1) The returns do not take into account commissions and other trading costs. One bank (which owns a broker) gives 30 commission-free trades per month to certain customers under certain conditions. You should take into account your own percentage commission and other trading costs in determining your own returns. This will be different for each person depending upon the size of each trade, and the size of the commission. You would adjust your results accordingly.
2) The returns do not take into account “slippage,” that is, the phenomenon that the system generated stops and entry prices may not be achieved in reality. The experienced stop may be better or worse than the one generated by the system. More often than not, stop execution is worse than the stop that the algorithm generated. On ETF trades, there is a technical issue that we have experienced with regard to stop prices. It is commonly known that when a stop price is triggered, then the stop becomes a market order. However, the triggering mechanism of certain firms has come into question. For some brokers (particulary those associated with major banks), the trigger is the bid price. Overnight, this spread can become wide, and even if the ETF has not traded at the stop, the bid may still trigger it. One day, I woke to find that I was out of a position even though the ETF had never traded at the stop price. The bid price had triggered it. So, if you are going to follow the stops in the BLOG, I have two ways you can go:
a) find a broker wherein the stop is triggered by the market price, and set the stop "good till cancelled," or
b) set each stop daily (day order) after the market opens, when the bid and ask spread is relatively small.
Questions about this can be sent to bassanalytics@live.com
3) On any given day, we do not know how many positions we will have. The number of active positions varies from day to day. For 2010 it has ranged between one and six, inclusive. For purposes of our ETF return calculations, we assumed 5 positions of equal amounts of money. So, for example, if you had $100,000, you would break it into five equal chunks of $20,000. When a signal comes, we assume that only $20,000 is devoted to it, then $20,000 in the next one, etc. This means that the winning and losing trades have a "diluted" effect. Whenever less than 5 positions are generated by the algorithms, there will be un-invested capital.
4) We assumed no compounding of earnings. In other words, if the portfolio rises in value to $120,000 from $100,000, we still devote only $20,000 in five chunks each time a signal is generated. The accumulated gains for the year have not been invested. It is assumed that the amount per investment will be modified at the beginning of the next year.
5) The yield on un-invested assets is zero. What we mean here is the return on assets not currently being utilized by an algorithm. Zero yield is realistic for some money market funds associated with brokerage houses these days. Some brokers may give 1% on these univested funds; some may charge a percentage like .75% just to keep the uninvested money in the account. So, you would adjust your returns accordingly.
6) There are a few signals that exited overnight before the opening of the New York markets the next day. I have excluded those signals from the ETF calculation. However, there were a few that exited during the first day of New York trading, and I included those in the results. My computer systems revise their stops continuously, and so there were a few signals that could not have been followed exactly by the readers of the BLOG. Someday, I may offer the facility to send emails out when the systems generate intra-day signals.
7) The results assume that every signal, up to 5 signals at one time, was followed. You should do your own thinking and decide what risk profile you would like to employ. It is very possible that you might have fundamental issues with some of the signals. You may simply be bullish on stocks. Or you might want to be long gold no matter what. Some may wish to get out of a long position when a sell short signal is generated, but never go short. There are all sorts of possibilities for each person. As I said before, the results are illustrative only. You should determine what assumptions are appropriate for you based upon how you use the data presented in the BLOG. Investors should always discuss any investment with their personal investment counsel.
8) Past performance is not indicative of future results. The algorithms have been back-tested for high win-ratios using historical data. There is no assurance that any future year will be similar.
9) All of the trades presented in the BLOG are available seriatim upon request.
