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Mark Holstius

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Posts: 744

Joined: 10/11/2012
Location: Sleepy Hollow, IL

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Subject : Follow The Money Modifications
Posted : 7/6/2017 12:26 PM
Post #36779

As I attempted to explain at the Bash and in previous posts, I’m employing a new concept with this portfolio.

Rather than filtering trades, the portfolio dynamically selects symbols and takes numerous small trades in various groups. It’s a model / set of rules / that will dynamically vary the pool of stocks traded by RTM strategies, attempting to select the stocks currently traded by large institutions.

I don’t expect the portfolio to avoid Market Events / Black Swans. Drawdowns that affect the market as a whole will be normal, though hopefully limited. Instead, I want a portfolio that will trade consistently and respond positively after an event.

The recent multiple entry trade in ARNC for a loss in June has proven to be beneficial, as it got me thinking about both my Money Flow parameters and my “base” list of stocks. As a result, I’ve made a few small revisions to my Follow The Money Rev02 portfolio that I hope will be of benefit to us all, and posted it on Elite as “Follow The Money Rev06”.

The basic concepts remain the same;

1) Dynamic Lists select the stocks to trade on a daily basis.

2) Portfolio Wizard selects the 25 Strategies out of a pool of 40 to trade on a weekly basis.

3) Trades are long only in RTMs using high money flow stocks.

4) Trade size is small to achieve diversification / reduction of risk by taking numerous trades.


The modifications concerning Money Flow and foreign stocks aren’t extreme. They seem practical & make sense to me on a “gut level”.

The first small modification is an increase in the minimum Money Flow required from $50M to $60M in order to screen for higher liquidity.

The primary modification attempts to identify stocks experiencing recent changes in Money Flow in order to avoid 2 situations;

1) If there’s a spike in money flow that puts a stock into my $60M target Money Flow range (similar to what happened recently with ARNC), the portfolio will wait a week before trading the stock. Hopefully, that will avoid the attempt by RTMs to “catch the falling knife” when bad news comes out & a stock experiences a high negative Money Flow.

2) If there’s a drop in Money Flow that causes a stock to fall below the $60M target (a decrease in activity prior to earnings, etc.), the portfolio will again wait a week before trading the stock.

The modification to the base list involves removing ~160 International stocks from the list that appear to trade primarily in a foreign market. I kept a few foreign stocks that do a large percentage of their trading in the US markets, so my base list now contains ~4,100 Optionable stocks.

I constructed the following table to illustrate the problem that can occur when trading foreign stocks.



The table has the NYSE in column B starting at midnight (labeled with a blue #1)

There are 12 more large markets in columns across the table with their local time of day in each row corresponding to the NYSE EST time of day in the same row. Each column has the particular market’s trading times highlighted in yellow.

I’ll use London to illustrate a possible problem with foreign stocks (column E: blue #2);

A) OV triggers a trade using the closing price at 4PM EST, which is 10PM in London.

B) OV enters the trade MOO 17 hours and 30 min later at 9:30AM EST the following morning. The corresponding time of entry is 3:30PM in London. In row 51, the table shows that the London Market has already been open for 7 hours and 30 minutes at the time the trade is entered. We’d be entering the trade near the end of the trading day in London - and if that’s the primary market for the symbol, a lot may have happened.

The problem can be even more pronounced in columns I (Dubai) thru O (New Zealand). The decision to take the trade is made when each of those markets has been closed for quite some time, followed by another entire trading day in the foreign market before the MOO entry occurs (when the foreign market is again closed).

To illustrate, suppose a stock trades primarily on the Tokyo exchange (column M). OV could trigger a trade at 4:00PM EST Tuesday afternoon based on the Tokyo close that occurred 15 hours earlier. Tokyo would then have an entire day of trading before OV executes the MOO trade at 9:30AM EST Wednesday (11:30PM Tokyo time - again while that market is closed). The symbol then might not experience a significant # of trades until the Tokyo market opens 9 hours and 30 minutes later (9AM Thursday, Tokyo time).

BTW - There are 5 major markets that observe DST, so I’ve also attached a table with those DST markets highlighted in green with the times adjusted accordingly if you’re interested (see the attached file “02 Foreign Markets vs EDT.png”).

As I said, these aren’t major changes. They’re modifications that I feel are reasonable attempts to improve the model / rules & help it respond dynamically to what I believe may happen in the real world.

