Technical analysis, Support resistance breakout with backtest, Achieve 14% return | Renny Tan | Skillshare

Technical analysis, Support resistance breakout with backtest, Achieve 14% return

Renny Tan,

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22 Lessons (2h 32m)
    • 1. 0Preview

    • 2. 0First Things skillshare

    • 3. S01 Introduction 01 Introduction and lesson plan

    • 4. S02 Support and resistance 01 Introduction

    • 5. S02 Support and resistance 02 Drawing the lines

    • 6. S02 Support and resistance 03 Drawing the Resistance

    • 7. S02 Support and resistance 04 Drawing the Support

    • 8. S02 Support and resistance 05 Chart setup

    • 9. S02 Support and resistance 06 Trade setup

    • 10. S03 Test Results 01 Testing Results – Long Trades

    • 11. S03 Test Results 02 Testing Results – Short Trades

    • 12. S04 Summary 01 Summary of results and lessons learnt

    • 13. S09 Backtesting Basics 01 Introduction

    • 14. S09 Backtesting Basics 02 Markets and time period

    • 15. S09 Backtesting Basics 03 Annualized returns

    • 16. S09 Backtesting Basics 04 Win rate

    • 17. S09 Backtesting Basics 05 Consecutive losses

    • 18. S09 Backtesting Basics 06 Equity curve shape

    • 19. S09 Backtesting Basics 07 Maximum drawdown

    • 20. S10 Trading basics 01 Diversification

    • 21. S10 Trading basics 02 Asymmetry of returns

    • 22. S10 Trading basics 03 Risk and reward


About This Class

Achieve 14% return with support resistance strategy. With backtest results included, you'll know the actual performance.

Did you know that the support resistance breakout method can give 14% return per year after accounting for trading commissions? The best part is that you do not need to have any technical analysis skills at all!

Support resistance breakout is one of the most powerful trading system ever invented. The question is, do you know how to use them?

Most courses out there are very good at teaching you the theory, but they fail to prove to you on the methods’ effectiveness. If the methods are not even profitable, why bother learning from them at all? You will be risking your hard earned money on a big unknowns.

This course will be very much different. Yes, as you expect, I am going to teach you how to use the support resistance breakout strategy. But then after that, I will conduct a back test so you  know exactly how well or how badly the moving average method performs.

 This course shall be conducted by an experience instructor with proven track record.

Unlike some other courses out there where you just hear instructors talking endlessly, and you only see boring text in their power point presentation, this course shall include animations, images, charts and diagrams help you understand the various concepts and I guarantee your understanding.

I promise I will not be teaching generic unactionable ideas like you must buy low and sell high. Also, this is also not a motivation class where I preach to you that you must work hard to succeed, or you must have discipline to profit from the market.

In this course, I will teach you exact actionable methods and frame work that you can immediately apply to your investments.


