The Hurst Trader

I have written before about the “grand plan” for the screensaver, and I’m pleased to announce that the final manifestation of the screensaver has now arrived.

What does the screensaver do?
Apart from the obvious: the screensaver uses your computer’s processing power when you are not using it, in order to:

• Perform backtests on a data series, according to the trading settings that were active on the chart at the time that you assigned the chart to the screensaver. This is an important point – you can test different trading settings by assigning the same chart to the screensaver several times.
• THT runs TWO backtests for every cycle of the nominal model (from 5 days to 18 years) that it finds in the data. One of the backtests uses the Nominal Model as the basis for the analysis, the other uses the Initial Cyclic Model as the basis for the analyis.

How to use the screensaver
The best way of explaining is by example, and so here is an example of using the screensaver, using the S&P 500. I am going to try to make this as easy to read as possible, so I am going to use many pictures, instead of long dense explanations!

• First of all I downloaded historic data for the S&P 500 from Yahoo Finance (it is reliable data, and free!). Simply click on the “download to spreadsheet” button at the bottom of the page, then change the name of the table.csv file to something more meaningful, such as sp500.csv.
• Then, very importantly I set the analysis start date. I have written about this several times on the Hurst Trader forum, and also spoken about it in several webinars. Basically you should set the start of analysis to just before a trough which you consider to be of some importance. I set the analysis start date to mid-July 2007, because I believe that the trough in mid-August 2007 is a trough of the 54-month cycle.
• There is something else that you should understand about the screensaver and the analysis period (how much data you assign) – it doesn’t start trading from the very beginning of the data, for fairly obvious reasons: it needs some data to perform an analysis in order to make trading decisions. THT will use anything from 80 to 400 bars to perform its initial analysis, before trading. In this example THT will use 400 bars, and so I don’t expect to see any trades before about August 2008:
  

  Note the first 400 bars will NOT be traded

• Then set all your other trading settings. In this example I am using an Expert model because that enables THT to identify longer cycles in the data than it would have otherwise. Using this expert model it will find troughs of cycles up to 54 months, whereas if I hadn’t used the Expert model, it would only have found troughs of cycles up to 20 weeks long. (I am using such a short analysis period so that I could generate this example quickly – normally one would use more data). To understand more about Expert models, take a look at the expert model webinar. The benefit of finding longer cycles is that it improves THT’s underlying trend calculations (see webinar #10)
• Then assign this chart to the screensaver:
  

  Assign to screensaver

  If your screensaver is processing some other data, and you want it to move straight on to this new data, simply click on:

• 

  Reset the screensaver to have it start a new sequence of backtests

  Note that you can assign many charts to the screensaver. It will queue them.

• Then take a break! Let your screensaver run. It will shut down every hour, so as to purge the vast amount of information that it builds up, but will start up again after the standard screensaver delay.
• Next is the fun part – while you’ve been drinking tea, or enjoying your life in other ways, THT has been working hard. On my computer this took 4 hours to complete – obviously with more data you can expect it to take much longer (see why I chose a short analysis period?)

Importing the trade histories
Now the fun begins. THT has been working as your trading research assistant, and has some interesting information about which cycles would have been best to trade over the time period that you specified as the analysis period (less the first 400 bars…)

• Open the trading history list for this data file (you can only do this from within a chart):
  

  Import a trading history

• Note that THT presents a Nominal model and Initial Cyclic model history for each cycle that it found in the data. Choose one that you’d like to look at:
  

  A summary of trading histories

  There are two side-points worth noting here:

• • The Nominal model has performed much better than the Initial Cyclic Model on this data series. This will not always be the case, and is hardly surprising in this example, because the S&P 500 is an index, hence an average, and should be close to the Nominal model.
  • The 5-day cycle is not a reliable cycle to trade! I know many people like to trade short-term, but I have found that the 5-day cycle seldom offers reliable results.
• This particular trading history includes an Open trade at the end of the history – note how THT creates exit orders, and will start monitoring this trade. If you ran the screensaver a while ago then you will probably have to exit this trade manually.
  

  Open trade with exit levels

• But why stop there? One of the questions I often get asked is “what if I were to trade more than one cycle at the same time?” Well, let’s see. I quite like the 40-week Nominal Model results as well:
  

  Summary of 40-week trading cycle

  Note that you can import many trade histories, and THT will handle them all in the same chart, but in order to trade more than one cycle you will have to create a new chart for each cycle.

• Next we will have a look at how we would have fared trading the 40-day and 40-week cycles between about August/September 2008 and November 2009.

The Trading Reports
So how would we have performed, trading the 40-day and 40-week cycles?

First of all, a disclaimer: Please bear in mind that I am presenting hypothetical results here. I am not making any representation that your trading account would have experienced the same profit or loss. Also remember that past performance of a trading method is no guarantee of future performance.

And so, let me rephrase that : Hypothetically, how would THT have performed?

