My trading strategies follow this Naming Convention:

[Direction]_Entry_TestPeriod_[Dataset]_Exit

where:

• Direction is either L for buying long or S for selling short.   Direction is optional and if missing defaults to L.
• Entry indicates the entry strategy used.
• TestPeriod is the abbreviated years of the test data.   The data runs from May to April.  So 0407 means May 1, 2004 to April 30, 2007.
• Dataset indicates the data vendor.   It is optional and defaults to CSI Data if not used.
• Exit indicates the exit strategy used.

If one of the above field’s parameters are varied during the test, the exact settings for the run are shown next to it.   If settings are not given, then the commonly used settings apply.

For example, L_All_9404_CSI_Timed_200day

• Trades Long (enters by buying stock)
• Enter always
• Spans the time period  May 1, 1994 – April 30, 2004
• Runs on CSI Data
• Exits on a specific time setting of 200 days

Another example, MACDH_0407_ATR3

• Trades Long (enters by buying stock)
• Enter when MACDH ticks up, settings 12, 26, 9
• Spans the time period  May 1, 2004 – April 30, 2007
• Runs on CSI Data
• Exits on a trailing ATR stop of 3

Updated 11/12/08.

Tags: ATR, backtesting, data, exit, indicator, long, macdh, stop, strategy, trading

The Percentage Trailing Stop is one way to limit losses and protect profits.  A stop loss order is set a given percentage away from the current price.    As the price moves in the trader’s favor, the stop rachets along with, never giving ground once its protected by the stop.   For example, after buying long, a trader may set a trailing stop 7% below the current price.   As the price moves up, the trader moves up the stop but never moves it down when the price goes down.   Eventually the price does retrace the 7%, the stop is hit, and the trade exits.

Extra Insight:

In backtesting, the same percentage value is applied to all stocks.   This is not ideal because each stock has a different daily price range — some will routinely move 3% in a day while others barely budge.    The percentage trailing stop adapts to the individual stock better than the dollar trailing stop but not as well as the ATR trailing stop.  

As with all trailing stops, the percentage trail never exits at the extreme of a movement.   Hence it always gives back some of the profits.

Click here for BackTesting Reports on Trailing Stops

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

Tags: exit, long, loss, stop, trading, trailing backtesting

Risk management is crucial because all trading strategies lose sometimes.    By limiting risk, a trader has a chance to survive long enough to find a way to thrive.   The topic is way too big for my little glossary but its here because I want to encourage traders to think about risk.

Extra Insight: 
Funny Carrie Underwood parody reminder to manage risk:

Backtesting trading strategies provides insight into the risk of various trading strategies.   Understanding risk is the first step towards managing it.   A complete understanding includes the knowledge that there’s always the risk of something completely unknown and unforeseen happening.

Different people have different risk tolerance and even the same person will view various risk differently.  That means you have to decide for yourself what to risk.

Here are a few “rules of thumb”:

• Don’t risk more than you can afford to lose.
• Limit the risk on each position.  1% of your trading account risked per stock is a middle-of-the-road estimate.  By risked, I mean the amount lost if the stop is hit.  No stop?  Then limit the size of the whole position to a small fraction of your account.
• Limit the total exposure of your account.   What happens if all your stops get hit?   What happens if the market gaps past all your stops.   Make sure you can handle it.
• “Blowing up” means losing 50% of account value.   Don’t let that happen!

Here’s a link to the book advertised in the video: Mastering the Trade (McGraw-Hill Trader’s Edge).

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

Tags: backtesting, long, management, risk, sizing, stop, strategy, trading

Shorting is simply selling a stock you have borrowed but you haven’t yet bought.   The idea is to sell when the price is high and buy later when the price is lower.    Buying the stock then closes the short trade as the stock is paid back to the lender (usually the broker).  

Details on how to sell short are in Sell and Sell Short by Dr. Alexander Elder.

Extra Insight:

Short selling is more difficult to model for backtesting because not everything is reflected in the price.  Extra rules are imposed by the SEC such as no shorting until the price ticks up.  The SEC recently removed this one.    The stock also needs to be available to short — meaning someone has to be willing to lend out the shares. Often shares are not available when the price is in free fall.   As we see in the current crisis, new rules are created on the fly such as the one-month hiatus on shorting bank shares.  To be super-accurate, a model would need to have different shorting rules for different dates– something that is beyond the scope of most backtesting engines.   The upshot is that backtesting doesn’t model short strategies as well as it does long strategies.

Risk management is more important for short selling because a short seller loses money when the stock rises without limit.   In contrast, a buyer of a stock can only lose as much as they paid for it.

A portion of the proceeds of a short sale are available immediately.   Some traders (and mutual fund managers) will use the proceeds to buy shares of a different stock thus making their money go farther.

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

Tags: backtesting, Elder, long, management, risk, selling, short, strategy

A Swing Trader tries to capitalize on short-term price movements.  A swing trader will hold overnight, possibly for several days, which distinquishes swing trading from daytrading.   Of course some exit strategies are open-ended so the trade may last as long as the stock is running.  After backtesting a few we can see the average hold time for the different trading strategies and settings.

Extra Insight:

In my backtesting, the 2day timed exits apply to Swing Trading.   At that point, its clear if the entry strategy has the trade off to a good start.

Swing Trading Books at Amazon

(Backtesting Blog is an Amazon Associate.)

Updated 11/17/08.

Tags: backtesting, day, entry, exit, long, strategy, swing trader, trading

Trader Type is defined by how long a person likes to hold a position.  My categories are:

• Buy ‘n’ Hold = practically forever = no pre-defined exit
• Active Investor = measure in years with pre-defined exit
• Position Trader = measure in weeks
• Swing Trader = short term, measure in days
• Day Trader = don’t hold overnight
• Market Maker = always have an offer to buy and sell outstanding

Extra Insight:

I’m most interested in the swing trade and position trading.   I’d like to hear what readers think is the most interesting area and have set up a Buzz Dash poll.    Please vote for your favorite type:

Many experts say you need to find the style that suits you best and that timeframe is often a matter of temperment.   Maybe, but I do find my temperment changes as I see the various track records from backtesting!

Updated 11/17/08.

Tags: backtesting, day, exit, long, selling, short, timeframe, trader type, trading