1. 0Preview: Did you know the support resistance? Breakout matter can give 14% return your after accounting for trading commissions. The best part is that you do not need to have any technical and nurses skills at all. Support resistance Breakout is one of the most powerful trading system ever invented. The question is, do you know how to use them? Move causes out. There are very good at teaching you the curie, but they feel to prove the method's effectiveness. If the method steady teach are not even profitable, why bother learning from them at all? You'll be risking your heart on money on big unknowns. This cause will be very much different. Yes, as you respect, I'm gonna teach you how to use the support, resistance, breakout strategy. But and after that, unlike other causes out there, I will conduct a back pass. So you know, as a kid how well or how badly the method performs. With these back test results, you will get a good picture on how the method were performed in the future. Most support resistance strategies can only give 67%. Some even give you losses. The really good support resistance strategies can give a nice 14% return a year without any work on your part. And in this cause, you will learn exactly which tragic and provide those returns. This costs shall be conducted by experienced instructor with proven track record on like God across is out there where you just yet and the sea and you only see barring text in the Power point presentation. This costs shall include animations, images, shots and diagrams toe help. You understand the various concepts and I guarantee your understanding. I promise I will not be teaching generic actionable ideas like you must buy your in so high . Also, this is not the more division cars were pitched to you. You must work hard to succeed or you must have is a pinto profit from the market in this cause, I will teach you exact fashionable methods and framework that you can immediately apply to your investments. So what are you waiting for? It is time to take action. Go head to kick in and row bottle and I'll see you at our calls 2. 0First Things skillshare: before we start off the course that me quickly go through some technical tips, I tend to speak police. Cody, if you think that I'm speaking too fast or I'm speaking to so early, you can always change the speed by cooking on the speed option and selecting a different speed to enjoy the full benefits off. This costs peace. Do not skip any actress. 3. S01 Introduction 01 Introduction and lesson plan: before we begin, we need to go through some disclaimer knowledge. Pursue is not a register or credit that Financial Advisor. All knowledge shed here is purely for education. Proper Sony investments involves risk. Past performance is no guarantee or future performance. Bass Concert Your license Financial advisor before starting on any investments that involves risk Now that we got it after way, let us begin. Hello, Thank you for purchasing this cause. What is this cause about and why this cause support and resistance trading strategy is one off the most powerful technical indicator ever invented support and resistance tragic and give a 14% return per year after accounting for trading commissions. You do not need to have any Tanika and nine assists kills it off. This is because you can autopilot this system as a mechanical trading system. The question is, do you know which support and resistance strategy can provide these kind off 14% return? I'm sure you haven't ended some other trading causes before. Most other courses out there are very good at teaching you the teary. But they feel toe prove the method's effectiveness, if they are methods are not even profitable in the first place. Why border the hunting from them at all? You'll be risking your hard earned money on big unknowns. This costs will be very much different. Yes, As us back, I'm gonna teach you how to use the support and resistance breakout strategy. But then, after that is where I at a lot of very to you, unlike other causes all day, I'm going to conduct a back test So you know exactly how well or how baddie the system may perform. With these specters results, you will get a good picture on how the method may perform into the future. Yeah, me show them to you. Most support and resistance strategies can only give you 6 to 7% return already not too bad . And some of them gives losses to U minus in high percent, minus 13%. Make sure your vote using these at all costs. The really good support resistance strategies can give you a nice 14% return per year without any work on your part. And in this cause, you're gonna exactly which support and resistance strategy can provide these returns to you . I created these costs for students off all level some students may be unfamiliar with back testing and the basics off trading. Therefore, I included back testing, introduction and trading Basic section to help begin in students. If you're unfamiliar with back testing and your new trading piece, jump to those action first. These sections are at the greater part off the trade off the cost under Back Testing Basics and Trading Basics section. If not, if you're ready and experience trader who knows how to decipher back testing results based . Continue with the cost default sequence. If you just want to jump right into using the best method that I've taught, you can just jump to the summary sexual. It's all summarized. A. So what are my credentials? Why am I qualified to teach? Most instructors out there usually just showcased how many students they have thought or how many videos they've created. Okay, the question is, do they walk the talk? How is the investment track record? Like most of the time, you do not see them publishing any off their track record at all. Maybe they have a track record for teaching, and they have many students. Yes, there's one of walk. The question is Adi successful investors himself. Have we achieved a success to investing or trading? Or did a in chief Deane success true teaching? If there are no successful investors himself, you might be running nonsense. Former salesmen