Trade System Track Record Information

By Kevin Butler

Dear Friend:

Let me begin by thanking you for your interest in our products and services.  We receive many request for track record information on our trade systems and I'd like to personally address that topic.

Although standard performance data is commonly viewed as a simple method to judge a system's strength, it is actually a much more complicated and, very often, misleading base of information. 

The commonly accepted performance information is based upon a static trading approach.  It does not reflect the approach I and many professional traders use.  And it doesn't reflect the approach I teach.

For some traders, all trade signals are treated equally.  Each signal is treated exactly the same way using the same level of funding.  The same level of capital is placed in each signal and that level is maintained throughout the trade.

Additionally. the trade system rules are the primary guidelines that govern trade entry, management and exit.

In short, the trade system is the complete trade program.

This approach is simple and makes back testing easy.  It is also the basis upon which the commonly accepted performance data is obtained.

~*~*~  But it is NOT the optimal way to trade.  ~*~*~

In the advanced approach that I use and teach, the broad market is the primary factor that governs ALL trade decisions.  The trade system rules are subordinate to the condition of the broad market.

Let me briefly explain how this approach works and why it makes performance data very difficult to obtain.

As I teach, one should only trade in the direction of the broad market trend.  Therefore, one would not usually have both long and short trades in play at the same time.  There are a only a couple of specific exceptions to this principle.

This principle would therefore exclude any trade signals that are not in harmony with the broad market trend.  This eliminates a certain amount of signals generated.

Secondly, the broad market determines the level of exposure or how aggressive one should trade.  This principle is applied in a couple of specific ways.

The expected strength of the market move is one factor that determines how aggressively one should trade.  If the move is expected to be strong, aggressive positions are taken and a high level of capital exposure is made.

But if the expected strength of the market move is weaker, a lower level of capital exposure is made.

Therefore, one market move may justify only 20% capital exposure where another warrants 40% - 60% and strong moves can justify 70% or 85%.

By applying the principle that capital exposure should match the expected strength of the market move, one reduces capital exposure when risk is greater and increases exposure when risk is lower.  The actual principle is stated as follows:

"Capital exposure should be inversely proportional to the level of risk".

While this is a sound and technically solid approach to trading, it makes simple back testing impossible. 

When the risk is greater, when one usually experiences more losses on the signals generated, we actually have far less capital exposed.  So the losses we experience do not have a substantial effect upon our account or overall performance.

Additionally, the strength of the market move can and does change as the move progresses.  Our level of capital exposure increases and decreases as the strength of the move increases and decreases.

For this reason, the level of capital invested in a specific trade may vary while the trade is in play.  It is not uncommon to increase capital in a trade if the broad market move gains momentum.  Conversely, capital exposure in a trade may be reduced if the broad market momentum decreases.

Therefore, a stock that shows a price increase of 10% may not, and often does not, accurately reflect the level of profit earned on that trade.  Since the level of capital is increased and decreased based upon the broad market momentum, our approach allows us to earn an average return higher than the static price increase.

This principle is applied in another way as well.

The broad market, just like individual stocks, moves and progresses in a wave like pattern, a thrust followed by a pullback.

Understanding the normal progression of price, the principle indicates that new positions would only be aggressively taken (with high capital exposure) at the beginning of a thrust move.  As the market move matures, the odds of an impending pullback increase.

Any trade system will continue to generate trade signals throughout the market move.  However, one should be less inclined to take new positions as the move progresses.  You don't want a bunch of new trades right when the market begins to pullback against you.

This trade strategy is another factor that makes simple back testing an inaccurate procedure.

As I previously stated, the trade system rules are subordinate to the condition of the broad market.  The system rules are followed UNLESS the broad market indicates that other action should be taken.

Let me give an example of how this principle is applied and why it makes simple back testing a pointless effort with our professional level approach to trading. 

Suppose you have many long trades in play and the market is making a thrust move up.  Now the market gives a strong indication of a reversal in direction.  Maybe the market is approaching a resistance level.  Or perhaps it is time for a normal pullback to occur.

