Systems: How good is good enough?

[Graysteel]

I have been kicking around the question of how good is good enough when it comes to trading systems. I mean, how much better than the S&P does a system have to be to make it 'worth while'. I have heard a few different ideas, some figure in the difference between short term and long term tax rates, some folks look at it compared to the returns of managed funds. What are your thoughts?

[aiki14]

I have been kicking around the question of how good is good enough when it comes to trading systems. I mean, how much better than the S&P does a system have to be to make it 'worth while'. I have heard a few different ideas, some figure in the difference between short term and long term tax rates, some folks look at it compared to the returns of managed funds. What are your thoughts?

I'd be inclined to keep any system that gives me 10 pts of alpha related to it's benchmark, if I was a believer in systems.

[netwrangler]

I have been kicking around the question of how good is good enough when it comes to trading systems. I mean, how much better than the S&P does a system have to be to make it 'worth while'. I have heard a few different ideas, some figure in the difference between short term and long term tax rates, some folks look at it compared to the returns of managed funds. What are your thoughts?

With my covered call approach, I'm happy if I add a couple of percentage points to the S&P 500 for the year.

Individual trades will bring much higher returns. That said, if an honest accounting of all trades gives me that 2% boost, I'm happy.

Evaluating a system? IMHO Only way to do it is total return over a year or more.

[theticktrader]

Graysteel: are you daytrading, buy and hold, or swing trading?

[Luc1Grunt]

Base capital of $50,000 (2:1 leverage = 100,000 buying power) opened and closed each day. Money market interest is 3.9% APR because no trades are held overnight.

$10,000 to $15,000 per trade, at 8-10 trades a day (margin / not always simultaneous positions / not including averaging in) = $150,000 per day in trades / all positions closed by EOD.

220 trading days per year.

33 million a year in total day trades at 1/2% overall gain = $165,000 yearly income. Better file mark to market and trader status!

165,000 profit from base capital of 50,000 = 330%.

This is a "working" account and not a passive / semi-passive trading approach.

From the income, deduct taxes, living expenses, and INVESTMENTS. Comparatively the same as working a high stress professional job for "the man". And you trade in your underwear, LOL!

It's a model. It is achievable.

OP Quote:

"I mean, how much better than the S&P does a system have to be to make it 'worth while'. I have heard a few different ideas, some figure in the difference between short term and long term tax rates, some folks look at it compared to the returns of managed funds."

I would pose the question....time = money? How much of YOUR time you "invest" in trading should be in proportion to the return? Among other factors of course...but if you daytrade as a business and spend 9-10 hours of your life "working", you should see profits well-above the S&P or you will find you work for peanuts. Better moonlight at Burger King for rent money.

$50,000 a year is the interest on a million dollar base from a common money market account or treasuries (roughly). Totally passive income. No time or effort required (relatively speaking).

That same 5% a year return for working your ass off behind the screen everyday? How about 10%? That amounts to peanuts on a monthly basis. Would you consider this a good wage if you were spending the time working in a "job"?

How about 20% APR (beating the S&P) on a 50k account. = $10,000/year. Great return, but relative to how much time spent from your "life"? If this is from passive acounts-------> fantastic return!

What is the time spent worth?

I pose these for thought, not for argument. Each trader / investor has to answer these questions on their own.

[aiki14]

You almost lost me after the underwear thing Luc, then I realized I had to get dressed. Great post explaining a point, and how you can do this thing with a reasonable amount of capital.
The key in my opinion is discipline, without it you're gambling. I also know Luc is very industrious, a characteristic I also endeavor to achieve. I have never met a successful trader that wasn't both. And my definition of successful is achieving positive outcomes on average over the long term.

Also a point to reinforce is
"From the income, deduct taxes, living expenses, and INVESTMENTS"
Note to readers, this is a professional trader taking money out of his trading account and moving it to his investment account. I have a slightly longer time frame to my trading, which necessitates, again in my opinion, having more at risk to make the "net income" I seek, but I never let my trading accounts represent more than 15% of my portfolio. Trading and investments are different, and the first is a means to the second.

