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Sunday, January 27, 2013

System 12 aka MegaDozen

Possibly my greatest achievement - System 12 !
Why there is no System 11?  Actually I have an Idea for it, so keeping "number" 11 reserved.

This is a rule based, (almost) mechanical, statistical system.
Fixed position sizing, diversification and overreaching risk controls.

Back test was run 9/4/2012 to 1/25/2013 and projects 20% annually, with maximum draw-down of 12%.
I took out-most care to avoid hindsight bias, included larger commission and slippage, and took all actions that was common to me, even seeing that they will result in small losses shortly thereafter. The key here is losses where small, because of risk management. Even AAPL, I had to buy at extended price in the beginning of back test, while producing largest loss of all, still exited early enough to avoid 30% collapse in price.

I started back test in September 2012, at very inopportune time, knowing that market will tank in Oct-Nov. I wrote what I thought throwout whole period. How hard it was to keep positions, how many collapsed and never recovered, and how incredibly hard it was to enter and keep new positions in over-bought, over-extended market. I made a fine profit during this period, but had to fight thru many concerns and contradictions.System 12 answers all these questions will rules and mechanical execution. "Almost" mechanical, because I have time to act - a Positioning Period (PP). The only amendment to exit rules is an Emergency Exit (EE), when there is a big downside gap, Expanded Range (ER) day near support area. Back testing shows that, without exception, these conditions lead to lower prices. EE was not used in backtest.

Quite possible that equity curve can be used as forward looking indicator of market conditions, based on divergence with SandP500. Non-confirmation at end of October, when SPX was making final rally attempt to 1460 but equity was plummeting, should have been used as warning and requirement for EE.

Maybe I am getting ahead of myself, but i decided to run simultaneously Back Test with Forward Test (BTFT) and System 12 Transition (S12T). I will keep two sets of records, so i can analyze them. System 12 can be run with UNLIMITED amount of money, so this only first transition. better to learn from small mistakes...lol.
         BTFT will start on Monday 1/28/2013 at open in OX paper account. There is a problem for beginning of February - I didn't have to re-balance Mega Dozen (MD) yet. Now i have to, because many of MD where not available at November low, so I had to go to Second Dozen (SD). Now that some of MD available again - I need to switch, or go into Leverage Period (LP). I like an idea of LP, because it pains me to sell a winner.
          S12T will also start on Monday. I will use 2PP to enter as many as I can of MD. Then will reassess. BTFT will go into LP and its fine with me. I estimate 3 months for S12T to come in sync with BTFT.

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