I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

It would seem that measuring losses would be taken care of by measuring gains.  If a negative gain is present, it would indicate a loss.  This is true, but there are other ways of looking at losses that can pertain to a trading system’s performance.  One method might be to measure the drawdown.  A drawdown is measured from the time a retrenchment begins to when a new high is reached.  This method is used because a valley can’t be measured until a new high occurs.  Once the new high is reached, the percentage change from the old high to the smallest trough is recorded.  Trading systems have the tendency to allow more drawdown as the gains become greater.  As the drawdown is minimized, it has a tendency to reduce the gains as well.  This is all fine and well, except the trader never knows where his entry is in the scheme of things.  He does not want to take a 20% loss shortly after entering a position.  If he had already made 90%, then maybe it wouldn’t be viewed as being so bad.

Trading systems can be set to trade the cycles or trade the trends.  Trading the trend usually has a larger amount of drawdown leniency, thus allowing more give back on the market cycles.  Cycle trading can be very efficient, but in many cases a trader could have made more by buying and holding.  The proper way to interpret or use a trading system is to reduce the risk.  You may have made more gains by doing something else, but the trader should reduce the risk to an acceptable level for the desired trading style.  It is always a good thing to manage the losses.  Many people make good gains and end up giving back way too much.  The goal should be to keep most of what you gain.

A good trading system will act in the capacity of minimizing the amount you give back to the market while leaving you good gains on the upside.  Measuring gains and measuring losses have to work in tandem along with other factors to determine a good trading system.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

Measuring gains seems like a very straightforward proposition, and it is.  The real question is, how well, or how much gain should I have achieved.  That question gets a little more complicated.  Gains are reasonably associated with risk.  You hear about the cases where a person makes some extraordinary gain, and he is prancing quite high.  Did he just hit a lucky chance, or did he perform in an extraordinary fashion?  The market indicators usually give indication as how the various securities performed.  Not all stocks follow the market, but most do.  Therefore, measuring gains might be in reference to the market indicators, measuring gains might be in reference to other securities, measuring gains might be in reference to some other trader’s gains, or measuring gains might just be in reference to positive or negative.

All the aforementioned measuring methods hold some merit, but we must strive to find something that yields a reasonable answer.  This section does not deal with loss management or risk, just gain.  There are probably two methods of measurement that gives credence to a trading system’s gain performance:  the percent gain of the system verses the buy and hold percent gain over the same security over the same period of time, and the percent gain of the system on a security verses the buy and hold percent gain of various market indicators.

There are two parts to making a system work well for a trader.  The first is a system that performs well, and the second is applying the system to the proper securities.  This article will be in reference to taking long positions verses short position.  If a system is assessed against enough securities that represent a composition of going up, going sideways, and going down, you can then determine its effectiveness.  Be careful, most systems are situational and only work well in one of the three types of markets.  If a system can give you positive gains, or non-negative gains, and out perform the market indexes, it has established a merit that few can achieve.  There is some unfairness in this overall method, but if this is found, it represents an effective system.  The unfairness lies in the situation where the market is going up and a measured security is going down.  In that case it may be very difficult for a securities system gain to outperform the market.  Some judgment may have to be exercised.

To find the best system, a person would have to perform the above for each system and do a comparison.  What a wonderful journey for those who enjoy that sort of work.  But for those who don’t enjoy the analysis of data at this level, the above method should prove effective in assessing a trading system performance.

I have found this article that I feel is worthy of posting here at Stock Analysis Talk.  It is an article from Caprock Analytics.  They have interesting content on their site, and I advise you to take a look.

 

A trading system is a method in which a number of signals are generated to help the trader make decisions.  Some of the possible signals that could be generated from a trading system are a setup for a buy signal, a buy signal, a hold signal, a setup for a sell, and a sell signal.  If the system also deals with going Short on a position, then the signals would be generated inversely.  More will be talked about going Short in future topics, but the concentration in this article will be going Long in a position to eliminate any confusion.

