Trade Simulator 2

The next video in our trading simulator series is now up! In this video I share the basic formulas involved in making your own simulator. With this you will be accurately modelling your trading systems like a pro. Once you build a simulator, just enter your system parameters and start testing. If you've never modeled trading before you may be in for a surprise; learn how your system actually does in all market conditions.

How to use the power of compounding to set and achieve your goals

How to use the power of compounding to set and achieve your goals

     Most of us are familiar with the concept of compounding, particularly as it pertains to money and the earning or paying (shudder) of interest. But the benefits of this concept can be applied to a wide variety of situations. Take for example goal setting. We all set goals. Goals help us define what we want and then help us measure our progress towards achieving them. A great deal has been said about two aspects of goal setting. Firstly, we are commonly encouraged to set lofty goals which at the outset seem unrealistic or unachievable but are meant to push us towards an end result vastly greater than where we started and one that is greater than we expected.  Secondly, we are taught to set smart goals; goals that are broken down into their smaller and more easily actionable components, all adding up to the end result. The problem with these two approaches is that we can begin to focus on one end of the spectrum to the detriment of the other. A lofty end goal can induce paralysis or feelings of being overwhelmed by the seemingly impossible or insurmountable task, while the other, that is the focusing on small manageable steps, can lead us into complacency and keep us in our comfort zone rather than pushing the boundaries of what we think is possible. So what does compounding have to do with all of this? How can we use this concept to gain all the advantages of both ends of the spectrum to keep us on track towards them? Imagine this example:

Let’s say you want to set a goal to increase traffic to your website. You decide to measure your progress by counting the total traffic to the site every week. So you check your analytics account and find that last week your site generated 300 visits for the week. Not bad you think but it could definitely be better. So what should the target be? Well 1000 hits would be great, right? Sure it’s more than 3 times what you have now but what’s the point of setting a goal if it’s not going to challenge you to push yourself? So you go with a goal of 1000 and then determine your next actions. What are the small steps you can identify and take now to start you on your way? You decide to do 3 social media posts and 1 blog post, and you estimate that this will drive traffic up by 25 hits. It’s a good start but you’re honest with yourself and you know that it’s a long way from your goal of 1000. Still, you plug away for a few more days or weeks trying the same old approach with similar results until interest in your goal fades and gets replaced by some other ‘urgent’ task. Why? Because it’s difficult to maintain focus and drive without ever seeing the reward of achieving your goal.

Now let’s try this again; this time using the power of compounding. So you want to increase traffic to your website to new and record levels. You check your stats and see that you’re at about 300 hits per week. Now you set a goal of increasing this by 10% this week. No problem, that’s only 30 more than last week. A few social media posts, a blog post, and maybe a few phone calls and you’re there. Now make the goal compounding every week so that next week the goal becomes 363 hits (330+10%). Again, you feel this is no problem. Encouraged by your results last week, you hit the ground running and manage to do 5 social media posts and 2 blog posts and you hit your goal again. Savour the reward. Now every week you approach this task with the energy and creativity to accomplish it supplied by the reward of the previous week’s achievement. Like a carrot on a stick, your goal is always just a little bit ahead of you but you enjoy the chase. Plug the numbers into a compound interest calculator and you see that a goal of a 10% increase on 300 hits compounded every week puts you roughly at 1000 hits/week by week 38 and over 3800 hits in week 52. Total traffic for the year: over 42600!

Not only does this approach surpass the original goal of 1000 hits/week but it gives you a timeline and encouragement along the way; a powerful tool that will have you both thinking big and taking small steps simultaneously and effectively towards an even greater result.

Trade Simulator Video!

Check out the first video in a series about building a trading simulator:

 https://www.youtube.com/watch?v=MpWZfGakFYk

Any trader worth his or her salt should have one of these at their disposal. Trading simulators allow you to test the parameters of your trading system and see what the results would be if you ran thousands of trades. Not only is the process of building your trade simulator an extremely valuable exercise in itself, but after you have used one you will likely find it to be an indispensable tool for building and managing trading systems.

