and Exit Signals for this model from late 2007. I use the NASDAQ 100 (NDX) as the tracking vehicle, and the relevant e-mini future as the trading vehicle (NQU09).

Disclosure: Long the NQU09.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security***