Last week with Tiki torches held high above our heads we blazed a path into the colossal cave of “How QiT works.” I promised to re-light the torch this week and show you examples of trades. However, before we trudge back to the cave I would like to dip our toes into the quagmire we so eloquently avoided last week. The quagmire we called optimization.
Why We Optimize
The market is always changing so the algos need to change along with it. QiT has a few tools in its toolbox to augment this process. Tools like the circuit breaker will move us into cash when the portfolio is zigging and the market is zagging.
But another tool that is more proactive is optimization.
What is Optimization
Each filter that is used to narrow down the stock market into a manageable list has many parameters. For example, a moving average can be daily, hourly, weekly. It can be from 1 to almost infinity.
We need to examine every one of those parameters like Benedict Cumberbatch’s Sherlock would investigate a blood spot at a crime scene. We need to see if the combination of parameters we currently have in our test tube boosts the Compounded Annual Return. Or does it reduce the Max Drawdow?
But just like the rest of us, filters do not live in a vacuum.
Every parameter applied to each filter can – and does – affect all the others. So, it is incumbent upon the developer to test combinations of parameters and examine how one interacts or affects, the other. Or how the combinations move the bottom line. The number of backtests you have to run is astronomical.
When I say I’ve done 1000s of backtests, I’m not using hyperbole.
One of the filters I use is a pullback, which is a limit order a small percentage below today’s close. This is a very sensitive filter and one I modify more often than the others.
I recently changed the Large Cap Retirement pullback from 1.0% to 0.0%. One eagle-eyed member noted this change and directed me a statement on the performance page, “We enter with a limit order a small percentage below today’s close.”
A 0.0% is not a small percentage, it is no percentage. I’m glad Frank caught that and hope others are watching the portfolios as closely as he is..
I’ve updated all the performance pages to accommodate this parameter in the pullback filter.
The Anatomy of a Trade
Now let’s forge our way back into the cavern and return to the promise I made last week and dissect a trade. I made the choice, without anyone giving me permission, to go easy on myself and picked one of the simpler algorithms, the Large Cap Retirement.
The filters applied to the Large Cap Retirement are:
1. New weekly high occurred < 20 days ago
2. Index is $NDX, $SPX or $RUI
3. Two consecutive downward closes
4. Connors RSI (cRSI) < 40
5. Above the 200MA
6. Exit when cRSI > 55
ULTA setup on May 25th for possible entry May 29th.
Here is the trade on the Member’s site.
Here is the why ULTA was posted as a possible trade on May 25th:
1. May 25th was < 20 days from the May 21st new weekly high
2. ULTA is a $NDX constituent
3. May 23rd and 24th were down days
4. cRSI was > 40
5. ULTA was above its 200MA
May 25th was the setup bar
Before the market opens on May 29th we place an order to buy ULTA at $248.54. I can hear the wheels and cogs turning in all your heads, “How did you pick $248.54?” How did the algo settle on that price? The close on the 28th (the Setup Day) was $251.05. The pullback percentage on that day was 1.0% so we place a limit order for the 29th ($251.05 * 99%) = $248.54.
On the 29th, the stock opens at $249.44 but falls to a low of $248.25 and we are filled.
On the same day we were filled, cRSI climbed to > 55, the algos exit parameter. This means the trade entry and exit setup happened the same day. We placed an exit order the next day and depart this position on May 30th at the open, $255.43.
The pullback percentage has been optimized and, as I mentioned earlier, was 1.0% on May 25th but is now 0.0%.
Tip of the Iceberg
This is the basis of the algo but far from what makes a well designed and robust strategy. We now need to apply:
1. Advance Slot Technology
2. Cash Account or Margin (how we reallocate funds)
3. Exit with a limit or market at open (large caps exit with MOO)
4. Rounding small numbers – a bane of all Quant services
5. Tick Size Pilot Program
These filters are changing as the market changes in an attempt to stay keep in sync and are altered behind the scene. I’m sure you don’t want to know each and every detail of what I do daily.
You just want me to “Show you the Money.”
So here is the money!
large Cap Retirement is making new equity highs.
Over the last year, this portfolio fell below its circuit breaker numerous times and you were pulling your hair out because it wasn’t trading. Now you see it was all worth it.
It’s now time to extinguish our Tiki torches and return to daylight. I hope I accomplished my mission of explaining how QiT works.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
“If awesome were inches, we’d be the Effiel Tower.”