10 New Back Tests: TSI Vector Strategy

In the past day I was able to knock out 10 new back tests using the True Strength Index (TSI) vector strategy. The results are promising and in this post we’ll take a look at them in some detail, and also take a peek at their respective equity curves.


I am finding that as I have several ticker symbols that respond well to the strategy it is getting a bit quicker to add new promising candidates. Ultimately I would like to have around 50 of these in play, then do the ‘bring me down to reality’ process of using the TradeStation Walk-Forward analyzer and, assuming there is anything left to look at, begin posting the trades in real-time and see what happens.


The area in the left side panel of the home page will be used to record the real-time trades. I will replace the existing ‘Stock Quotes’ gizmo (just below ‘Subscribe to my blog’) with a list of (hopefully) 50 stocks/strategies. Each stock listed will include the signal indicated for the open market order of the next day’s trade. The signal will either be BUY, SELL, HOLD or NO TRADE. Also, each ticker symbol will link to its own separate page with the data I have regarding its back test results and a recording of its performance in real-time. 


I purposely devised the strategy so that it is entirely based on where the stock ends at the close each day. That is, at 4:01 pm est I will know the market order signal for the following morning’s NYSE open at 9:30 am est. It will be nothing complicated to use because one either buys, sells or holds at the open each morning. No limit orders, no stop orders, etc. Just market order to BUY or SELL. My strategy is written this way and that is precisely what it back tests.


Let’s look now at a graphic that details the 10 new back test candidates. A number of these are mining companies but from here on out I will be expanding more broadly into the stocks that are members of the S&P 500 index.

One of the understandings being brought into clearer focus as I do this back testing stuff has to do with the general topic of risk and pain. Each strategy gives me an opportunity to control both concepts quite well. But the interesting thing is that if one has a decent tolerance for pain, tempered by an accurate understanding of risk, over time that person will, by far, make the most money.


The two S&P 500 ETF (SPY) strategies offer good examples of this observation. Both have extremely high win/loss ratios (88.6% – 86.5%) with modest $Avg Net per Trade ($150 – $160). However, both also have a large losing trade in excess of $1,000. 


As I am able to adjust the value for the stop loss variable, the results shown above have the stop loss for SPY-1 set to 15% and SPY-2 is set to 11%. If I try to avoid the large losing trade in SPY-1 by ratcheting down the stop loss from 15% to 4%, the largest losing trade shrinks from $1,055 to $815. And an even tighter stop of just 2% yields an even smaller largest losing trade of $690.


But the rub is that the 15% stop loss shown above for SPY-1 yields,  over 10 years, a Total Net Profit (including commission expenses – $7 to buy, $7 to sell) of $13,221. The 4% stop loss yields a much smaller Total Net Profit – $8,063. 


By taking less risk with the 4% vs. 15% stop, the largest loser shrunk by $240 ($1055 - $815). But the Total Net Profit yielded when using the 4% stop loss also shrunk – by a whopping $5,158 ($13,221 – $8,063).


My question: is reducing the largest loss by $240 worth giving up $5,158?


If one really cannot take much pain, dropping the stop loss from 15% to 2% brings the worst trade down from a loss of $1055 to $690, but also drops the Total Net Profit to $7,248. This strategy would allow one to sleep better at night, I suppose, but in the end one may consider it expensive sleep – to the tune of $5,973.


Here is a graphic of the first 4 ticker symbols’ Equity Curves: AEM, AU, COST and GG

The Costco (COST) and Goldcorp (GG) strategies were a little slow to get in gear – kinda spinning their wheels for the first 8 – 10 trades. The Agnico Eagle Mines (AEM) equity curve is just about textbook perfect.


Here are the next 4: JCP, NCMGY, NEM and SA

On first blush the equity curve of JC Penny looks questionable after trade 20. The data that is not seen is that JC Penny topped at the same time as trade 20 – February 2007 ……. at $87.18. 


Any idea where JCP closed this past Friday? If not, the answer is $14.28. Over the past 6+ years, shares of JCP have lost 83.62%. Meanwhile, the strategy (bless its heart) kept trying to make money and really did not get anywhere, but it did not lose much either. Very little, in fact….. just a few hundred bucks.


And finally for the 2 equity curves of SPY.

If you followed the dialog above about risk tolerance and stop loss settings, you will understand why each strategy exhibited a vicious knife stab or two in their otherwise ‘perfect’ equity curves.

I hope you have a good week and keep in touch, OK?


John
[email protected]