Calculating Projected Annual Return of a Trading System

How to combine expectancy and compounding

Whether using an automated algorithm or a manual trading system, it is imperative that investors have some method of projecting the annual returns of their systems and portfolios. The human mind has a very difficult time grasping the concept of probability, and people often assume correlation or cause and effect where there is none. We search for patterns on a micro level and our brains supply them for us, happily falsifying the data to appease our desire for order and structure. Meanwhile what we really need in order to overcome this is to simply be shown the end results of our system over a long period of time. That way we will be able to see past the ups and downs and concentrate more objectively on macro results. Note; I’m not talking about back testing which traders love to do, rather I’m talking about combining individual results to create a smoothed projection in simple, relatable terms to show us where we are likely to end up after plying a system for a year. Put simply, if we could see ahead and estimate a 5 or 10 percent return, we could objectively determine the quality of the system and not make rash, unqualified adjustments.

So how do we combine all of our trading data into a single number? Basically it goes like this: First we need to know what the expectancy of our system is. What is the average net result of all our trades?

Here is the formula:

 EXPECTANCY = [(average win percentage * average win size)-(average loss percentage * average win size)]

OR

E=([%W*Wsize)-(%L*Lsize)]   Note: percentages are expressed like this: 40% gets entered as 0.40

Now we need to convert expectancy into a percentage. Simply divide expectancy by principle (principle being the starting account or portfolio amount at the beginning of the year):

EXPECTANCY/PRINCIPLE=EXPECTANCY% (again expressed as a decimal- 0.5% is entered as 0.005)

Next we need to calculate iteration; that is, how many times does the system repeat or generate a result in a year? This is pretty straightforward. Whether you’re marking individual trades or entire portfolios, simply divide the length of time the position remains open by the total available time for the period.

Example: if a portfolio gets opened on a Monday and is closed out on Friday, then ITERATION=52 (52 weeks in a year).

Now we need to plug our expectancy and iteration values into the compound interest formula and generate a total amount returned after one year.

Here is the formula:

RETURN AMOUNT= [principle*(1+expectancy%) ^ iteration]- principle

Finally, to arrive at our annual expected rate of return, simply divide RETURN AMOUNT by PRINCIPLE

RETURN AMOUNT/PRINCIPLE=RETURN%  

So there you have it; a clear and understandable value to show you objectively how your system is performing. One thing you will notice is that this approach highlights otherwise imperceptible individual results. A trade, fund, or portfolio with a profit of a quarter percent on its own doesn’t seem like much but compounded many times over will produce a healthy return. After all, the market is about the small, consistent advantage- if only most traders could see it. Hopefully now they will, armed with this tool.  

Improving your home winemaking

Improving your home winemaking

Like every home winemaker in the world, I’m eternally striving to improve the quality of my wines. That’s not to say the quality is low; quite the opposite actually. The quality is such that purchasing commercial wines at $12 to $20 on average seems utterly wasteful given that my wines are more like $2.50 to $3.00 per bottle and are easily comparable in quality; and in at least 50% of cases, even better in my opinion.  It’s not a ridiculous claim either, especially when you consider how far wine kits have come.  Many people don’t realize that the juice in these kits is often pressed from the same grapes as your favorite commercial wine; having been grown in the same vineyards.  I won’t go so far as to name names, but it’s no secret that many of the world’s big wine brands  also fall under the corporate structures  of wine kit manufacturers.  It’s a great way to profit from excess supply from their vineyards.  Add this to the fact that before the ingredients arrive at your local shop they have been scrutinized by professionals to ensure consistent quality.  So with a little experience, the home winemaker can achieve results like never before. 

So where do you go when you feel like you’ve reached a point where you’re consistently putting out top quality and stylistically correct wines? And by that I mean your Cabernet Sauvignon tastes like Cabernet Sauvignon and your Pinot Noir tastes like Pinot Noir and they don’t share an underlying similarity with every other wine you make.

Two places you can and certainly should go if you’re an experienced home winemaker are: 1) adapt fermentation schedules to the variety and style of the wine you’re making; don’t just use a cookie cutter approach the treat all wines the same.  While we’re at it, let’s throw various fermentation temperatures into the mix.  Try fermenting each batch at different temperatures according to style.

