This is why you need a system

  • A genuine crisis will bring about genuine reform
  • This is how I trade with my own money
  • If you talk the talk…
  • Real time trading

Just a quick heads up before I get into today’s Insider.

As you may know, on Tuesday evening we hosted a Quant Trader Live webinar, where Jason McIntosh took readers through the nuts and bolts of the Quant Trader service.

A four part educational video series on the Quant Trader system preceded the webinar. The purpose was to bring everyone up to speed on the night, and allow them to ask informed questions in the one hour Q&A session that followed the webinar.

If you missed out on the opportunity to sign up to video sessions, don’t worry. We’re making the pre-webinar training videos available (completely free of charge). If you’re interested in learning about calculating the best time to buy a stock…and, more importantly, the best time to SELL…you should find these videos extremely beneficial. Parts one and two will hit your inbox tomorrow and on Sunday. So make sure you check them out.

Let’s move on to the topic of the day…or the week actually…

That is, Janet Yellen’s speech at the Jackson Hole central banker symposium tomorrow. It’s all the rage, apparently. Not because it will inherently contain anything useful, or anything that we couldn’t work out for ourselves using other available information. But because everyone thinks that everyone else thinks it will be an important speech.

Epsilon Theory author Ben Hunt calls this ‘common knowledge’. It’s not what everyone actually knows. Rather, it’s what everyone thinks everyone else knows. And everyone thinks that everyone thinks that what Janet Yellen has to say is important and market moving.

Even though it’s not, really.

Got that?

Let’s check out the markets, before moving on to more bureaucratic absurdity.

Markets

Overnight, the Dow Jones Industrial Average closed down 33 points, or 0.18%.

The S&P 500 index lost 3 points, or 0.14%.

In Europe, the Euro Stoxx 50 index lost 21 points, or 0.69%. Meanwhile, the FTSE 100 fell 0.28%, and Germany’s DAX index closed lower by 0.88%.

In Asia, Japan’s Nikkei 225 index is down 141.63 points, or 0.86%, at time of writing. China’s CSI 300 index is up 0.23%.

In Australia, the S&P/ASX 200 index is down 23.5 points, or 0.42%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$46.80 per barrel. Brent crude is trading for US$48.10 per barrel.

Gold is US$1,324.45 (AU$1,734.09) per troy ounce. Silver is US$18.63 (AU$24.40) per troy ounce.

The Aussie dollar is worth 76.40 US cents.

A genuine crisis will bring about genuine reform

Don’t you love the difference in political rhetoric before an election compared to after one?

Treasurer Scott Morrison, desperate to get his budget bills through parliament, is now wielding the ‘recession’ word and worrying about excessive debt. He’s even concerned about China. Before, there was nary a mention of the problems in the Middle Kingdom.

As the Financial Review reports today:

In his speech to a business breakfast in Sydney, Mr Morrison not only warned of recession caused by ongoing complacency towards growing debt and deficit, but he was more frank than usual about the additional challenge to the Australian economy being posed by the slowdown in China.

He singled out China’s own growing debt level, the uncertainty surrounding how it will be met, and its lack of a reform agenda.

“What is the composition of this debt? How is it being managed, what are the assets underpinning it and what is the profitability of the enterprises and the quality of the revenue streams servicing it?” he said.

“The ability to repay loans is deteriorating as profits continue to deteriorate, especially for state-owned enterprises. The level of non-performing loans has increased by 126 per cent since 2013.”

Mr Morrison said “a no reform option will see China’s growth hold up above baseline until the end of the decade, but after that, continue to head south rather than stabilise”.

“Australia would not be isolated from the effects of that outcome either.”

The only time you can be politically honest is at the very start of your term. So enjoy hearing the truth from these guys for the next few months at least. From there the lies and equivocation pick up…for the next two and a half years…

Morrison is right to warn about complacency. But it’s a complacency fostered by him and many preceding governments because it suited their agenda.

The complacency is ingrained. It’s not going away. As I’ve written plenty of times in The Daily Reckoning, we won’t get genuine reform until we get a genuine crisis.

I don’t know when that will be. Central bank currency destruction might continue to levitate asset prices for years to come, all the while undermining the health of the real economy until it just lays down and dies.

In the meantime, as I wrote yesterday, you need a system to deal with this market. You can’t just guess and have an opinion on what you *think* will happen. There’s just too much information to process…too much complexity to deal with.

Chances are you’ll be wrong. Or you might be right, but with your timing out to such an extent you’re as good as wrong anyway.

Quant Trader is one such system, specifically designed for retail traders. In the essay below, the man who built the system, Jason McIntosh, reveals how he trades with his own money. I hope you find it valuable.

Cheers,
Greg

……………………………………………………………………………………………………..

This is How I Trade With My Own Money
By Jason McIntosh, Editor, Quant Trader

Before I start, I want you to read this… 

Have you read Hot Copper’s clients opinions about Algorithmic trading? I could not find one favourable word towards it. They said a few unfavourable words about it. Many of them want ASIC to look into the pricing.

Just last Friday I decided that I join you, now I am confused. Thank you for the info, and all that you care and understand.