A point on systems, earlier I intimated I am not a true believer in systems, but I'd like to clarify that. I don't believe in these "systems for sale" where they make claims of some proprietary system that will make you money forever. I have great doubts that any working system will find it's way to the "end user" before it becomes obsolete. I do believe in a trading plan, I believe in mine, and I believe one can beat the market adhering to a plan. I think the plan/system must be adaptive, must include fundamental and technical analysis, and money management strategies. I think you want to take the emotion out of your trading while understanding the markets react in emotional ways.

[Graysteel]

theticktrader: I am researching strategies that hold for between 1 day and one month.

I understand that point about performance is somewhat a consideration of effort. A strategy that only returns 0.001% better than the S&P isn't worth investing a lot of time in based on a return per hour standpoint.

However, I was more curious about performance per dollar and or performance of non-correlated strategies. I know folks who find value in strategies that return slightly lower than the S&P (for instance) because they are not correlated with the general market, so they have the value of reducing volatility in the entire portfolio.

I am just curious how folks are looking at things. When I evaluate a securities strategy and find a 1% gain over the S&P, I don't tend to get too excited. I was wondering if I was being overly optimistic in my expectations.

[netwrangler]

I have been kicking around the question of how good is good enough when it comes to trading systems. I mean, how much better than the S&P does a system have to be to make it 'worth while'. I have heard a few different ideas, some figure in the difference between short term and long term tax rates, some folks look at it compared to the returns of managed funds. What are your thoughts?

What if we forum members were actually sitting on a fabulous trading system, and didn't even know it?

On that happy thought, I decided to compare the performance of the stalwarts in the Weekly Stock Challenge to the broader market.
Here are the assumptions:

• Both the WSC index and SPY start the "close" of 1/5/2007 with a normalized value of 100%
• Each week, at the open, you buy equal dollar amounts of SPY and whatever the WSC mix is for the week.
• Each week you sell both positions at the close.
• For both the WSC index and SPY, the percentage gain/(loss) is added to/(subtracted from) the prior week's value.

The results made me think immediately of the Pogo quote. "We have met the enemy, and he is us."



Analysis Notes:

1. The WSC average weekly change is -.48%, with a 3.01% Std Dev. The SPY weekly change averaged -.05% with a 1.96% Std Dev.
2. WSC beat SPY 24 out of 45 weeks.
3. Each index logged a positive weekly change 20 out of 45 weeks.
4. Both indices were positive in the same week only 4 times.
5. The WSC index, as shown above, is a share weighted index. What if it were Cap weighted? Percent gain weighted?
6. Why does SPY show a loss when the 1/8/2007 open was 140.82 and the 11/16/2007 close was 145.79?
7. The weekly change percentages are added or subtracted to the prior week's index value, not multiplied. The assumption is that the same dollar amount is invested at the beginning of each week, as opposed to investing what you had at the end of the prior week.

Data Sources:

The WSC data came from manually copying prior results postings into MS Excel. [So there could be typos.]
The Spy data came from Yahoo Finance Historical Weekly prices for SPY.
Brokerage fees and dividends are ignored.

[primer]

Interesting analysis netwrangler. What did you use to generate that chart?

[netwrangler]

Interesting analysis netwrangler. What did you use to generate that chart?

I generated the chart with Excel 2003.
Yahoo Finance lets you export price histories to .csv files which, of course, are readable by Excel.

Yahoo Finance has Open, High, Low, Close, Volume, and "Adjusted Close". It also gives dividend and split history. I know the "Adjusted Close" adjusts for splits and spin-offs. I'm not sure what else is covered in the "adjustments."
I did some data massaging to get the %change for each week, and to get the averages, Std Dev, and other data. Nothing fancy, just very basic analysis using functions built in to Excel.

A stock's price history is available from Yahoo as a daily, weekly, or monthly series. You can also get just the dividends. I think this is a great resource.