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Charts & Analysis

Trading Systems: Getting Beaten Up By Volatility

Man what a wild two days. Up 5% on one and then down 4% the very next day. Volatile times! Yes, yes, I’d predicted a rally on Wednesday and it turned out right but don’t read too much into that, it was pure luck.

Okay, so why are we still so badly mauled? This is a time to be careful and please, respect those stop losses. I’m expecting another bounce soon, we’re back to oversold territory.

Unfortunately this volatility ripped apart our systems. The two intraday systems made money on all the last three days – Tuesday going down 4%, Wednesday up 5% and Thu down 4%. On one system we are up nearly 10% in July (3 trading days) and the other, we’re up 15%. Pretty good.

Our longer term systems got hosed pretty badly (in our view). One system is up only 1.5% in the last three days, and the other is down nearly 9% (which is lousy even if the system isn’t designed to take this kind of volatility). Net of all four systems, we are at +0.33% for the month (each system has a different amount of money on it). With the index falling about 3% in the same time, we have done better, but this is not satisfactory – we should have gotten better results.

(Note: I’m not comparing earlier times. FTR, June has been kind to us: 9.9% returns versus a Nifty drop of -17%, and half of May – our first system went online on May 15 – was at 1.46% versus Nifty drop of -2.81%)

Am I going to reveal what’s in the system? No. We need to run our money on it and this is our sole source of income – there is no way I will jeopardize that right now. And, we will eventually move into a money management role and then OTHER people’s wealth will run on these (or variations of these) – and I don’t want to let that opportunity go either.

But one thing is for sure: This is a SIMPLE system which takes only ONE factor into consideration: Stock Price. We trade only liquid stocks, and the systems look ONLY at price. If anything else is used it is volume (in determining which stock to trade). Sometimes the simpler the system, the better.

I will see if I can post a small graph of our systems (since we had real money behind it) versus the Nifty. I know this is just me showing off, but what the heck, I feel proud of it.

I think this field will soon need smart programmers. If you’re interested in this field and have some ideas, touch base with me (deepakshenoy at gmail). What will be needed is people with a mind to automate, and the ability to code – not the trader who wants to put discretion into every trade. Meaning: if you think you have to be there to know the current news, the data, what people are saying etc. before buying or selling, we aren’t going to gel. Eventually we want to create a hedge fund where all trading is done by computers and only a few people will exist – and make a lot of money.

  • amit says:

    >when you say up 4% etc. do you mean this is net gain, excluding STT etc? or are the other costs anyway negligible?

  • Deepak Shenoy says:

    >amit: net of brokerage, service tax, STT, exchange taxes, stamp duty and reflecting brokerage statements (i.e. this is not just a back test)

  • Anonymous says:

    >This 4% is with what % leverage ie. are you calculating on margin invested(intra day or future)/option premium or in cash stocks.

    We worry about hedge funds leverage.

  • Deepak Shenoy says:

    >anon: Leverage isn’t bad if used appropriately with risk. Two of our systems (the intraday ones) have zero leverage at this point. There’s extremely low risk so we’re keen on exploring some uplevers there.

    The other two are based on F&O and use 3x leverage but the drawdowns are about 8% unlevered (so 24% leveraged) which we’re ok with.

  • Roshan says:

    >Hi Deepak
    I m very exited at the concept of automated traded systems….
    I hope to be one of ur client someday……and retire in goa sumday and leave the task of money making to a computers and a few smart programmers.

    If you a need smart programmers..I think hiring a few IIT/ISI/IISc students as summer/winter interns is a good idea!

  • Kumar says:

    >I am a pure buy & hold type investor, who is wondering whether it is preferable to switch to more trading type. Would appreciate if you could answer these questions:

    1. Who do you use as your broker and are you satisfied with the service?

    2. Who provides you with intraday data?

    3. Assuming that you deal with both stocks & derivatives, do you have any preference of one over the other as far as trading is concerned?


  • Deepak Shenoy says:

    >roshan: I wish too 🙂 First we gotta make sure this stuff really works…over a longer period.

    kumar: we use a number of brokers – RM, Sharekhan etc. Intraday data is available from a number of people who vend it, I won’t reveal who we’re using, but it’s fairly common to get data nowadays. We use strategies across multiple markets and don’t restrict ourselves to instruments at this point – so stocks, futures, options, all work.

  • subhash says:

    Its truth that trading systems getting beaten up by volatility.I m very exited at the concept of automated traded systems….
    I hope to be one of ur client someday……and retire in goa sum day and leave the task of money making to a computers and a few smart programmers.

    subhash pandey