Whatever the specific reason may be, you have good evidence that the market is about to reverse against you. 

You should now exit your trade positions.

Notice that the system rules did not govern the decision to exit, the broad market did.  Once the market begins moving against you, the trades will suffer.  So when given a clear indication that the market is about to reverse, it is time to exit.

How does one define these principles into a software formula that will run a back test?

I'm going to throw one final principle into the mix.

As you can see, in our professional level trade approach, not all trade signals are treated equally.  Not all signals are traded and we certainly don't fund each trade equally.  And once a trade position has been taken, the level of capital can and does fluctuate during the life of the trade.  The broad market plays a primary role in these decisions.

The way we manage our trades also helps us to achieve optimal performance, well above what a simple back test may indicate.  We don't simply fund a trade and "let it ride".

There are several trade management strategies that can be applied to maximize profits and minimize loss/risk.  For example, one strategy is called "The Position Leverage Strategy".

Using this strategy, funds from poor performing trades are systematically funneled into the better performing trades.  At the beginning of the market move, one may start with many trades in play, securing a reasonable level of diversification at the start of the move.

But as the move progresses, the poor performing trades are dropped off (usually before being stopped out) and a higher level of capital is shifted into the better performing trades.  Within a short period of time, the trader is in a position where the better performing trades are weighted much heavier than weaker performing trades.

This strategy alone helps us to achieve several additional profit percentage points that has a substantial long-term affect on performance.

But again, it is a principle and strategy that can not be reduced to a mathematical formula and back tested.

There is a vast difference in our advanced, dynamic approach to trading over the static approach taken by many average traders. 

The static approach views the trade system as the complete trade program.  Our dynamic approach views trade systems as tools that are used within a total trade program.

And this difference makes all the difference in the world.

If all this seems a bit confusing, I'd like to give a quick example of how we trade a market move.  Hopefully this will make it all more clear.

Day #1:  The market has been making a down move.  Today the action closes near a support level and the odds favor a reversal. 

As a result, we create a trade pool using today's long signals from both our trade systems.  There are a total of 25 long signals. 

Based on the odds of reversal, we decide to enter the play with a total exposure of 25% of our capital.  We'll spread these funds evenly over the 10 top ranking signals, obtaining good diversification at the start of a move.  Although we're trading 10 stocks, we'll track the performance of all 25 stocks in our trade pool.

Day #2:  The market had a short day with little distance, producing a reversal formation right at the support level.  The market analysis indicates the odds of a reversal up are now even stronger than yesterday.

As a result of the market analysis, we decide to increase our capital exposure to match the increased odds favoring the bulls.  We raise our exposure from 25% to 50%.

We want to maintain good diversification since the up move hasn't yet begun.  We're going to keep 10 trades in play, but we're going to adjust our positions and merge the additional capital into our trades.

When compared to all 25 signals we pooled yesterday, some of our trades performing near the top, some in the middle and some near the bottom (in terms of performance).  Let's assume we have 4 trades that are in the top 10 performers and 6 trades are below the top 10.

We're going to adjust our positions to be invested in the top 10 performing signals.  That means we're going to close the 6 poor performing positions.  Of the top 10 performing trades, we're already invested in 4, so we'll open a position in the remaining 6.

This strategy of adjusting positions to be invested in the best performing trades is detailed in our book "The Position Leverage Strategy" (a book you'll get for FREE when you join the Power Program). 

So at the end of day #2 the odds of a reversal up has increased, we have increased our exposure from 25% to 50% and adjusted our positions to be invested in the 10 top performing trades. 

Day #3:  The bulls reverse the action as expected and the market makes a good gain.  The up move is now underway.  The market analysis indicates the move is fairly strong and should continue.

With the move underway we're not going to make any adjustment in our exposure at this time.  We'll maintain our 50% exposure level for the moment.

