I actually don’t have any problem with the slippage for the above $100K values. I think back to the first few years when I started with P123 and was trading $500 to $2000 /stock using a AvgDailyTot(60) > 20000, I seldom experienced slippage nearly as high as you are using in the 0 to $100K ranges ( although I never traded a stock that had a value less than $10K). I did trade MANY stocks in the $20K to $100K range and only very rarely did I experience slippage as high as 5 to 6% (for a $1 dollar stock). It is because of the success that I had since then that I am able to now trade $20K to $100K/stock.
I would like to develop Ports aimed at the beginner using AvgDailyTot > $20K to $100K to kick start their Portfolios like I did back then with my Ports. The 5% slippage + $8 commission + the 0.01/price, + the avg of hi & low, all add up to way too much penalty for Sims running MicroCaps like I did. The high returns I achieved back then were with Sims that used a buy rule; AvgDailyTot(60) > 20000 & AvgDailyTot(60) < 100000 & Close(0) > 1 & Close(0) < 20. That forced the Sim to select all low priced micro caps. To maximize the gain/stock/day the stocks were held almost always only a few weeks or less achieving gains/stock between only 5 to 10%. The current summation of penalties makes it impossible to create a successful Sim. The capital is 100% lost in the penalties within only a few years.
If a beginner can’t do what I did 8 years ago with the R2G Ports, then they are too conservative. Maybe we need to study the below $100K amounts a little more to develop a simple method for slippage that will work for the beginner.
Thank you. I see that and agree. I am trading 3 portfolios now. I trade one of them at the open (and the others are window trades). Buying at the open seems to make a big difference for this sim and am willing to pay the additional $3 commission. So I agree it can and does make a difference.
I missed that some are apparently recommending that R2G sims be run at the average of the next days high and low. I’m interested in understanding slippage in my sims and don’t mean to get too involved in the R2G discussion.
I was under the assumption that everyone was setting that to 0 and only using the variable slippage. It’s too high at the beginning and irrelevant once the sim gets into the millions. A fixed commission’s effect is also too dependent on the capital amount used
Is it ok to require all R2G to be simulated using variable slippage & 0 commission?
That is exactly my point! The $8 is because that is the commission I pay. No guessing or approximations required. If there is a beginner starting with initial risking of $5000 and buying 5 stocks (as I did) he would need to be able to make a profit early in his trading, or he won’t stick to the web site. At the same time, he won’t have the knowledge to even try to develop his own ranking systems and Sims.
That is why most of the people who first find this site don’t come back after their free month is over. That is one of the best advantages of R2G. A beginner doesn’t need the knowledge. However, if there are no R2G Ports that can give him that large early boost in his portfolio, he will just be drawn to the 100s of other sites that claim huge gains from penny stock and micro caps.
The stocks in the $20,000 to $100,000 average amount traded are where the highest gain/stock/day can be found. The current R2G approach takes Sims that feature those stocks off the table. My desire is to help the beginner with the same approach that I started with and has since allowed me to retire early. I am just disappointed we can’t feature these stocks.
The approach of using $0 fees in R2G Ports enabled the Sim I discussed above to go from losing all capital in the first few years to making a 9.2% annual return with a 55% drawdown. And that is with market timing. So, no, just using 0 commissions won’t work either.
All of that is to say, although these low dollar, micro cap stocks are off the table, that doesn’t keep a beginner from buying into R2G small, mid, and large cap Ports.
I’m coming down to the side that commission should not be included as a mandatory part of the R2G portfolios. That is too difficult to include, too inaccurate and depends so much on the equity traded.
Clearly, some people are trading with fixed commissions, others are trading based on amount per share, others still will pay based on the percentage of trading value. Fixed commissions also tend to be proportionately higher when trading a small amount, and lower when trading a large amount. Trying to capture an “average” of that will invoke endless debate and no real solution. Instead it should be up to individuals to decide if a particular trading strategy makes sense for them given their own financial position and broker fees, and armed with the knowledge of the profit per share.
I would also seriously consider making some strong liquidity limits for these portfolios. I would consider any stock that trades with a daily turnover under $100k effectively un-tradeable. I Also think market capitalization is a more important indicator of liquidity. Even if the turnover is not particularly high, stocks with a larger market capitalization will have a tendency towards greater depth of the order book, and “on demand” liquidity is there when needed.