I felt the original portfolio (Rev02) was already quite robust and wouldn’t be affected much by the changes. To avoid any unintentional curve fitting, I made the modifications prior to observing the results in OV. After making them, I ran OV to obtain some before & after comparisons…

Alan Faris & I have both been proponents of using CAR / Avg % Invested as a measure of “efficiency”, so I’ll include that statistic in a snag of both Rev02 and the new Rev06 from 1/2007 thru the end of 2015: the “development period” for this portfolio;




As expected, there are fewer trades due to the modifications & the equity is lower for the new Rev06. I’m glad there are no large variations (which would indicate some sort of curve fit to the data), while there are improvements;

HR is higher (76.8% vs 75.4%)
Avg Annual MDD is lower (8.3% vs 8.8%)
The “efficiency” measure is higher (1.65 vs 1.49)


Expanding the comparison to the last 15 years;




Once again, there are fewer trades due to the modifications & the equity is lower for the new Rev06 - but there are incremental improvements;

HR is higher (77.2% vs 75.8%)
Avg Annual MDD is lower (7.5% vs 8.3%)
The “efficiency” measure is higher (1.52 vs 1.42)


This past year;




HR is higher (82.2% vs 76.3%)
Avg Annual MDD is lower (2.0% vs 4.0%)
The “efficiency” measure is higher (1.42 vs 1.07)
The Equity Curve just appears more "stable"



Recent Performance

This is an unexpected pleasant surprise that makes me really, REALLY wish I’d constructed the portfolio this way originally.

When I start both with the date I originally posted Rev02 to Elite (6/15/17), there’s a distinct advantage - and it’s quite apparent that we all would’ve benefited from the modifications.




The efficiency ratio is meaningless over such a short period, but the improved results are obvious.

The modified portfolio has closed 62 trades since 6/15 - ALL of them profitable.

It appears that the modifications have improved the stock selection over time, and quite dramatically recently. I don’t know if it’ll hold for the future (and LD advises that we should avoid trading a new portfolio until it’s in a DD…), but the modifications are simple, logical, and not the result of any curve fitting to the recent data - so I’m hopeful.

For comparison, here are the results since 6/15/17 using an 8% allocation (4% of Margin Equity);




For the record - I’m trading it with the lower allocations in both my IRA and Margin accounts until I have more experience / data, and would recommend that all subscribers do the same. However, you can modify my Account Settings along with your choice for the portfolio Trade Multiplier (trade allocation size) via this portfolio in the Elite tab in OV whether you’re a subscriber or not in order to see various options & confirm the results I’ve posted above. The allocation decision is obviously up to you and your risk tolerance.

I posted the process for observing the portfolio in your own account with no requirement to subscribe in this thread;

https://www.omnitrader.com/currentclients/omnivestforum/thread-view.asp?threadid=7832&posts=14#36778

Another “FWIW”: I ran this with the symbol ARNC in the symbol list and the new modifications did eliminate that trade. I’ve since removed ARNC from the list because of the volatility in the stock as a result of the London fire.

I feel this attempt to develop a model that dynamically identifies symbols being traded by large institutions appears to hold promise. I’m hopeful that we can get even better performance when we’re able to add AI, expectancy, and different trade plans in OV.

When I reflect on it, these new modifications might be a stabilizing factor due to a rise in activity by robo advisors or an increased flow into index funds(?). I honestly don’t know. I’m in the process of comparing the before & after trades to help clarify things.

I’ve posted the portfolio in Elite as “Follow The Money Rev06”.

I’ll be sharing more details in the near future concerning drawdown expectations and the benefits of multiple trades in the same symbol.

As always, good luck in your trading…

Mark


[Edited by Mark Holstius on 7/7/2017 6:40 AM]

Attached file : 01 Foreign Markets vs EST.png (820KB - 1657 downloads)
Attached file : 02 Foreign Markets vs EDT.png (834KB - 266 downloads)
Attached file : 03 Development period.png (235KB - 1619 downloads)
Attached file : 04 15 Years.png (252KB - 1595 downloads)
Attached file : 05 1 Year.png (221KB - 1580 downloads)
Attached file : 06 Since original post.png (122KB - 1599 downloads)
Attached file : 07 8 percent.png (89KB - 1566 downloads)

Deleting message 36779 : Follow The Money Modifications


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