Comparing the performance of the 25 signals in our trade pool, 3 of our existing positions has fallen out of the top 10, but 4 of our trades are really producing huge profits. 

With 3 days of performance under our belts, we're getting a good idea of which stocks are truly great trades.  We can now begin to consolidate our money into the very top performers. 

Therefore, of the 10 trades we currently have, we're going to close the bottom 5 and put those funds into the remaining 5.  The result is that we still have a 50% exposure, but those funds are now located in the top 5 performing trades.  After 3 days of trade performance, these 5 stocks are best performing signals of all 25 in our trade pool.

Day #4:  The bulls score another victory, but the market analysis reveals the up move is losing steam.  The bulls are still favored to move, but the odds are decreasing and a bear reversal is approaching.

As a result of the market analysis, we're going to decrease our exposure from 50% back down to 25%.  The method of decreasing exposure can vary.  If the top 1 or 2 performing trades is substantially greater than the remaining 3 or 4, I'll tend to take more money out of the weaker trades and leave a lot of money in the really strong trades.  But if the 5 trades are performing relatively equal, I'll take an equal amount out of each trade.

The end result is that enough money is taken out to reduce our total exposure from 50% down to 25% to match the bullish odds.

Our 5 existing trades remain as the top performers, so we're not going to make any position adjustments. 

Day #5:  The bulls score another victory, but the market analysis reveals the bulls have closed right at a resistance level.  The action also produced a reversal signal and the bulls are showing real weakness.  The conclusion is that the bears are now favored to reverse and make a down move.

At this point we close our remaining trades and book profits.  The technical odds have now swung against the bulls and it's time to exit all trades.

Day #6:  The bears reverse the action and the market moves down.  Had we remained in the action we would have suffered a loss of profits. 

We don't provide trade system performance data because in the real world of trading, much of the performance is determined by HOW YOU USE THE SYSTEM... not just the technical strength of the system.

Stock trading on an advanced level isn't as easy as pushing a few buttons or following some multi-colored light scheme.  And that's why most average traders are always seeking the magical trade system that will open the market money vault.

That's also why most average traders are always disappointed with their performance!

Advanced trading is very much like playing good poker.  Your trade system is your hand, the tool you'll use to attack your opponent (the market).

It would be incorrect to say that a specific poker hand should always be played the same way.  That's simply not true in poker (or trading) as it is in a game like blackjack.

There are many factors that determine the best way to play a specific poker hand.  The same applies to professional level stock trading.  In poker, the most important factor is your opponent.  In stock trading, the most important factor is the broad market.

In poker, a hand would be played in different ways, depending upon the type of opponent being played.  And in trading, the way you achieve maximum results depends upon the condition of the broad market and how you manage the trades you enter.

I am uncomfortable in providing system or performance data based upon a static trading approach that I neither use nor teach.  It's an approach that is limited in performance and doesn't reflect the real world market conditions you'll face when you put your money on the table.

As someone who has developed systems and back test formulas for over 15 years, I am able to address this issue with a reasonable degree of authority.

I could impress you by telling you the average profit I earn each year, but then I would be asked to explain every decision that was made on the trades taken.  As you can see, trades are worked from the moment they are entered until the moment they are closed, and it would be far too time consuming to explain the reasoning behind every trade decision.

Our trade systems are technically solid and have a high level of predictive value.  They are superior trade systems in every respect.

But to view and use any system in isolation, separate from the broad market, is a drastic mistake.  And this is why we strongly recommend the Power Program. 

The Power Program provides three daily reports that give step-by-step instructions.  You'll be able to easily apply advanced trade strategies as the action unfolds, because we'll walk you through every market move.

If you really want to achieve optimal performance, please examine the benefits of this unique program... there's nothing like it any where else!

Power Program

Move up to a more advanced level of trading.

Yes, it takes more knowledge (that's why we're here!)...

Yes, it takes more work and effort...

But YES...

You will reap the benefits of consistent, exceptional, long-term performance!

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Good Luck and Good Trading! 
Kevin Butler