Averaging down

Somehow, the following review from an RT Hedge Light subscriber should be required reading for all C2 newbies (not the bolded words). It is a poster child for dozens of similar systems we have seen the past year or so:

"a 14% drop in equity in just 1 day for a stock system is too risky for me. Especially if this is caused by just one position (after averaging down into it heavily) in a portfolio of 15 stocks while the broader market is just doing fine. With one bad call the vendor gave away 2 months of profits on a single day. "

There is an amazing number of systems that have looked good on C2, and then imploded when the vendor lost control or could not keep up the mirage. This is why a pretty equity curve often has little value…

The most important thing in subscribing to a system: outperformance, outperformance, outperformance… Otherwise, why subscribe? I am still amazed at some systems like Big Cat, which have an APD of 0.08. Why would anyone think a system that has a max drawdown of $100 for every $8 in profit has value???

that was supposed to read "NOTE the bolded words"

"This is why a pretty equity curve often has little value… "

The APD didn’t see this coming either. It was above 1 before this trade.

I’m a subscriber to this system and I traded it only at a small scale, because essentially I agree if you say that a pretty curve doesn’t say everything.

But I don’t agree with the suggestion that this system has imploded. I will let the defense to the vendor, but I agree with the analysis he gave us in a message to the subscribers. I expect that this trade will eventually turn out well, although the present drawdown is indeed not a pleasant experience.

Note that, because this is a stock system, a drawdown has very different causes and consequences than in futures or forex trading. It is not caused by overleverage and you won’t get a margin call (unless you traded on margin, but that is not advisable here since many positions of the system are non-marginable stocks).

Simple. Big Cat is a scalping machine with 2.089 pts per future contract. Compare this to, for eg., 26.681 pts per future contract for method Z3 (Prudent) Test.

Averaging your losses by itself is not a bad strategy if the averaging is done within a valid setup (framework). Similarly pyramiding your profits by itself is not a bad strategy if the pyramiding is done when there is a retracement, again within a valid setup (framework). The architecture is merely a illusion when the setup (framework) collapses.

The winners and losers are determined only on exits, not entries. Entries control risk, while exits determines winners or losers. At best APD ratio highlights risk taken by the system (badly skewed by a single trade), not the reliability of the system in producing a profit, which is a more important statistic, in my opinion, because it more clearly highlights the nature of the system (scalping or non-scalping).

ps: the same logic applies to RT Hedge LT, which is a scalping machine with 0.13 Average P/L per stock share (inspite of the vendors claim that it is a LongTerm - LT system) compared to for eg., Mosaik (E. Ag…) Hedge at 8.42 Average P/L per stock share.

Thanks Jules. I really wish that autotrader would have waited for the dividend. A 35% projected ROI is to me worth a drawdown to achieve it.

Anyway, if it turns out the stock I invested in admits fraud, I will sell it at a loss. However, if it does not, then I should see a recovery since its at book value and close to cash value.

I did make a mistake by not taking some off the table when that trade went green, but I was looking for it to go up 2 more points. Then the day after its competitor came out with a warning that they made accounting errors so of course my position got hit.

I believe that statistic is also affected by the open trade that caused the drawdown. You always said that drawdowns in open positions are not real (or something like that), so you should apply that here too. I don’t think this is a scalping system. It is a system with a drawdown, and perhaps the drawdown is too big for the taste of some, but it is not a scalping system.

By the way, if you manually trade the system, I am buying the NOVASTAR FINL PFD C in my real money account. For some reason even though that stock trades on the NYSE, I can’t get C2 to issue a buy signal since they say that the symbol does not exist.

It would be a scalping machine when he takes that big loss in this particular trade :slight_smile: It is funny that eventhough you do not agree in principle that open drawdowns are not real (unlike me), you use my position on that to undercut my logic:-) Whatever floats your boat…

ps: Contradictions cannot exist in reality. After all, things are what they are. A is A independent of anyone’s wishes or desires.

Yes, funny, isn’t it? :slight_smile:

Wouldn’t be surprising if APD and other indicators don’t catch something like this. The reviewer called out one major trade that took out 2 months of profit and said there was heavy averaging down involved on that trade. So such indicators might not notice this until a vendor labors to overcome that one really bad drawdown via averaging down.

But what they DO, is punish systems (that try to avoid closing out losing trades or average down to make trades look better) by dramatically lowering their APD or similar stats…

This scenario just resembles some other systems, that have nice equity growth, and then suddenly fall like a bird after it runs into a window… The midMay timeframe did this to a number of popular systems.

To me, what this indicates is a serious defeciency in his setups for stock trades. I believe that fundamentals had a major part in his decision to average down in this particular trade. I always called fundamentals, funny mentals. Charts do not lie, just in case one needs a reminder…

I don’t find the above answer or the following rebuttal as particularly helpful. The original review comment seems “spot on.” Nonsubscribers cannot see what happens, but heavy averaging down to prevent a drawdown from appearing in the results is a standard ploy of vendors. And invoking Warren Buffet seems a reach…

“We are not designed to follow the market, but to find stocks where we believe we can achieve a higher level of return over the long term. Buffet has been able to achieve a 15% annual ROI, but even his stock had a year where it was down 50% but then went on to recover its loss and now is at new highs.”

I am using fundamentals to trade RT Hedge LT. I don’t think they are a bad way to trade as long as you don’t have a CEO commiting fraud. My system will not catch that, but I do diversify in multiple sectors to try to reduce risk.

However, I use only technicals to trade RT FOREX North. I either use stops or hedges to reduce risk.

Either my strategy and edge work or they don’t. If the reward increases, then averaging into the position seems worth the risk to me, and that’s how I trade with real money. I will see over time if the system recovers from the drawdown.

I see, where that fundamentals philosophy is coming from: WB. But, WB has enormous resources to ferret out the truth; for eg., if he is investing in a company building a bridge, he will camp out on that bridge for days and check out its foundation, design etc., before investing in that company and when he is sure that he is right, he goes with everything he has got, i.e., with enormous leverage which would make ordinary mortals faint…in short he waits and goes for home runs exclusively…Very few have those kind of resources or patience at their disposal…

There is a resemblance in the equity curves, but I think the underlying scenario is quite different. The price of this stock is now close to what the firm has in cash per share. I am not an experienced trader, but it seems to me that averaging down with stocks in that situation is quite different from averaging down futures or forex.

I disagree. It is not different. Here’s why: leverage is the life-blood of forex and futures, because forex and futures markets do not move much compared to stocks.

Stocks do not need leverage. They move enormously, sometimes 35 - 50% in a single day. Compare this to forex markets which moves on the average 0.5% and futures markets which moves on the average 1-2% in a single day.

The reason why forex and futures need this leverage is to make it attractive relative to stocks should be readily apparent now. Needless to say that high leverage for stocks (similar to forex or futures) would be calamitous to the portfolio…

The reviewer’s point is, that averaging the position helped implode a great deal of profit in a short period of time.

I think his/her point is independent of whether you have an edge. Your money management reflected an immature handling of the trade. If you can give back that much profit in a short time, there is no reason why it couldn’t do that or even triple that in the same period.

Nonsubscribers cannot yet see the trade in question. But the rebuttal didn’t help the cause. The review seemed proper.

The difference is that futures and forex with few exceptions do not have a relatively hard bottom like the cash value per share, and that you cannot get a margin call for an unmargined long position in stocks.