So I might suggest, as per my own requirements
price > 1 (I know this is already implemented)
universe(nootc)
avgdailyturn(20) > 100,000
mktcap > 50
I consider this an absolute minimum. Perhaps though given how R2G portfolios may be traded by multiple users the requirements should be even more conservative,
avgdailyturn(20) > 500,000
mktcap > 200
I think some of the spectacular returns seen in p123 simulations are completely unachievable when trading for real (personal experience included). I think strict minimum liquidity limits is going to reduce the risk of future disappointed customers.
As for the new R2G portfolios I’d also rather see the minimum trade daily total volume amount to be 500,000 AT LEAST.
Under this amount we are having too many random moves against us and we kid ourselves in the sims. Especially if several traders are indeed trading the same port, this is the minimum imho.
In trading my own ports I have found that anything under 500,000 is in fact practically untradeable.
Wern
Aren’t you reblancing to equal weights using the “Sell All” trick at each rebalance, and generating “buy/Sell differences” ? With those the flat rate will kill you
I don’t see how commissions can be integrated. It will just make developers start with $100,000 or $1 million portfolios to make it negligible. Then we need to make a rule about starting capital size and it goes on an on…
And these costs vary from broker to broker. Using the formula we have, it seems reasonable that it estimates what someone using Foliofn would get (more or less over time).
“Aren’t you reblancing to equal weights using the “Sell All” trick at each rebalance, and generating “buy/Sell differences” ? With those the flat rate will kill you”
Marco,
Yes I have a many Sims and Ports that use the Sell All trick, and 2 Ports that I trade. When designing them I start with 0 fees and 0 slippage, and gradually increase them to study the affects on the performance. But they are also $200K liquidity, and I know how to handle the slippage difference with my real ports. I would never suggest that any Sim that uses the Sell All approach be used in a R2G Port. You really need to thoroughly understand the affects or you will have disastrous performance.
Oliver, & Wern,
OK now, don’t get carried away with how you are trading with larger $/stock. We need to still allow the beginner with only $5000 to trade R2G Ports and still have a chance for the type of gains I achieved the first few years I was using P123 Ports.
I suggest the P123 require that the R2G authors disclose their fees, slippage, and min price and liquidity. P123 can get the fees and slippage from the first page of the Port, but the liquidity and price may be buried in the ranking system, a universe filter, or the buy rules. The lowest price is already displayed in the R2G Ports summery.
Marco,
Sounds good. Since most of the stats are based on the sim, which is traded according to the developer’s discretion (next open, avg of high/low, etc.), then that should be noted somewhere as well (or is it already?).
Denny,
I don’t see how R2G can give beginners an experience similar to yours with a low liquidity strategy. One person making careful entries and exits is quite different from a group of traders placing orders of indeterminate size at indeterminate times. In my trading I have made simplicity a priority, and so I prefer to place trades before the open. If your subscribers all do this they will certainly impact the price, especially since you have no control over their trading size.
You are correct that the subs must have some restraint in trading the low liquidity Ports. The designers should discuss reasonable trading approaches (without giving recommendations). I would only allow a ½ dozen subs to any of these Ports I add to R2G. I feel though, that the members are able to trade them fairly well based on the number of Ports that were copied from my public Ports that show up in the weekly performance email with my name in the title.
These are all $200K or less Ports that I traded at one time. A few of them I modified from copied public Sims. I made them public after I no longer traded them. There has been nothing to keep dozens of members from trading them. I realize that the prices that members are getting on their trades of these Ports may be significantly worse than the slippage and fee built into them. At least with the R2G Ports we are able to use more conservative slippage and limit the number of subs.
Here’s a way to get a grasp of slippage caused by subscribers. I’m throwing this out for discussion. There might well be a reason why it would not work. I’m hoping for a discussion and possible refinements.
Step One - For each R2G Portfolio find out the historic difference of results from the “open” price to the “closing” price on entry and exit days. This could be generated by running each R2G port as a sim: once using open prices and once using closing prices. For example, let’s say R2G prot “XZY” has an average trade gain of 5.0% using open prices and 4.5% using closing prices and the historic difference would be 0.5%.
Then once the R2G port has been live for a “sufficent” amount of time (perhaps 6 months, or perhaps better a certain number of realized trades like 100), compare the live results (average gain per trade using open vs closing prices). For illustrative purposes, if the difference is 1.00%, then one might assume the buy/sell pressure of the subscribers of the sim has created additional “round trip (buy and sell)” slippage of 0.50% (which would be 0.25% slippage in a single direction).
