The video below shows a 10 year simulation run of the Precision stop 2011 version on 70 UK stocks.
The vast majority of traders do not believe that trend following works, this video will show you most emphatically that it does.
The theme of letting go of control and just riding the trends when they change is an alien concept to most who prefer to allow emotional decisions to cloud their judgement and even though they continue to lose, they don't seem to learn how simple it is to follow trends. There are long "underwater" periods. which means the number of days between new account highs being made. The draw downs can be high with trend following, but when all the factors are weighed up, it still remains the number one choice for serious professional traders.
Note If you have trouble viewing all the numbers when watching the video, try adjusting the resolution to 720 HD which is found on the video toolbar HD.
<<<Watch in full screen mode for a better view
Some of the terms used in the video display may not be familiar to you, so lower down the page is a detailed explanation of the terms used.
Shortly I shall be adding some comparison videos showing the Donchian 210 day trend system versus the Precision stop 2011 model. Richard Donchian is believed to be the first person to design a trend following system, and the very simple model he used went long ( bought ) when a 210 day high was hit, and went short ( sold ) when a 210 day low was hit. The opposite corresponding 210 day value is used as the stop entry for the next trade.
Whilst the Donchian system is very basic, it does indeed tend to make reasonable profits over the long run at the expense of large drawdowns. Before traders dismiss the Donchian model as being crude and overly simple, it is as well to remember that his work is the corner stone of all the trend following systems available today.
The Donchian system was tested by Ed Seykota on an old Fortran computer many years ago using punch cards, to his amazement Mr Seykota found it to be profitable so he went on the design his own exponential moving average trend following model, and inspired many other traders to develop their own.
The Precision stop 2011 is purely a trend following model based on my many years of trading, testing and technical analysis experience. Some of my inspiration for designing this model is a result of studying the work of the two aforementioned gentlemen, seeking improvements where I was able to find them. It is unlike the Seykota model and the Donchian model, the only common factor being that it follows trends in more precise manner.
There is some detailed analysis showing how to set up a system correctly for best results on the how to test a trading system pages.
After you watch the video you will see me click on Generate Excel report, this actual report is available to download for your own perusal.
If you have trouble viewing all the numbers when watching the video, try moving the slider bar back and forth a few times, the video will then become HD.
Roger Medcalf 2010.
Precision stop 2011 is due for release in January 2011, superseding the 2005 model currently available here
Glossary of terms
|Open position profit||The total profit on all open long and short positions|
|Max Loss||The in running maximum peak to trough draw down possible on a day by day basis assuming all trades get stopped out|
|Risk||The intended risk from entry price to stop on all open positions ( pre-set to 0.25 in the simulation video)|
|RPT (Risk per trade)||Risk divided by Trade divisor, computes the risk of entry price to stop on each individual trade|
|Gearing used||Total value of longs and shorts divided by W Equity ( Working Equity ) E.G If W Equity = £20,000 and total value = £100,000 Then Gearing = 5|
|Highest Gearing||The maximum gearing used during the run|
|% Underwater||The total percentage of time that the equity line is not making a new peak|
|Highest Equity||The highest value of W Equity achieved during the run|
|Net long-short EXP||The value of exposure in the portfolio if net long or short E.G If long value = £10,000 ,short value = £20,000 then net short exp = £10,000|
|Starting Equity||The initial starting capital used by the run|
|Closed Equity||The profit - loss of all closed out trades + initial capital|
|W Equity||The real time value of the portfolio|
|Risk variable||0.25 = 25% of the W Equity is used to compute Risk (Adjustments to this value make huge differences to performance)|
|Trades divisor||The number is used to divide Risk variable to allocate correct deal size to each trade.|
|Max cost % per trade||The maximum value of a trade must not exceed this value, this is for limiting huge trades when stop values are tight. (A safety feature)|
|Initial max trades pd||The maximum number of trades the system will activate on the first day of the run|
|Max trades allowed||The maximum number of trades the system is allowed to have open on any given day|
|Max gearing allowed||The maximum gearing allowed in the run|
|Spread percent||The run uses open high low close data, so bid ask must be estimated. If set to 1.5 then it indicates bid 98.5 ask 100.( 3% a RT ) (Round turn)|
|Noise less than 1000||Unused filter in the video|
|Percent profit||The real time percentage profit generated during the run.|
|Max draw down||The largest peak to trough value on the run expressed as a percentage.|
|Long W/L ratio||The ratio of number long wins / number long trades (E.G 10 trades 6 wins = 60%)|
|Short W/L ratio||The ratio of number short wins / number short losses|
|Total W/L ratio||Both of the above ratios combined to give a system health reading in one number|
|Long R/Reward||The ratio of average long wins / long losing trades|
|Short R/Reward||The ratio of average short wins / short losing trades|
|Overall R/Reward||The above two ratios combined|
|Pie chart display||Shows the percentage balance of the portfolio in real time during the run. Notice the illusion of a spring pulling it back to long most of the time.|
|Max underwater||The highest period between the account making a new peak.|
|Total long trades||The number of completed long trades during the run|
|Total short trades||The number of completed short trades during the run|
|Total trades||Summation of the two numbers above|
|Long profit||The value of the current open position long profit|
|Short profit||The value of the current open position short profit|
|Display mode||Basic display so as to be easily understood by the average trader|
|Open position P/L||The value of the current open positions profit|
|Locked in profit||The profit value locked in by the stops ( this assumes that the market will trade at the stop level ) See Slippage definition and footnotes|
|Capital employed||The monetary value of all trades basis of their individual entry prices added up|
|Total working||The monetary value of all trades basis of their individual bid ask prices added up|
|Slippage||The amount of slippage applied to each trade. 50% indicates halfway point between the intended stop entry level and the worst price of the day|
|Long cost||The cost of all open long trades when bought|
|Long value||The value of all open long trades in real time|
|Short cost||The cost of all open short trades when sold|
|Short value||The value of all open short trades in real time|
|Indicator generator settings||The settings applied to the Precision stop 2011. Multiplier = the multiplication factor applied, Min percent = minimum percent stop distance|
|The lower windows||Show all the actual trades and their values in running.|
|Generate Excel report||The generate report that goes with this video is available to download directly here on this page|
Additional clarification information
As the test used closing prices for open high low close, it is not possible to extract the bid and ask prices. To get around this accurately there are two separate features added to give a realistic simulation.
Spread percent. If the system buys a stock which has a closing price of 100p and the spread percent is set to 1.5 this means it will view the data ask 101.5 and book trades basis of that. The same happens when trades are closed out. So if the trade was opened and closed at the same 100p level it would sell at a price of 98.5p making a total deal cost of 3% per trade. Some stocks in the test have tight spread of less than 0.25% and others are wider up to 5% so this feature averages it out nicely.
Slippage factor. This additional feature makes the system testing even more stringent, as it then adds more costs to the equation. E.G if the intended entry price is the above 101.5 and the days high is 105 the simulation will book this trade at (101.5 + 105 ) / 2 making an entry level at 103.2
Software. Please note the software that generated this simulation is not for sale to the public as it is my own proprietary software design.
The for sale item is the Precision stop 2011 which is an add on for Tradestation (all versions) and Multicharts ( all versions) which is due for release in January 2011.
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