• Open the Trading Report for the chart:
  

  View Trade Reports

  Note the first 400 bars will NOT be traded

• 

  The trading report

  There is a lot of information there, which I will explain in webinars, tutorials, and on this forum in the fullness of time, but for now, a few points of interest:

• • The most important number in the whole report is possibly the first one that I have highlighted – Profit Factor Two. This is the ratio between the average win and the average loss. Note that in fact THT was only right about the trades it made about half the time, but … the average winning trade (when THT was “right”) was more than 3 times as big as the average losing trade (when THT was “wrong”).
  • I have also highlighted the Annualised % return, because that is a figure that means something to me. It is certainly more than I would get by having my money sitting in a bank. Bear in mind that this return is achieved by risking no more that 2% of equity per trade (in theory – gaps and other market events could make that number higher).
  • Finally notice a very important number – the Maximum % drawdown. This is the maximum amount that the account went down (experienced a run of losses) during the period. In this example that amount is 7.77% (on the 2nd of September 2009). This is a useful figure, because you should always assume that from the moment you start trading, you will hit that maximum drawdown period straight away. Most people would recommend that you double that figure, so in this example you should assume that it is quite possible that you will lose about 16% of your equity before you make any money.
• Finally let’s take a look at the Equity graph:
  

  The equity graph

  The blue line is the actual equity for every day. The thin red line is the maximum intraday drawdown, and the thin green line is the maximum intraday gain.

• Note how the maximum % drawdown is visible on the chart. That 8% drop in equity would have required a good mental attitude (trading psychology).

Well that wraps up the use of the screensaver in THT. Two parting comments:

• Opening trading histories generated before September is not likely to work. THT will try to update the file format, but very old history files will be incompatible. In any case the phasing analysis of THT at that time was unreliable, and so the trading history files are meaningless anyway.
• Remember that trading histories built by the screensaver are the result of a purely automated process, and represent a “worst case scenario” because THT takes the most aggressive trading approach of entirely trusting its phasing analysis, and entering trades without any reference to a consideration of the market as a whole, and countless other factors that an experienced analyst and trader would be able to apply. For this reason I am actually against this sort of automated backtesting! But I also recognise that there is a place for it, so long as the results are taken with a “pinch of salt”, an understanding of the limitations of a purely automated process. A better process I believe would be stepping through the data bar-by-bar and applying some of your own experience and knowledge to the situation. (Of course you can do this with THT, but it is more time consuming).

I have realised that many people are reading this “development blog” about The Hurst Trader, instead of connecting to our Hurst Trader Forum, and so I am going to be doing some dual posting between the two, for the benefit of those who don’t go for the whole forum thing!

The Hurst Trader has an extensive “trading module” built into it (see Webinar #10 in which I introduce the way in which THT does its trading).

However I am pleased to announce a brand new feature within THT, which is a “manual trading” capability.

This allows you to:

• Tell THT that you have entered a trade.
  • you can have THT monitor the trade for you, in terms of adjusting stops, setting Take Profit orders, etc.
  • OR you can have THT leave the trade alone, in which case you will need to calculate your own exits.
• Tell THT that you have exited a trade (even though there were no exit orders triggered).
• Generate your own Action Signals (take a look at Webinar #10 if you don’t know what an Action Signal is)
  • The Action Signal can be handled by THT as a regular Action Signal that it has generated, in which case it will generate Trade Orders as necessary when the Action Signal is triggered (or before, depending on the type of Action Signal).
  • Or the Action Signal could simply trigger an alert – a message box that will pop up when the Action Signal is triggered (this might be more appropriately called a “Signal”, but the “Action” involved is triggering an alert, so I won’t get complicated about it!)
• Delete an open trade (useful if THT is monitoring an open trade, but you would rather it was finding new entry opportunities).
• Create your own Trade Orders – instead of telling THT that you have entered or exited a trade, or creating Action Signals that will have THT generate orders, you can create your own entry and exit orders, which THT will monitor in the same way as it monitors the trade orders that it generates itself.
• Add closed (historic) trades yourself, and build a trading history. If you’ve been trading an instrument for a while (before THT was available!), then you can manually enter the trading history of the instrument, and thereby use THT’s Trade Report to tell you how you’re doing (maximum draw-down, annualised % return and other useful statistics that THT calculates), including spending much rewarding feel-good time staring at the equity graph!
• Import a Trading History from a trading history file that has been built by your THT screensaver! I am very excited about this, because I have finally moved the screensaver up to its final manifestation. I will explain this in more detail in a future post.
• Clear the full trading history (so that you can look at trading various cycles, settings and so forth, and then work with a chart that represents a full history of trading in that manner).

This functionality is going to take me a few posts to explain in detail, so watch this space …

Those who are testing the ALPHA version of THT will have the functionality available in version 1.2.0.0 (available 5 December 2009).

Those who are working with the BETA version of THT can expect to have this functionality as soon as the bugs are worked out of the system (probably by about the 16th of December 2009).