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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Stock Farmer who wrote (54556)	11/2/2003 3:24:56 AM
From: Mathemagician	Read Replies (2) \| Respond to of 54805

I write price-based trading systems for a living. It appears to me that what you are saying is equivalent to saying that it is (nearly) impossible to accurately backtest a discretionary trading system. Here's an experiment that illustrates the difficulty. Make two printouts of your favorite chart and start drawing trendlines on one of them. Draw as many as you like using any method and at any scale. Now, pretend that you bought when downward trendlines were violated and sold when upward trendlines were violated. You will invariably find that you would have made a killing if only you'd traded using trendlines! Now, use a piece of paper to completely cover up the second chart. Start moving the paper slowly to the right. As each new bar appears, draw the trendline using only the information that would have been available to you at that point in time. Buy and sell using the same rules as before until you get to the end of the chart. When you're done, compare the results. Invariably, your results on the second pass will be MUCH worse than your results on the first pass. This is because the first trendlines were drawn with the benefit of hindsight. Many of the trendlines in the second chart had to be redrawn many times as violations of the current line proved to be premature indications of a change in trend, causing whipsaw losses that were not there in the first chart. If this is, indeed, what you are saying then I agree that the Gorilla Game as defined by Geoffrey Moore has not been properly backtested. However, this does not imply that it is a bad strategy. Just that we don't know whether it will produce superior returns or not. Its real-time track record has not been very good, but don't forget that it is a long-only strategy focusing on high-beta stocks and recent market action has been one of the worst bear markets in history. In other words, it was not designed for a bear market and as soon as a bear market became evident, one should have liquidated all gorillas and discontinued the GG until a bull resumed. My personal feeling on the matter is that the jury is still out. When designing a trading system, you don't just look at returns. You also have to look at risk and volatility to make sure that you can weather the inevitable drawdowns both financially and emotionally. After all, it doesn't do you any good to average a 250% annual return if you experience drawdowns greater than 100%, which will take you out of the game. Looking at the GG as a "trading system" I would definitely recommend better stop-loss criteria and a good volatility filter/exit. I might also recommend systematic index put purchases to hedge against a bear market or one-time event. As a side note, many successful trading systems seek to buy pullbacks within a trend. This is analogous to buying gorillas when the price becomes attractive. Lots of stuff here. It's late so maybe I'm just babbling. <font face=wingdings>e</font>