The performance data in the attached PDF files represents past performance. Past performance is no guarantee of future results, and current performance may be higher or lower than past performance.
In the past, the track record on the website was in its simplest form, showing only the entry price and exit price for the symbols in which the Strategy had taken a position and the results were posted in the month that the positions were closed. This provided a general idea of the strategies out-of-sample or real-time results but didn't provide the complete picture which is generated by applying money-management which is used in conjunction with the Strategy and combined they make up what we call the Complete Solution.
We have been utilizing the Strategy and the Complete Solution since late 2007 and have been sending daily e-mails to clients notifying them of impending Strategy positions, stops for existing positions and the initial risk for new positions, since August of 2009. Therefore it makes it easy to track and verify every position, the initial risk for every position, trailing stops and exits for every position since August of 2009.
Henceforth, we will post the out-of-sample track record for the Strategy/Complete Solution based upon various account sizes, and risk tolerances. In order to properly implement the Complete Solution one must decide on four things. (1) the amount of capital to be utilized, (2) the percent of the capital account to be risked on each position, (3) the maximum number of shares to purchase in any position and (4) is the percentage of the account to be maintained in cash.
As an example, if we start with (1) a $50,000 account, (2) risking 2% per position, (3) the maximum shares per position of 1,000 and (4) the portfolio constraint is 0.90, the math would be as follows. We would risk no more than $1,000 per position ($50,000 * 2%). If the initial risk for the proposed position is estimated to be $2.18 per share, the number of shares to be purchased is 400 ($1,000 / $2.18 = 458.72 rounded down to 400). The Complete Solution rounds down to the nearest 100 shares in order to avoid any odd lot transactions.
Furthermore, if the current price to purchase one share of the proposed position is $22.15, the total cost of this position would be $22.15 * 400 shares or $8,860. Of the $8,860 invested in this position only $872 would be at risk because we would place a sell stop to exit this position at $2.18 below are entry price. If the sell stop was executed, the loss in this proposed position would be $2.18 times 400 shares or $872.
In order to take this proposed position, the cash balance in your account would have to be at least $13,860; which is the cost of acquiring the 400 shares ($8,860) in the proposed position together with the $5,000 (10%) minimum cash balance.
A step-by-step procedure would be to read the e-mail which is sent out the day before the position is to be entered and which includes the initial risk as well as the last closing price for the proposed position. As stated above, the initial risk of $2.18 divided into your maximum risk of $1,000 results in the purchase of 400 shares at a projected cost of $8,860; if your account balance is equal to or exceeds $13,860 you place an order to purchase 400 shares of the stock symbol indicated for the proposed position AT THE MARKET. The order will be filled at the next day’s open. Once you get the hang of it, the entire process will take you less than 10 or 15 min.
Each day we send out an email with the exact stop-loss price for every position that the Strategy/Complete Solution is in. In the foregoing example the stop-loss price is likely to be at or near $19.97. Therefore, if you bought 400 shares of the symbol in the proposed position, you would place an order to sell 400 shares at $19.97 (we know neither the exact entry price nor the exact stop-loss until after the market closes on the day of entry). Placing the stop-loss order takes about 5 to 10 minutes to accomplish and can be done any time before the next day's open.
The attached PDF files show the results of following the Strategy/Complete Solution for the periods shown. The results are shown for various account sizes and various risk parameters. Again the risk parameters, which each investor needs to make his/her own decision are, (1) account size, (2) percent to risk on each position, (3) maximum shares to hold in any one position, (4) the minimum cash balance to be maintained in the account.
The back-testing is completely mechanical in that you either buy the number of shares calculated by the foregoing formula or you don’t buy any. In the foregoing example, let’s say the account balance was such that you didn’t have enough to purchase 400 shares but you could purchase 200 shares, you would still purchase zero shares. As a practical matter, you can do anything you want to but for the purpose of evaluating the Strategy/Complete Solution we need to adhere strictly to the rules.
An important goal of the Complete Solution is capital preservation. You will notice that Real-Time, Out-Of-Sample Results that the maximum drawdowns as a percent of the beginning account balance is relatively low, usually less than 5%. The maximum drawdown is based upon the sum of the end-of-month closed positions profit and losses and is cumulative. So if there were three loosing months in a row, the losses would be added together to calculate the maximum drawdown.
Stop-loss orders are provided for every position entered in order to set the maximum potential loss for each position. The stop-loss calculations are a combination of percent stops, volatility stops and time-in-the-market stops. The importance of capital preservation can be demonstrated by the simple fact that if you experience a 50% loss in capital it takes a 100% gain to get your capital account back to even.
As a general guideline, the percent of account to be risked on any one position, usually falls within a range of 1% to 5%, with the majority between 2% and 4%. An important consideration is your own risk tolerance and comfort level, in conjunction with the amount of money that you have allocated to the endeavor. Keep in mind that if you risk too little you may not make enough money to keep yourself interested; alternatively, if you risk too much and encounter a string of losses you may not be able to maintain the discipline to continue.
The burning question is always; will the years to come bring profitable results? The short answer is that nobody really knows. We are in unprecedented times and that is all the more reason to be utilizing money management, loss control protection and capital preservation techniques (the Complete Solution). Need more information? Contact us at info@frandp.com with your questions.
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