It is quite easy to be fooled into using unprofitable trading
ideas.
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Firstly, the ones having working trading ideas are more
likely to be quiet about them than the ones having losing ideas. Why?
Simply because the ones with working ideas will always be afraid that they
will lose money if too many utilizes their ideas, but maybe executes them
better. |
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Secondly, many of the ideas that are published and
have worked did so when they were published, but the advantage they had is
now gone when they are freely available and easily executed. |
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Thirdly, many programs that are of type "develop your
own idea" does for some reason deliver default settings that are far
from optimal. Omega Research, having Supercharts and Tradestation as their
main tools do for example deliver very few "up to date"
indicators/systems/parameters. It is more likely that the developer of a
less known tool will spend time including indicators that return a profit. |
For example a lot of people have learned that buying when MACD
fast average crosses above the slow average is a good buy, but in reality it is
no good
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In fact, back testing on stock market data back to 1989 shows
that if I had used that trading idea on the Swedish stock market, buying every time a stock fulfilled that criteria, and selling every time the MACD
fast average crossed down below its slow average again, I would have lost 1
880 000 SEK. That is a terrible blow. |
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To add to that, in one single stock of those, I would have
made 28 consecutive losses, and have needed 128 000 SEK just to be able to
trade the account to that point of loss |
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Only 31% of my trades would have brought me profit, and on average I would have lost 90 SEK per
trade (this assumes a commission of 125
SEK for every trade, buying for 30.000 SEK every time I trade (this setup
assures commission
is a low part of the cost, and that trades on low priced stocks weigh in
just as high as trades on high priced stocks). |
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Is the above a realistic loss? No, the real loss would be
higher. Commissions would cost more, and the above assumes we always did get
the opening price when we buy and sell. |
Variations on MACD might also be unprofitable
Tradestation, and thus maybe Supercharts, include a system that
buys on MACD, buy instead of exiting on the MACD signal described above exits on
a diminishing change in ADX. Interestingly enough, running the same test on
that system shows that matters in some way got better, but in other ways became
even worse! The maximum loss is lower, the total loss is slightly lower, the
percentage of trades winning is slightly better, but: The average loss per trade
is worse, now losing on average 110 SEK per trade, thus still on average fooling
the trader to play a system that will lose money for him.
Optimizing MACD on a single index or stock might make it look
profitable
When doing optimization, you might optimize an unprofitable
system so that it looks profitable in the test environment you have done the
optimization in. Doing the optimization wrong, you
might be losing more money after optimization than before. For example, this
can be done with MACD on the main index of Sweden, making it look profitable
while it in fact returns an even higher loss than before.
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