 

The purpose of any trading system is to make positive gains in monetary worth.  There are many systems in existence that strive to achieve different goals, but all are predicated on making money.  A system can be optimized for maximum gains, optimized for minimum loss (draw-down), optimized for a balance between these two goals, optimized for short term positions, optimized for long term positions, or etc.  The goals of various trading systems can be as far reaching as one’s imagination.

 

There are many books and information available to describe trading systems and how they are tested.  The most common way of testing a system is to analyze its performance over historical data.  This is a good method, but it should be kept in mind to test over various market conditions to understand it effectiveness across the various conditions.  Many systems work well in certain conditions and not in others.  Often one needs to use different systems for the different types of markets that are present.  The problem with this is that it is usually difficult to determine if the market conditions are changing until it has already changed.

 

Many systems generate a variety of metrics to allow the trader to assess the systems effectiveness and the market conditions.  Generating these metrics are as difficult as generating the system itself.  History has shown that many bad systems have been generated over the years, and the good ones are normally only effective for certain market conditions.  Risk is always a concern for the trader.  He wants to minimize his/her risk while capitalizing on opportunities to make positive gains.  A metric to give an assessment of risk is, there again, just as hard to generate as the system itself.

 

The perfect system would be a living algorithm that adapts and accurately predicts the market and the position (stock) movement to maximize gains and minimize risk.  It has been said that you cannot predict the market, and in general that is true if you consider all cases.  The real fact is that you cannot predict a market that has gone out of normal trading conditions.  A market is in normal trading conditions over 95% of the time, and therefore it is to some degree predictable during that time.  Events that cause an anomaly are such as unforeseen changes in the economic situation, world wide or local catastrophes, large companies doing improper things that come to light that have a perceived impact to the market, trading/investor radical change of confidence in the market, and many others.  But after a market adjustment, it goes back to normal trading.  This doesn’t mean it will go back to where it was before the adjustment, it simply means that it goes back to a normal pattern.  This pattern can be, and normally is, different from the pattern that existed before the adjustment.  In terms of normal market changes, they are reasonably predictable or readable.

 

The term “indicator” is used quite often to describe various market conditions.  There are fundamental indicators, economic indicators, and technical indicators.  In all of the market downturns and crashes in the U.S. markets in its history, the indicators have told the story that the market is doing this.  The problem is that most traders/investors ignore the signals and loose a lot of money.  A good trading system is suppose to help you maximize your gains, minimize your loses, and take the emotion out of the decision process.

 

Well, the Market is in shambles, and we investors are in the process of wondering what to do.  That is the question of the day.  If you are still in positions, should you stay or take the losses and get out?  If you are out, is it time to buy?  Stocks are cheap only when they are done going down.  A few months ago, a colleague told me to buy financials because they were at the bottom and a good buy.  I didn’t buy, and he bought a bunch.  Well, needless to say, he bought much trouble.  So, what is the answer?  I don’t have the answer, but the market has busted below the last support level, and there isn’t another one in sight.  The truth of the matter is that the traditional technical analysis does not hold in times like these.  The market will return to normalcy, but when that will happen is not to be answered presently.  There is too much emotion and fear leading the way.

The leaders of the financial institution across the globe have created an event of greed and stupidity that now has to run it course.  The bailouts across the world will surely do something to help the situation, but I will not address that with my opinion in this write-up.  We have greed running rampant in politics, corporations, positions of power, and we, the individual investors.  Maybe it is time to bring things back to a reasonable level of doing what is best for all, not the supreme selfish prevalent attitude.

If you perform your technical analysis with honesty, it will tell you when the market has returned to the sanity level worth trading.  We will not be able to catch the absolute bottom, but we will see after the fact that the bottom has been formed.  Keep in mind that most of the time after a bottom, it will go back down to test that bottom to see if it holds.  The market is definitely below the moving averages.  If you looking for long positions, it might be prudent to see a crossing to the positive side.  If you are reading various oscillators, good luck, I don’t think they will be very useful at this time.  The dive in price has distorted our indicators so badly that market normalcy will have to prevail before we can read the ‘tea leaves’.  I realize I haven’t been much help, but maybe I have helped in the fact that reading the signals are not going to be very clear in the near term.