Member, Elizabeth

Many people think algorithmic trading is a strategy. This is a mistake. It’s actually a process. It uses a computer to follow a set of rules. You then use the output to place trades.

Algorithmic trading can apply to countless strategies. These range from ultra-short term high frequency systems, to ones that trade off monthly price data. They can be very different.

It’s difficult to give a specific response to Elizabeth’s email. Maybe the problem lies with a particular strategy…or perhaps there’s a dislike of computer generated signals. I simply don’t know.

Everyone is different. It’s OK not to like a certain way of trading. The very reason markets exist is because people have different points of view.

But I can tell you this. Algorithmic trading works for me — I’ve been using it for years.

Algorithmic trading has three big pluses in my view:

  1. Consistency and ease of use;
  2. The ability to cover many more stocks than I could manually, and;
  3. I can test ideas before putting my money on the line.

But not everyone sees it this way. As I said, a market needs different viewpoints.

One of the criticisms I hear involves back-testing. Some people don’t trust the results. And I can understand why — it’s easy to manipulate. I’ve seen some awful examples over the years.

Others dislike the lack of fundamental analysis. They say values should underpin every trade.

Sure, pure algorithmic trading relies on share price history — this is how I trade. But that doesn’t mean you can’t overlay your own financial analysis. Some people do this with great success.   

Another complaint is that algorithmic trading doesn’t work all the time. I agree. I’ve yet to see an approach that does. Every trading method goes through periods that aren’t suitable.

Elizabeth also mentions calls for ASIC to investigate pricing.

I believe she’s referring to potential price manipulation by high frequency trading firms. This can have implications for all traders — algorithmic or not. It’s an issue regulators are grappling with globally.

If you talk the talk…

I said earlier that algorithmic trading works for me.

You’ll probably accept this statement at face value. But some people will be sceptical. They’ll want to know how my own trading stacks up. There’s an expectation that I ‘walk the walk’.  

And do you know what? That’s fair enough. I always want to know the track record of a person giving me advice. I don’t expect you to be any different. 

I’m going to show you some results in a minute. These are for a system I’ve been trading with for the past eight months. This particular strategy has a lot in common with Quant Trader.

First, let me set the scene.

Cast your mind back to the start of October. Doom and gloom was everywhere. The markets were near their lows, and many people were bracing for a crash.  

The title of the Quant Trader report that week was: Forget a crash: 16.3% returns are possible in October. The report’s aim was to put some perspective to all the negativity. Quant Trader subscribers can read it here.

Now, I want to make one thing clear. This isn’t an ‘I told you so’ moment. I don’t do those. I know there’ll be many times when I’m wrong. I’m telling you this to make a point.

You see, four days earlier, I’d pushed the ‘go’ button on a new system. I did exactly what I told you to do on 1 October 2015 — ignore the gloom and follow the signals.

Let me tell you a bit about this system.

You’d find it very similar to Quant Trader. In fact, it’s identical in many respects. I’ve mostly made minor adjustment to suit my own situation.

The slight variations also help me avoid trading at the same time as my subscribers. I don’t want to be competing with you for a stock. In the event of an overlap, I simply trade the next day. You come first! 

The biggest difference is to the exit strategy. I use time exits for unprofitable trades — like we discussed last week. The limit I set is 60 trading days.

The reason for time exits is capital efficiency. Put simply, I want to sell stocks that aren’t performing. This lets me get money into new opportunities faster.

Real time trading

OK, so here’s what I did.

I put $500,000 into a trading account. Then — just as my subscribers do with Quant Trader — I’ve been following the signals and managing my exits.

You may be interested to know how I set my trade size. The system allocates 2.5% of capital to each stock. So, on day one, my trade size was $12,500 (this allows for a portfolio of up to 40 stocks).

The advantage of this method is that it’s dynamic. It allows trade size to grow (or shrink) with my capital. Doing this also ensures my position sizing remains consistent. 

Let me show you how it’s been going…



chart image

Click to enlarge


This chart closely matches the profit/loss of my trading account. It covers the period from 28 September 2015 to 18 August 2016.

My profits over this time are $131,471. That’s a 26.3% return in under 11 months. The All Ordinaries is up 10.2% for the same period.

The $131,471 figure is from my personal accounting software. It includes brokerage and dividends. This is the real thing — these are actual trading profits for open and closed trades.

You can see it’s not all smooth sailing — it never is. I have good months, and bad. That’s the reality of trading. You need patience and discipline to stick it out during the down months.

So what about those time exits?

Well, back-testing suggests a lower win rate and more trades. This is proving to be true in live trading. My win rate for all open and closed trades is currently 47.2%.

Trade volume is also relatively high — there have been 89 entries in total. But I find this easy to manage. It averages out at eight buy orders per month. 

Brokerage isn’t an issue in my situation. It only represents a tiny fraction of the profits.

So that’s a bit of my story for you.

Algorithmic trading makes all this possible. It allows me to identify trades in stock and futures markets I’d otherwise miss — there are just too many possibilities to analyse manually.

I’ll let you judge for yourself. But in my view, there’s no better way to trade. 

Regards,

Jason McIntosh
Editor, Quant Trader

Editor’s Note: Quant Trader sources all images in the article above.