As the live history lengthens, the additional slippage number would become more precise. It would be useful to see multiple “windows” of this subscriber caused slippage of say 6 months a piece. That would allow trends to be spotted (and serve as an indicator for developers to consider not taking more subscribers). These “window” stats would be useful to subscribers (to determine if they want to sign up).
Oh, one wrinkle might be to randomness which might make the 6 month window stats bounce around a bit. So get a handle on possible noise, one could generate 6 month window stats for the back test period. That would let one see the range of “noise”.
I don’t think that your suggestions are workable. First, the only P123 employees that have access to the private Ports, Sims, Ranking systems, and Screens are Marco and Ted, and they don’t have time to run statistics on the Ports. Second, I don’t think that you will be able to talk the Port designers into running the stats you suggest. I wouldn’t since I feel the robustness tests I currently run are sufficient, and I have never bothered to re-run them after 6 months. It is hard enough to get members to run good robustness tests.
I fully understand you wish to have significant out of sample data to mitigate much of the over-optimized risk from the R2G Ports before joining them. I feel that won’t work for a couple of reasons. First, many of the potential excellent micro and small cap Ports with minimal optimization will have the same problem as over-optimized Ports with potential excessive trading volume due to too many subs or subs buying more shares than is reasonable for the recommended stocks. Second, buy the time the Good Ports have 6 months of trading history, the Ports that have a limit on the # of subs will have been fully subscribed and there will be no way to join the Port unless a sub drops off (and you happen to notice it before someone else dose). That leaves Ports with poorer out-of-sample trading history or new Ports with little or no history.
So conservative investors who need good out-of-sample trading statistics to reduce risk prior to subscribing will have very few opportunities. The large cap Ports that don’t have a sub limit (and lower annual gains), or Ports he creates himself.
In order to have an opportunity for higher annual returns investors have to take risks. The unknown risk of a potentially over-optimized Port is just one more risk we have to accept.
I did not know that that only 2 staff could do the tests. But when I think of it, that’s a good for privacy of user’s systems.
My hope would be if Marco created an automated script to run the comparisons tests without anyone seeing the buy/sell rules or ranking factors. That would respect privacy of the “secret sauce”, reduce on-going staff time to a minimum (after the initial work of writing the script), and give designers and developers important feedback.
Fortunately, I don’t have to choose between having no portfolio to use or risk picking a R2G port with great stats which might have been curve fit. I’ve got a couple decent ones of my own. My interest in R2G is to fill a niche need I have for a portfolio with high average trade gains to be a good fit for small tax free accounts that my own higher trading frequency methods can’t handle well.
I see the value of trying to show that a small port can overcome trading costs, but I don’t think that a backtest with fixed commissions does that. The backtest shows a port overcoming such costs 13 years ago and the commission was mostly irrelevant ever since. Taking the example of $5000 split across 5 stocks, an $8 commission is .8% of each trade. P123 does have an option to set a commission as the percent of the total (I assume this is a percent of the total trade). So this could be set to .8% to show that the strategy overcomes commissions throughout the backtest, not just at the beginning. As it is, assuming returns comparable to Denny’s small cap R2G model, a backtest starting at $5K would have a current value of well over $1M, and the $8 fixed commission would now be .003% per trade, rather than .8%. Clearly a strategy trading stocks with a liquidity of under $100K as Denny mentioned would not be able to scale to over $1M as the backtest would, so it would not be possible for the trades for such a strategy to grow so large relative to the commissions as would be seen in a backtest.
In my R2G port I used .5 cents per share because that shows my backtest overcoming realistic trading costs every single week since 1999. I felt that is important to show for a high turnover trading strategy. If I switched the commission to an $8 flat fee it would cut 5.5% off the Trading Costs / Curr Mkt Value for my R2G strategy. That is more than the value in many of the models.
While there may be value in allowing each designer to take their own approach, I think in the end that many users may compare performance without fully understanding such differences underlying the backtests.
How come when I want to make an R2G portfolio I am forced to use variable slippage and when I look at other R2G portfolios I see they have for example 0.15% fixed slippage? Doesn’t seem fair unless changes have not rolled across early-made R2G portfolios yet.
