Reality Index Example

Below are some real-world results for three C2 systems I am trading in a Scottrade account with 10-15 seconds delay between receiving an ITM signal and getting the trade entered. All trades signaled for each system were attempted with no exceptions over the periods listed.

For Bris I am trading varying quantities, but generally less than suggested. For Extreme-os I am trading exactly one half of the quantity signaled by C2 in every case. For OEX Trading I am (unfortunately as it has turned out so far) trading the full number of contracts suggested and suffered the whopping $24,200 loss on today’s closed trade. I have adjusted my numbers for Bris and Extreme-os upwards to match the numbers if I had traded the same C2 quantities, and I have also not included commissions in my numbers (to make an apples to apples comparison ). So my actual win/loss numbers are a little worse than below because of commissions.

All in all, fairly decent comparisons despite some trade mismatches due to missed limit orders either by me, or by C2. I have lost more, and made less, for each system relative to C2 as a result of the order mismatches, but am not doing all that differently in the big picture. Note that C2 combines same-day trades in the same symbol in their tables so the total number of trades doesn’t match up exactly, but this doesn’t affect net P/L numbers in the comparisons.

Including the big loss by OEX Trading today, and ignoring commissions, my net “C2 experience” so far would have been a loss of $2,547 if I had traded the C2 quantities. C2 shows a net profit of $8580. Hoping for better luck from OEX Trading as I have evidently managed to subscribe just in time for the worst trade the system has seen to date!

System: Bris (started trading on 8/2/05)

My account: 7 closed trades, 5 W and 2 L.

Closed P/L: Profit, $20,956 ( 2 open with $8,000 loss)

C2 account: 7 closed trades, 7 W and 0 L.

Closed P/L: Profit, $28,000 (2 open with $7,500 loss)

System: Extreme-os (started trading on 8/15/05)

My account: 20 closed trades, 10 W and 10 L.

Closed P/L: Loss, ($1,378) (4 open with $1,691 loss)

C2 account: 22 closed trades, 14 W and 7 L, 1 even.

Closed P/L: Profit, $581 (4 open with $1,524 loss)

System: OEX Trading (started trading on 8/22/05)

My account: 8 closed trades, 3 W and 5 L.

Closed P/L: Loss, ($22,125), 0 open trades

C2 account: 4 closed trades, 3 W and 1 L.

Closed P/L: Loss, ($20,001), 0 open trades

In the case of OEX options, even though the option expires on Sep 05, it was closed today, probabably because its value dropped to half its original value. The reason: it is not in harmony with the broad market. Be warned that options traders are notoriously wrong at major market turning points (I predicted a market downturn on 08/16/05). Market Volatility Index (VIX) has accurately signalled major market turns and has perfect negative correlation with the major market. Seems like, Bris is still holding those losing positions and other systems like Extreme-os and CoinCollector which trades @ES are also holding long positions in a bull trap.

If you choose technically solid trading systems and apply them in harmony with the broad market, leverage can help boost profits, otherwise it will hurt.

Indeed the risk involved in options trading require specialized knowledge and expertise.

Trading in these specialty markets requires a vast amount of experience and knowledge in those specific areas.

Call options are generally more risky than the underlying stock on which they are based. See for eg., Cox and Rubinstein (1985) Options Markets (Englewood Cliffs, NJ: Prentice Hall). The stock returns are more predictable, hence there is greater value to be gained from investing in stocks for each level of risk aversion compared to options. Alternatively, the predictability in stock returns make stocks less risky, ceteris paribus, hence even a risk-averse investor will hold a larger fraction of his wealth in stocks in this case. However, unlike the geometric Brownian motion case, the optimal buy-and-hold portfolios do contain short positions in some options (puts), even for lower levels of risk aversion. For higher levels of risk aversion, the situation is reversed: the optimal buy-and-hold portfolios are net negative in options, but they do contain long positions in certain options.

Studies show that over 80% of options expire worthless. Needless to say that the possibility of high returns offered by options is more than balanced by the real risk!

In finance, more than any other discipline, we face the problem of

dependence on a single unwanted observation: a single black swan can bankrupt you, or worse, bring down the entire financial system (LTCM for eg.) In other disciplines, say, zoology, a single black swan will be a mere oddity of small consequence. It will be called an outlier and merit an entry in some book of records –but it will cause no serious financial penalty to the financial research

institute. In finance, more than the sciences, we cannot merely

look at frequencies, we have to consider the outcome, namely, the

loss, which can be very negative…

Unlike gambling, where the outcomes are known and probabilities

constant and equal with a 50/50 win/loss ratio, in trading we have a multitude of random outcomes (UNKNOWN, UPREDICTABLE WITH 100% CERTAINITY) with undetermined (NON-CONSTANT, UNEQUAL) probability of winning. The outcome of a single trade is completely random and independent of the preceding trade. The maximal loss is a nondescreasing step function, with random amplitude leaps occurring at random moments. So, there is no real evidence to suppose that the maximal loss and maximal drawdown achieved will persist in the future which makes it necessary to protect ourselves against those rare events which might bankrupt us (worst case scenario) and so we lookfor an optimal outcome WHICH IS AN OUTCOME WHICH WILL NEVER BANKRUPT US. It is like designing a building to withstand an earthquake or a hurricane or a sunami in which case if it can withstand those rare events, it is an optimal building. In such cases, a Monte-Carlo simulation (MCS) to determine MDD or Maximum Stress and thereby MaxRisk (optimalf%) would be immensely valuable.

A good article on MCS can be found here:

All the best. I never wish luck, because “luck” has nothing to with it. “Thinking” is the only coin noble enough to buy “life”.

The open Bris options expire on 9/16 so there is little time left, but I chose the trading systems based purely on the C2 results and descriptions, and my personal preferences. Two steady-eddy stock systems (Aggressive and Extreme-os), and two riskier option systems. The Bris closed trade record speaks for itself, although there have obviously been intra-trade drawdowns of sizeable magnitude based on the C2 plot. Certainly worth a try IMO to see if he can continue the impressive W/L record.

OEX Trading does show a prior >$20K loss in the record so I knew that might happen again (just didn’t expect it in my first week!). They also clearly describe averaging into trades up to three times and putting stops at a 50% loss point, which is exactly what happened here. So I plan to continue for a while and see what happens. I proved to myself long ago that I am not a good trader, and I believe if following a system it should be followed to the letter without any second guessing. Time will tell if that makes any sense.

Following a system to the letter as far as the signal timing goes does makes sense. However, what is not fine is using the same position size.

Most of the systems do not have good money management. If you follow the same quidelines for money management as suggested by some system vendors, it would bankrupt you someday. This is expecially true with regard to the day-trading systems most of which specialize in one particular market (no diversification) with the result they end up taking extremely large positions.

And if you happen to be trading their signals, and in case of rare events (exchange trading functions suspended due to terrorist attacks, server outages for whatever reason, human or other reasons, etc.,) which happen from time to time, expose your account to wipe-out or even negative equity. The same goes for auto-trading. Missed fills on limit-orders expose the account to the same problem.

It is always better to use money-management which is tailored to your account size. For eg., to maintain the same performance over time you need to adjust your trading size to your account balance. The only way this can be done properly is by receiving signals from a system provider and/or trade yourself. If you start with 100k, but your system providers balance is already at 200k, you then need 1/2 the # of contracts, if that would still be possible, because you cant buy/sell 0.5 contracts.