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

2. 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

3. 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.
!?!?!?!

4. 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%

5. 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

6. 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

7. 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 Day MA
4,305
0.17R
1.26
60%
734%
51%
Baseline Day MA
3,160
1.21
61%
491%
56%

8. 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

9. 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%

10. 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

11. 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

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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. 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)

20. Equity Curve
CAGR = 25%

21. Return/Drawdown 2011 2012 2013 2014 2015 Number of Trades 88 112 67 7756
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

22. 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 (?)