From our July 2012 Newsletter:
I. Commentary by Marge Sherald, CEO
Here’s a sample of recent business headlines: Housing in Early Stages of Recovery, Commodities Down but Drought to Lead to Higher Food Prices, Stocks Slip Following Weak Retail Sales Data, and Will the Markets Follow the Usual Pattern and Rise in This Presidential Election Year? The headlines are all over the map. Volatility seems to be the name of the game for the remainder of 2012.
So how do you make these markets work for you? One trick I’ve found that improves my charts is to first build either a neural network prediction or a trading strategy, and then add Position Sizing from the Power User versions. Position sizing can make decent results even better. Instead of trading a fixed number of shares or contracts, you start trading more and more as you increase your account size by previous trades. Some of the position sizing methods scale back trade size if you start to lose money. Some methods are more risk adverse than others. There’s a help topic that briefly explains each method, but if you don’t know which method to use, you can let the optimizer pick a method and the amount you want to risk on each trade.
I created a sample chart called “Harmony Gold fixed shares vs position sizing 2.cht” that you can download from www.ward.net in the New and Updated Examples section.
The first Trading Strategy on the chart uses some traditional RSI trading rules for a stock named Harmony Gold, which has been showing some nice regular patterns over the past few years. (With all of the talk about gold possibly losing value, these patterns may not persist but the model held up over the past year out-of-sample. Use the chart for educational purposes, but there is no guarantee the results will continue into the future.) The trading strategy was set up to trade a fixed number of shares, with the number of shares being determined by the optimizer. The system ended up trading 192 shares on each trade, with a Return on Account of 13.1% for the out-of-sample period.
The second Trading Strategy starts with the same rules and then includes several different position sizing methods. After I added the rules, I chose the Modify Trading Strategy Parameters in the Trading Strategy wizard, and then went to the Sizing tab. This time I added Margin & Drawdown Sizing, Fixed Dollar Amount per Unit, and Fixed Dollar Risk and left the final choice up to the optimizer. I also let the optimizer find the parameters for each sizing method. The optimizer chose the Fixed Dollar Risk method. The Return on Account went up to 44.3% for the one year out-of-sample period, a significant increase from the original system return of 13.1%.