Extreme Frustration, but keeping my chin up.

For the past few days I have been in the process of culling out models that have not been performing well over the past few years. On the surface this is the right thing to do. However 3 of the 4 recently discontinued/suspended models have performed very well over the past few weeks:

Narrow Bar #1 NDX: generated a trade a few days ago that made about 0.5%. I have suspended the Narrow Bar models due to a flaw in the logic.

NDX OU: This morning, I closed the NDX OU trade pre-market for a 0.22% loss. The model has performed poorly over the past few years and for all intents and purposes is declared dead. The after hours futures have gapped up 25 points, so that model would be sitting on a 2.0% gain due to be closed at 4pm Wednesday.

NDX 14th DOM: I discontinued this model 15 minutes before the close of today's markets. The initial concept was sound, but the logic filters no longer made sense to me and the model has been performing poorly over the past few years, so I discontinued it. This model would have generated an entry signal at 4pm today. Right now, with the gap up in the NQ futures, that model is up about 1.85%.

Oh, the models that I am keeping, and that have generated positions over the past few weeks have either been scratches for small gains, or have gotten stopped out:

BTBT NDX
BTBT RUT
Payrolls NDX
NDX 1st DOM
NDX Summer Rally
NDX 30th DOM

Right now I am very frustrated. My cognitive side still believes in the models that have performed poorly over the past few weeks, and still believes the models that I have discontinued should stay offline. However, my emotional side is very frustrated. This reminds me of the challenging dynamic I experienced from the summer of 2007 to the summer of 2008. Nearly everything I did was wrong. The entry signals I took often turned into losers, and the entry signals I ignored ofter turned into winners. The basis for ignoring those profitable signals was disbelief in robust models. This happened so often, that I became too scared to trade.

This current environment appears to be different. A string of poor timing where good models produce losers and bad/suspect models produce actual/potential winners. I am not going to change how I trade. Except tonight and tomorrow will probably be rooting for the gap up to be sold! Emotionally, I want to be right, cognitively I won't be changing a thing.

Chin up!


p.s. the gap up may not be all that bad...i have been building a longer term investment position in the FAS for my IRA and some custodial accounts...the FAS may be held for another 3-15 months, depending on how it performs...ideally i want it to go down more so i can build up my position...alas i cant control what it does, so if it decides to put in a run, i will have a partial position, which is better than nothing...

Disclosure: Long FAS.

***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***

The Crusher: Market dislikes the June Payroll report, 'NDX 1st DOM' and 'NDX Summer Rally' get stopped out

Wow, that was an ugly Open. I was dropping my son off at daycare, so I wasn't in front of my screens to watch it. My stop orders were in place and they were hit:

'NDX 1st DOM':

The Modeled position (NDX) posted a 1.12% loss, worse than the Average Losing Trades return of -0.47%. The actual Trading position (NQU09) posted a -0.90% loss (including commissions), somewhat better than the model.

'NDX Summer Rally':

The Modeled position (NDX) posted a 1.29% loss, slightly better than the Average Losing Trades return of -1.45%. The actual Trading position (NQU09) posted a -1.53% loss (including commissions), somewhat worse than the model.

Dusted myself off and I have moved on. Another model may generate an Entry Signal for today's close. If it triggers I will post about it later.

Asleep at the Switch: 'NDX Summer Rally' generated a Long Entry Signal on 6/25/2009 and I missed it!

My 'NDX Summer Rally' System Trading Model generated a Long Entry Signal on 6/25/2009 and I missed the original entry. How did this happen? This model can only generate 1 signal/year, and while I have fully automated the Entry Signals for models that may generate multiple entries/year, I have not done so with models that only generate one signal/year. I manually review the once/year models weekly and noticed my error yesterday afternoon.

However, the NDX traded back down to its original entry price yesterday, so I was able to enter it then.

The concept for this model is the NDX tends to put on a rally starting sometime towards the end of June and finishing somewhere in the middle of July. Why does this happen? Who knows. Perhaps it has something to do with EOM and EOQ window dressing and then perhaps a run up into Q2 earnings announcements. In any case I have modeled it.

One of the things I really like about this model is that its Money Management Stop is very tight, currently at 1.3% below the Entry Price. If the supposed summer rally fails to happen or peters out quickly after it begins, this stop protects me from the big loss.

The trade generated from this model in 2008 was stopped out, so the model is trading just below its all time high (see Equity Curve chart above).

Here are some of the model's Performance Statistics:

• Model Tracking Vehicle=NDX
• Start Date=11/1/1985
• Number of Trades=23
• Average Trade Return=2.50%
• Win Rate=48%
• RAWAL (Ratio of the Average Win/Average Loss)=4.7
• Profit Factor=4.34

Notice the Win Rate is less than 50%, currently at 48%. How can a Strategy that is profitable less than half the time make money? The RAWAL is huge at 4.7. This means the Average Win is 4.7x the Average Loss. Every loss the model generated is from the tight stop.

In addition to the Money Management Stop, this model also has a Trailing Stop, which has been hit once during the life of the model. JE (http://myestradingjournal.blogspot.com/) and I talked last week about using Trailing Stops. Two of my models utilize them and perhaps more would benefit from them. Testing the other 33 strategies to see if they would benefit from a Trailing Stop is a reasonable Research Project.

Disclosure: Long the NQU09.

Disclosure: The performance results shown above are for Model analysis purposes and do not include commission or slippage. The model is built on data from the NDX, but I trade the model with the NQ e-mini. Actual trading results from the NQ usually differ from the model results of the NDX, with the NQ showing somewhat weaker performance data. Nonetheless, I still trade this model with the NQ 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***