I've had some fun today with trying out a few new custom indicators from Ehlers.

Now I am at the drawing board trying to turn a custom indicator into a function that can be used as a trigger or filter for entry. I have a good idea conceptually of how to do it. I believe I first need to turn the indicator into a function that can be called upon by my strategy.

I was playing with Ehlers "Truncated Indicators" (TASC 2020-07) recently and was surprised how much the indicators changed, and appeared more responsive when you truncate/remove the very old price memory. I also recently programmed up his system from " Rocket Science for Traders: Digital Signal Processing Applications" and ran it through Multiopt with very disappointing results.

Correct. Write it as a function, then have both the indicator and strategy call the function.

One of the most import concepts in software development is code resuability, thus the purpose and utility of functions.

Speaking of Ehler's, I have a ton of his code if either of you are interested, particularly in functions. Let me know and I can package it up.

I have done a ton of work on his various cycle concepts, but most have ended in dead ends. I have had very little success implementing his ideas into strategies. The best success we have had is with his TrendFlex/Reflex indicator on HO. It was in TASC earlier this year.

I would be interested but please don’t spend a ton of time on it. I guess this code is straight out of Tasc? Various articles? My attention in my trading ideas would be simply to use these as filters for an entry with an edge to possibly filter out losing trades. I can see how this endeavor would seem like trying to find a needle in the hay stack.
I often wonder if these writers are actually using their ideas in their own trading? I will also take a look specifically at the trendflex/reflex indicator you mentioned

To illustrate this let me use a simple example of 4 systems, that each make the same amount of money. In this example Sharpe is just Average/Std Dev,



Now let's combine these 4 systems into 6 different portfolio's that each contain 2 systems each.



Not surprisingly all portfolio's make the same amount of money. The portfolio with the best Sharpe ratio is the portfolio that combines systems 2 and 4 and almost goes straight up. That might seem obvious since the two individual systems with the best Sharpe ratio's were 2 and 4. But the 2nd best portfolio is the combination of 1 and 4, and system 1 has the worst Sharpe ratio. The worse portfolio is 1 and 2, which may surprise people given that 2 has one of the best Sharpe's and is also included in the best portfolio.

So why is this?

Correlation.

Positive correlated systems amplify movements, while negative correlated ones mute them. So as long as systems have positive expectations you want to have uncorrelated systems rather than correlated ones. (Which is why I mentioned the correlations of my 6 systems in one of my first posts!)



As you can see the portfolios with the highest Sharpes were the portfolios that combined uncorrelated systems, while the portfolio's with the worst Sharpes combined correlated systems!

Friday 29th September - Understanding what went wrong this Month ☹

This month has - to be blunt - been almost disastrous. After the nice $4k profit in August I somehow managed to lose about $10k in September, meaning I'm now down about $6k. Given that this portfolio of 8 systems largest drawdown ever, which was also a single month, was approximately $4.7 that's rather eye opening.

Looking at each system individually none of them are performing terrible, but 7 of the 8 eight had really bad months. Profit in terms of standard deviations away from expected were +0.51, -0.84, -0.97, -1.07, -1.2, -1.23, -1.36, -1.71 which isn't pretty. Since in average month we would expect about 5 systems to win, and 3 to lose, the summed up results are magnified and the portfolio performed 2.48 SD's below expectation!

So we had a bad month, and the killer was correlation. I think this chart sums up the problem in September. While the blue/89 months/all data does include a lot of backtest data, for the orange/12 months all 8 systems were live. As might be expected the live data distribution is shifted to the left, but still a result of 1 is a significant outlier.

I should have probably mentioned that for the average system I can be 0.478 SD's below expectation and still be breakeven which probably makes those numbers look slightly less horrific. The portfolio can be 1.14 SD's below expectation and still be breakeven.

Well the month of January officially sucks for my algos. Things were going so well for such a long time. I knew something like this was on the horizon and today I took a beating that has caused me to just pull the plug for a bit to breath. I can't watch as the market keeps ripping away profit like it was smoke in the wind. I have noticed that when things go wrong they tend to go wrong in several different areas making it much harder to bare.

I have decided to take a breather from my algos just for a few days to assess the situation and make some adjustments. The good news is I locked in a healthy profit from my start date and now is the time to make adjustments to my risk profile. I was approaching my max risk drawdown of 25% which was quite brutal. The sad part is that each of my strategies are doing what they are supposed to do and none have reached a max drawdown level. They just all seem to have pulled back at the same time or at least within a few days of each other. I just can't take that kind of beating anymore. I definitely need to focus on correlation now more than ever. I have been putting it off for quite a while. I tend to just wing it a bit as the gambler in me wants to be in a trade at all times.

It is very hard to trade with an undercapitalized account. I figure my minimum account balance should be roughly 100K but I'm a long way off from there.

I remember a number of years ago, I looked at winning days vs losing days. I found during one year, I lost a lot more days than I won. But overall I had a good year, even though it seemed like I was almost always in a drawdown.