for me, I've chief 28% time Wait that returned from my own investments and trading, using the knowledge they're taught in my coughs. I've 11 years off experience in business, investment and trading. And I'm also and be educated along the way. I will share with you my first hand experience beyond what you learn in the textbook. I'm going to condense all my knowledge into my course. So you do not have to figure things out for herself. I meet the expensive mistakes in the past and in my cause openly share review what works and what does not. So, at the end of the day, the most important thing is that you take away actionable knowledge and you have got some fight just like the folks in this picture over here. 4. S02 Support and resistance 01 Introduction: before we go into back testing, let us first try to understand what support and resistance is. That's a If you're hiring manager and you're looking for to hire someone for job, how would you decide how much to pay their present? You are most likely than not. Look at the person's employment history. You like to know how much persons last drawn salary is in his previous job. And with this last drawn salary information, you would use that as a basis to determine how much to pay that person in his new job if you were to choose to hire him. Similarly, when we want to determine the price off a certain as a set we humans tend toe you look at past prices. If, during the past Chapman's the highest price off the stock has Bean, let's say $2.80. Over here, you can see this a zambo and the lowest price off the stock has ever bean is $1.10 20 cents over here, like so we were tend to conclude that prices should never go above $2.80 and should never for B $01.20 and we justify this based on the past price that we observed. So you can see that the $2.80 price x as a resistance price whereby we do not expect prices to go beyond $2.80 and $1.20 x as a support price where we do not expect prices to go below $1.20 sec now what if prices big above the resistance price? What if prices break beyond $2? 80 cents? It goes up to 2 90 then upto $3.50 and then to Ford others. What does this tell you? It tells you that near the strong reason to justify Why the market what prices beyond the resistance price. Otherwise, the wisdom of the crowd would never agree toe paying these high prices right? Maybe the underlying company has a new stream off recurring revenue, and so the stock price should be worth more than it historically. Waas. Similarly, what if prices break below the support price prices breakdown B $01.20 down toe, $1 then to 80 cents and then to 60 cents? What does that tell you it's the same thing. Market is telling you that there's a strong reels of justify why prices should go b b o. To support a price. Maybe the underlying company has just lost a new major customer, and so the stock price should be worth less. Then use historic arrange. Okay, so that has tried to exploit this phenomenon. How can we make money off this this phenomenon over here? First off, we do not care what the reasons are why they broke through the are Historica Resistance price. Or they broke down the blog, our historical always price because chances are by the time the news, the reason why by the time we know the reason why the the price movement occurs, it's a really to it. What we can do here is we want to monitor these historica high prices and low prices. And once the price is a trash hole, we follow the crowd. The moment price breaks above the Historica high price on a resistance price level, we jump in tow by a long wave. The crowd, the moment prices break. Be old a support level. We cell together with the crowd and this shall form the basis off the Brick Scout support and resistance trading strategy. 5. S02 Support and resistance 02 Drawing the lines: The very next step is to establish these support and missus INS prices. How do we do that? Many folks out there off the methods taught in cause. Other causes out there often teach you are subject leave method on how to draw these lines . Often people rely on the naked. I'd identify areas off the part and resistance. For example, here we have four possible support and new easy sense lines for a sex same chart that most most folks would draw if they were to use the our naked eye. So which is a support trying to use? It could be like this over here. Or it could be like this over here could even be these two possibilities. So Oh, no, no. They are not so many ways to draw support behind. So which is the right support lying to use? Ah, there's no right or wrong. They can be right or they can be good. Support lines are they can be 40 support lies. We only know that in hindsight, but the some problems of this hour explain about the problems it on for the resistance lines is also the same story here for possible resistance lying for as exemption again. You also ways toe draw these resistance line and you'll get pretty confused on which is the right resistance trying to use. So they are few problems. If we use us subjective methods first, e trade, different traders will get very different trading results. You may have attended a cause where they teach you. Okay, use my support and resistance like like so this method they go to a certain a visual method that he thought and show that they made money. Okay, But when you try to use, try to emulate the same method. You don't make money, so it's quite subjective. You you'll get different trading results and you can really pinpoint why this happens to you. And the second thing is that the method is highly subjective. It is very difficult for US protests. It's very difficult for us to quantify the effectiveness off the method. If you use a matter for the past 10 years doesn't make money, it's hard for us to pinpoint because all this is such subjective. So in this cause, I'm gonna teach you 100% objective method with this method, were able to program the trading matter into an algorithm and conduct back tests with a practice. We can quantify how well or how bad the this method performs. All right. So, as I mentioned earlier on you get the highest or lowest historical price back in time To do this, we need to first define how far back in time do we look back? Um, is it 10 days? Oh, we go back in time, 20 days. All we go back in time of 50 days or even we can you Can you back in time, the 100 days, uh, or even upto 300 days way nieces on perimeter that we need to first define. The further you go back, the more very these support and resistance prices are, get me discussed on the details in the following matches. 