The Big Bamboo Trading System
Inaugural Post on the Big Bamboo Trading SystemA New ETF Trading System: Will Track and Trade on iBCby Woodshedder on September 29th, 2008 at 11:46 pm |
For a long time, I’ve been wanting to track and paper trade a system here on iBC.
I have not done so yet, as I do not want to disclose the specifics of systems that I am trading. There is, however, a system I’ve been watching that I think will be perfect for iBC for several reasons, with the 2 most important reasons being that I’m not trading the system (yet), and the ETFs it trades should be liquid enough to allow participation by others without creating large slippage.
I will not divulge the entry criteria, but I will be posting the signals nightly, in order to give plenty of time to be acted upon at the next open (I’m not recommending that you trade this system).
To whet any appetites, this system is up a whopping 71.6% this year.
Introduction to the New ETF System.
One of the pitfalls of trading a system is that one can easily start trading the system and find that he has begun trading it at the absolute worst time. This might mean starting a system and suffering through a drawdown before the system starts to generate profits. If one is lucky, he might find that the first trades are huge winners. The system trader will then have nice profit cushions, to absorb future drawdowns.
With that in mind (profit cushions) I want to start tracking this system, as of today, September 29th, 2008. The system trades only the double long and double inverse ETFs.
The three signals generated on Friday’s close were (MZZ: 101.44 +1.30%) , (EFU: 159.79 +3.76%) , and (SCC: 145.25 -0.65%) . However, this system will only take 2 trades per day, maximum. And it will hold only a maximum of 4 ETFs. When provided more opportunities than the system will allow, the system chooses the ETFs with the most volume. Therefore, this morning, this system bought (MZZ: 101.44 +1.30%) and (EFU: 159.79 +3.76%) . It is very important to note that the system also generated a sell-signal, as of tonight’s close, so these ETFs will be sold at the open Tuesday.
Position Sizing
The importance of calculating position sizes is crucial to the success of any system. Here is how this system will calculate position sizes:
- Initial Equity is $50,000.
- Risk on each trade will be 1% of equity.
- A 4% protective stop will be used on every trade.
Caveat: Position sizes set before the open can be troublesome because if a 4% stop is set based on the close, and the ETF gaps 2% on the open, the trade will actually move 6% before the stop is hit.
MZZ was purchased at the opening price of $64.39 The stop was set at $59.80, or 4% of the Friday’s close. As mentioned in the caveat, MZZ gapped up over 2 points.
The system will risk 1% of equity, which means this trade will risk $500.00 Therefore, 201 shares of MZZ were purchased. For the purpose of clarity, lets do the numbers so everyone understands the position sizing.
Since we are calculating our order the night before, we must use that evening’s closing price. MZZ closed at $62.29 Using the close, we figure the stop of 4%, which equals $59.80, or a risk of $2.49 To calculate the number of shares, we divide the 1% of equity by the amount risked. The formula is below:
$500.00 / $62.29*.04 = 201
So now, we are long 201 shares of MZZ, but we purchased them at $64.39 (due to this morning’s gap). This means our actual risk is now $922.59, or almost 2% of equity. Uh Oh!!! This could be a real problem, in real-time, if the trade turns against us. If one were able to monitor the open, position sizing could be adjusted as it became evident that the ETF would gap. However, I devise systems to be traded by those who work, and can’t trade while working. Lucky for us, these trades went deep into the money, and quick.
On to EFU. Based on the position sizing above, 112 shares of EFU were purchased. I won’t bore you with the stop details as you can calculate those, and besides, the stop will never be hit.
After the first day of trading the system, this is how the numbers look:
Symbol Cost Value at Close Unrealized Gains
MZZ $12,947.39 $14,319.24 $1371.85
EFU $13,160.38 $15,232.00 $2071.62
Cash $23,892.23
Not to shabby for the first day!
Each evening I will continue to post on this system, and flesh out all of the intracies, including more fancy accounting and statistics. I hope that this process will be very helpful for everyone as we begin to understand the process of mechanical system trading.
For Tuesday, we will sell MZZ and EFU on the open (the exit criteria will be covered in the future). There are no new entry signals for Tuesday.
Stay tuned…
All posts will be housed under the category of *New ETF Trading System, at least until it gets a formal name. Editors Note: The New ETF Trading System is now formally known as the Big Bamboo.
Second Introductory Post on The Big Bamboo System
New ETF Trading System: Part II and Closed Tradesby Woodshedder on October 1st, 2008 at 12:24 am |
While I explained in the previous post my intentions to track this system on iBC, I did not explain very much about the system itself.
The System Highlights:
Entry is secret but is not based on volume or RSI.
Exit rule is very simple: If RSI(2) closes above 80, sell at the next open.
This system has been backtested only as far back as Jan 1, 2008. Since the system trades only diETFs (double and inverse ETFs), and many of these diETFs are less than 2 years old, it is impossible to test back much more than 2 years. This should cause concern. However, I have tested this system on the SPY, DIA, and QQQQs, on all available data, and it is profitable. Still, that does not mean that the system will work the same on the diETFs. I am working on this system with another trader, who may or may not choose to remain nameless, and he will probably have tested this system back across all available data for the diETFs, within a week or so.
Here are the statistics, since January 1, 2008:
| Trade Statistics |
| There were 80 total stocks entered. Of those, 80 or 100.00% were complete and or 0.00% were open. |
| Of the 80 completed trades, 49 trades or 61.25%resulted in a net gain. |
| Your average net change for completed trades was: 2.60%. |
| The average draw down of your approach was: -3.25%. |
| The average max profit of your approach was: 5.88% |
| The Reward/Risk ratio for this approach is: 2.63 |
| Annualized Return on Investment (ROI): 268.02%, the ROI of ^IXIC was: -28.53%. |
| Exit Statistics |
| Stop Loss was triggered 31 times or 38.75% of the time.An exit trigger was executed 49 times or 61.25% of the time.An exit trigger was executed 49 times or 61.25% of the time. |
Remember, this system will hold a maximum of 4 diETFs, and will take only 2 new entries per day. Therefore, more trades were generated during the time period tested, but these trades were not taken due to the aforementioned rules. For example, If 4 diETFs are signalled for entry, the system will only take the 2 with the greatest volume.
This method of 2 new per day with 4 max positions is a variable that may need adjustment in the future. More testing needs to be done on this variable.
Spreadsheet and Trade Accounting:
I want to explain this spreadsheet. I’ve set it up to make it easy to figure out position-sizing, so orders can be set in the evening before bed. All I do is enter the close amount and the sheet figures my 4% risk/stop, and size.
- “Close” = the value on the day the signal is generated. Used for purposes of position-sizing.
- “4% Risk” = the dollar amount per share risked with a 4% stop
- “Stop” = stop market price to be entered when entry order is placed
- “Size” = number of shares
- “Entry” = actual entry price
- “RealRisk” = this calculation takes into account any opening gap above the previous close. Since the stop level is derived from the previous close, any opening gap will increase the actual risk.
- “Cost” = cost with $14 in commissions, to equal a round trip.
- “% Return” = the Return on Investment in each trade
- “Run % Ret” = sum of the % Return of all trades
- “Run P/L” = a running total of the profits and lossesd
Once more trades are made, the system will generate more interesting statistics, and an equity curve will be plotted.
Gain of 3.79%, Not Bad for the First Day
No Entry Signals for Tomorrow
