Week of 2012 MR 16

SPY rose by 2.2% this week, to its highest weekly close since Octo­ber 2007.  My account rose by 0.9%, back to its value from five weeks ago, but my loss floor fell by 2.5% to what might be its lowest value ever.  This is too much risk for the gain obtained; see “MACD-based Swing Trades” below for the new risk-reduction algorithm, which will raise the loss-floor from -6.1% up to -2.7%.

		│	Daily % gain size																	│	Max loss			│	Final Gain
Sym	Buy	│	Fri			Mon			Tue			Wed			Thu			Fri		│	Beg		End	│
TZA	FE29	│	-5.8	21		-5.1	0													│				│	+2.5%
TNA	MR09	│	-1.3	10		-1.9	10		+3.9	21		+1.3	21		+3.0	32		+2.4	32	│	-14.4		-12.0	│
SPY		│	+9.6			+9.6			+11.6			+11.5			+12.1			+11.8		│				│
me		│	-2.1			-2.2			-1.1			-1.7			-1.0			-1.2		│				│
floor		│	-3.6			-3.6			-4.6			-4.5			-6.1			-6.1		│				│

TNA: I have just about ⅓ of my money invested in a 3× leveraged fund, so basically I am “100% long the market”.  This is my highest market exposure in quite some time.  I am eking out a profit, but the max-loss floor is just too damn low!  The new system will raise the loss-floor from -12.0% to -2.2%.

I am pleased with my new concern for risk management.  Over the last year, I have been telling people that I am obviously a newbie trader because all I care about is profit, with no thought to spare for risk.  Perhaps I am moving up to Trader Experience Level 2?

MACD-based swing trades

Ticker Symbol		Buy date			Buy price			Sell date			Sell price			Acct Profit
		Model	Actual		M	A		Model	Actual		M	A		M	A
TNA		MR 09 11:00			$60.06	$60.11		(Not yet)
		MR 13 11:00			$60.24	$60.37
		MR 15 14:00			$62.04

TNA:  So far, so good!  All tranches bought at correct times.  Third tranche bought for exactly-correct price.  Hopefully my trading robot will close this position before the market turns.

New TNA rule: Each day at 10am, find the lowest low and 0.945 times the highest high for IWM over the preceding 22 hours.  Use whichever of these is higher as the new IWM sell-stop price.  If I currently own any TNA shares, take the percentage-change between sell-stop price and current IWM price, multiply by 3, then apply that to the current TNA price to get the new TNA stop price; update the standing “stop” order at Schwab with this new price.

New TZA rule: Each day at 10am, find the highest high and 1.046 times the lowest low for IWM over the preceding 15 hours.  Use whichever of these is lower as the new IWM buy-stop price.  If I currently own any TZA shares, take the percentage-change between buy-stop price and current IWM price, multiply by -3, then apply that to the current TZA price to get the new TZA stop price; update the standing “stop” order at Schwab with this new price.

These new rules replace the old continuous-update trailing stops (TNA: 0.95; TZA: 1.053).  The new system uses hard stops with once-daily updates, which the robot can handle all by itself (trailing stops required manual intervention to get them started).  The number of hours must be one more than a multiple of 7, because Schwab’s pricing data includes only daily highs & lows, not hourly ones.

Year		TNA						TZA
		Old			New			Old			New
		Gain	Risk		Gain	Risk		Gain	Risk		Gain	Risk
2008		7.5%	1.1%		6.7%	1.0%		14.9%	0.7%		14.7%	0.5%
2009		11.0%	1.0%		10.9%	1.1%		3.1%	0.9%		2.0%	1.0%
2010		1.7%	1.3%		1.0%	1.1%		9.2%	0.9%		6.2%	0.8%
2011		8.6%	1.7%		8.1%	0.8%		6.9%	0.9%		14.6%	0.5%

This table compares the old and new systems.  The “Risk” column shows the percentage of my account that is at risk, averaged over all days when some money was at risk.  Over the last four years, the new TNA system would have produced 7.5% less profit while taking 24% less risk (mostly in the last two years when volatility has been lower); the new TZA system would have produced 12% less profit while taking 33% less risk!

Because the new system takes so much less risk, I can justify increasing the tranche size.  If I increase the tranches from 10%-of-account up to 14%, the new system will produce about 26% more profit while taking the same amount of risk as the old system.  I think I’ll increase the tranche size after the current TNA trade is completed.

TRIX-based trend trades

Still not done yet—my day-job had lots of work this week.  I’ll probably use some variation of the same risk-reduction scheme shown above.  Meanwhile, TRIX(176,15) is still rather negative, so I still have lots of time before a “buy” signal might arise.