2) Switch out your yeast.  Most wine kits come equipped with EC – 1118 yeast as a standard.  It’s hearty and foolproof and will produce consistent results, but used across the board, your wines will all have a similar tone.  For the sake of a 99¢ packet of a different yeast strain, you can really make each batch unique.  Plus you can now use your leftover packets of 1118 to make some nice bread. I’ve done it and it’s delicious.

All of this assumes of course that you’re ready and capable of adapting carefully constructed kits to make them your own.  This is NOT a trivial matter.  These kits have a massive input of knowledge and resources and changing them is a bit like modifying your car; you become the engineer.  The original design and function has now been thrown out the window and you run an extremely likely risk of making it worse, not better.  How do you know if you’re up to it?  Do you have winemaking notes and spreadsheets on every batch going back 10 years?  Do you have a strange propensity to smell everything?  Do others plead with you to share your wines with them, or do you have to place it in their hands?  If you meet these criteria then go for it, one batch at a time, changing one variable at a time.

Cheers

Motion Sensing Scarecrow Review

Our scarecrow experience

This year we finally decided to take the plunge and converted our backyard entirely into a garden; out with the grass entirely, and in with the flowers and vegetables.  A good plan to be sure, but with one major challenge: the local wildlife is equally enamored with the idea.  As we discovered last year with our small plot –it’s extremely difficult to raise vegetables to maturity without the rabbits, squirrels, and groundhogs, etc.  feasting on them before we do.

Now one would think that with the yard completely enclosed by an 8 foot fence, we would have an edge in the defense category, and it does help but the reality is that we would need to extend the fence coverage both underground and over top of the entire yard to ensure 100% protection; a great solution if you don’t consider the cost.  So we needed a different approach.  Enter the modern day version of the scarecrow; scarecrow® by Contech. The idea is simple: an infrared motion sensor attached to a sprinkler head, and powered by a 9V battery.  Every time anything warm blooded (including you) enters the area, a short blast of water from the sprinkler startles the culprit and sends them running;  harmless and effective, and @ $70 cheap coverage for a small yard.  But does it actually work?  We’ve had ours for three months now and on balance I would say yes.  Sure, we’ve had the odd visit from the groundhog next door, and I found it helps keep everyone on their toes if you move the scarecrow to a new location occasionally. So the scarecrow is ultimately part of a solution that I would recommend.

Note: In our case we also had to make a modification to the device setup. After the first few days of use I noticed that the scarecrow seemed to work only intermittently. At first I wasn’t sure if this was normal operation as it does apparently randomize its operation to an extent.  It turns out it wasn’t working properly.  The issue was that the water pressure at our house is too high for the 9V battery to open the water valve unless the battery is at 98% capacity.  The solution: a trip back to Canadian Tire to buy an RV pressure control (fits on your faucet before the garden hose, regulates pressure to 40 PSI, cost $20.00). Problem solved.  Now it works as advertised – expect 5-6 months on a single battery. 

So I’m pleased with this overall, but I’m concerned that if others have this issue, how likely are they to figure out how to fix it?  I think the pressure control should have been included in the scarecrow design, but I understand that on product like this, keeping the price point in the $50 to $75 range is important.  Anyway, that’s my 2¢.  Hopefully if anyone is having the same issue they will come across this post.

How to record changes from a single cell to a table in Excel

I recently needed to find information on how to record the current output from a single cell to a new cell in a table in MS Excel. To clarify: I wanted to record the current value in A1 to a column starting with say C1, then have the value of A1 update (iterative calculation) and drop the value into C2 and so on for as many iterations as I want. There are a few solutions out there but almost all of them require VBA and I wanted a formula solution. After much research I came across this post: http://exceluser.com/excel_help/questions/timetrack.htm. The formula solution here works well so I thought I would share it in the hopes of making it easier to find for anyone else who needs it.

Armed with this formula, I was able to create an equities trading simulator which runs any particular strategy you wish to test, and compiles the results of 1000 trades in order to then calculate the strategy expectancy.