Mechanical trading of channelling swing system C. Crucil - Kansas City Research Weekend – June 17, 2016

Background Trading for three years – intraday, swing and long term Trading channeling system for past 1.5 years What I have learned about myself as a trader: My results show no evidence that my intuition/discretion provides an edge so currently choosing to use mechanical rules that I can backtest so that I can isolate source of problems as system, market or self Finding a trading system that fits the individual is imperative - I am currently focusing on swing and long-term systems which suits my strengths (analytical observer) and weaknesses (slow decision maker) I have not achieved consistent success in trading but do have some areas of moderate success – I am choosing to build upon these potential beachheads Although I realize that losses are an inevitable part of trading, I have discovered a low tolerance for drawdown – I am a brickmaker not a homerun hitter

Rolling average nSQN of past 100 CH trades Things working well as a starting point; relatively small drawdowns were alleviated by either different market conditions or improved stock screening. !?!?!?!

Baseline Channelling Backtest Current standard rules: Enter long when Williams %R < 20 (oversold) and close > 200 Day MA (long-term trend); enter on open next day following signal Exit on open next day when Williams %R > 70 Backtest only considers one entry Universe: ETF30, S&P100 and NASDAQ100 (155 total) Test Period: January 1, 2011 – March 31, 2016 Results: # Trades: 6,139 Expectancy: 0.16R Win Rate: 59% nSQN: 1.16 Total Return: 1,104% Max Drawdown: 82%

Considerations for rule adjustment Primary objective is to: reduce max drawdown (82% in baseline) and to reduce portfolio risk on days when high number of signals fire (i.e. fewer high quality entries) Options for rule adjustment: Overbought/oversold indicator choice (i.e. RSI1, NDX or Williams %R) Screen for intermediate price trend rather than just long-term (i.e. 200D MA) Chart pattern more likely for success Methods to reduce open risk with multiple consecutive correlated trades (system generates many signals with over 50% of the stock universe in a single day) Role of short/intermediate market direction (system currently only long in bull market) Role of market volatility

Shorter-Term Trend Considering we are looking for a mover over a 2-10 day period, would it be beneficial to consider a shorter term time frame for the definition of an uptrend? Uptrend criteria options: Close > 200 DayMA (baseline) Close > 100 Day MA Close > 50 DayMA

Short/Intermediate Trend Results # Trades Expectancy nSQN (100) Win Rate Total Return Max Drawdown Baseline (200 Day MA) 6,139 0.16R 1.16 59% 1,014% 82% Baseline + 100 Day MA 4,305 0.17R 1.26 60% 734% 51% Baseline + 50 Day MA 3,160 1.21 61% 491% 56%

Overbought/oversold Indicators Baseline William %r < 20 + close > 200 DayMA Williams %R (10): enter next day at open when %R < 20 and close > 200 Day MA ; exit next day at open when %R > 70 RSI2: enter next day at open when RSI2 < 20 and close > 200 Day MA exit next day at open when RSI2 > 70 NDX: enter next day at open when NDX < 20 and close > 200 Day MA ; exit next day at open when NDX > 70 Plus 100 DayMA Plus 50 DayMA New Baseline William %r < 20 + close > 200 DayMA + 100 DayMA RSI2 NDX

Overbought/oversold indicator results # Trades Expectancy nSQN (100) Win Rate Total Return Max Drawdown Baseline (Williams %rR) 6,139 0.16R 1.16 59% 1,014% 82% New Baseline (Williams %rR) 4,305 0.17R 1.26 60% 734% 51% New Baseline + NDX 2,020 0.18R 1.43 57% 361% 31% New Baseline + RSI2 1,726 0.21R 1.49 364% 24%

Chart Patterns Two chart patterns appear in 20% of all signals: 1) big red bar and 2) gap down Signal after a gap down Signal after big red bar

Chart pattern Results # Trades Expectancy nSQN (100) Win Rate Total Return Max Drawdown New Baseline + Big red candle 318 0.35R 2.42 63% New Baseline + Gap 87 0.05R 0.31

Still too many entry signals most days At 1% position sizing, ~ 60% of portfolio at risk with open positions

Stock Selection Screens New Baseline William %r < 20 + close > 200 DayMA + close > 100 DayMA + RSI2 < 20 Excluding gaps Objective is to generate a maximum of 3 correlated entries per day Stock selection screens: Reward:risk ratio: reward =10 day high; risk = 1 ATR (14) Relative volatility: ATR (14) % relative to SPY Relative strength: 30 day change relative to SPY Type of symbol (i.e.Dow30, Nasdaq, S&P, ETF) Reward: Risk Relative Volatility Relative Strength Type of symbol

Stock Screen Filter results Reward: Risk Relative Volatility Relative Strength Symbol category <2 2-3 >3 <0 0-1 >1 0-5 5-10 >10 Dow30 Nasdaq S&P ETF # Trades 82 808 750 89 984 516 679 607 265 nSQN 1.15 0.95 2.25 1.48 0.86 2.73 1.38 1.70 1.26 2.91 0.66 2.1 2.33 Avg. 0.14R 0.13R 0.32R 0.15R 0.1R 0.46R 0.19R 0.22R 0.20R 0.55R 0.08R 0.35R 0.17R

Market Direction New Baseline William %r < 20 close > 200 DayMA close > 100 DayMA RSI2 < 20 Excluding gaps Max three entries per day based on R:R, RelVol & RelStr Basic rule set uses 200D MA and market classification system enter longs only in bull market Considering we are looking for a mover over a 2-10 day period, would it be beneficial to consider a shorter term time frame for the definition of an uptrend? Market direction screens: Market classification system (bull, bear, sideways) SPY 100 day moving average SPY slope of 30 period linear regression line Market Classification SPY 100 DayMA SPY 200 DayMA SPY slope of 30 regression line

Market Direction Filter results Market Classification SPY 100 D MA SPY Slope30 Bull Bear Sideways Above Below Above 10d Avg Below 10 d avg # Trades 381 45 68 352 141 109 385 nSQN 2.26 3.51 4.72 2.37 3.73 2.58 2.81 Avg. 0.34R 0.70R 0.85R 0.36R 0.69R 0.35R 0.47R

Market Volatility Market volatility screens: Market classification system (quiet, normal, volatile) RiskZ VIX

Market Direction Filter results Market Classification RiskZ Quiet Normal Volatile >0.50 0.50 – (0.50) < (0.50) # Trades 75 281 91 130 179 185 nSQN 3.97 1.97 4.57 2.97 2.11 3.25 Avg. 0.52R 0.31R 0.9R 0.42R 0.34R 0.56R

Revised Ruleset Enter long at next open based on following criteria: close > 100 day MA RSI2 < 5 Williams %rR< 20 Exit next open when Williams %R > 70 Exclude entries after larger gaps Max 5 entries per day (sort by Rel Vol and R:R) No entries when market volatility = normal & RiskZ > (0.05) and < (0.50)

Equity Curve CAGR = 25%

Return/Drawdown 2011 2012 2013 2014 2015 Number of Trades 88 112 67 77 56 Return 50.8% 18.35% 24.25% 20.9% 14.1% Max Drawdown 13.0% 12.6% 2.1% 3.2% 4.8% Expectancy 0.61R 0.28R 0.68R 0.64R 0.74R nSQN 3.84 1.86 6.48 3.29 4.31

Summary System is more sensitive to market volatility than market direction; system performs better at volatility/RiskZ extremes System requires extensive entry screening to reduce portfolio risk Study does not consider exits; 63% of losses are full 1R losses Reducing drawdown comes at the cost of lower return (?)