6. S02 Support and resistance 03 Drawing the Resistance: First we start off with learning how to draw the resistance line. You recall that the resistance price is formed by the highest price in the past. The highest historical price Getting the highest price in the past is easy. Now the question is, how far back in time do we look back? So we first need to define this number. How many number of days back in time do we look back? So that's, uh let's Goto next, Right, Let's assume we have a chart like this. So that's assume we look back in time for five days. This means we count back five days to see what is the highest prices in the past five days . Then that highest price shall be our resistance price for today. Of course, we don't count today we start counting from this day over here. This this would be today. So we minus one and start counting from here. Why? To tree? Well, five. All right, so among the these five days, where is the highest price? We see that among these five days that we've counted this price over here is the highest price. It happens to be the high off the 5th 5th day, the most back in time number, the fifth day. And so this price shall form the resistance. For the past five days. You may be thinking, Oh, no, I have the council much. Don't worry. Our going toe that later. For now, I like you to learn. How do you actually, man unique out and we'll do that Were small numbers only. Now, if we change from five days to 10 days with MP can 10 days back in time like so. So remember we don't care about this number Over here. This is the state. Me? No. 123456789 10. All right, so we come back 10 days in time and we observe where is the highest point? And so this is the highest point. Happens to be on the seven day the high price of 70. It's no longer 5 50 anymore. So this is the highest price off the 10 day you're quaking time, so this price shall form the resistance price for the past 10 days. If we change that to 30 days, you look something like this. If you notice the more number of days that we go back, the more like the were encounter higher prices and the more that they were going to get higher resistance price do visually represent this resistance. Align. We put a horse on the line on this, so if we see prices moving along this line, it means that resistance has been broken and prices are. You have need to move higher as we go forward in time. This the i Rico creates itself always taking the highest price off the most recent 30 days , or how many or how many days that we define. And it this cuts the data beyond that. So there we have it. This is how we bought our house under resistant lying. But I want to show you some ism both. Let's have a look. So here's another example off how the different resistance behind. So, York, this is Mississippi 30 day your back and this is a 10 day you're back for the exact same shot. You notice that these lines keep adapting, always using the most recent 30 days on for in this, as I'm over here uses the most recent 10 days that the 30 day go back lying users a longer time period and notice how it reacts. Yes, sir. Toe movement whereby for the 10 day resistance and I it reacts quite fast. You know, something happened or you re actually. But this is like staying firm and not moving that much. This is we going over the place. Let's have another example. So it's the same thing. This is a different shot. It's the same thing over here. This a 30 day go back and this a 10 day your back and you notice that these lines keep attacked, adapting and the same observation for the periods chatter in a price. The 30 day is not we goring that much as competitive 10 day the dang it day. Is we going quite a lot over here, whereby the 30 days just staying cool and not moving that much. And so there we have it. This is how we put our house on the resistance line 7. S02 Support and resistance 04 Drawing the Support: No. We shall learn how to brought the support line we call The support lying is formed by the lowest price in the past. Getting these yours prices very easy. The question is, how far back in time are we going to go back to define this lowest price? It's the same case for resistance price. Just that we're going to look at the lowest price instead of the highest price. We first need to define how far back in time we'll look back. So that's assume we have, ah, chart like this. And let's assume we go back in time for five days. This means we come back five days to see what is the lowest price then that price shall be our support price today. So this day this candle here is today We do not count that we start counting from this day over here, let me demonstrate this to you so can't want to tree for five. All right, so among these five days, where is the lowest price? This is the lowest price and this go up Those price shall form no support for the past five days. And if we change that to 10 days with simply count 10 days back in time. 123456789 10. And where is, say always, price. We I know that the lowest prices over here, this is always price. So this goal price shall form the resistance for past 10 days and okay, Yes, Go back in time for 30 days and see what we observe If we change that toe the past 30 days . So we have counter past that the 30 30 days and the lowest prices. Look at this. It turns out that the reason must change in the line because they're always price. For the last 100 days, it's the same s the always price for the last 10 days. In general, the more number off days we go back, the more like Libya and car got need to encounter yours price. But of course, it's not the effect in this case. And the more that we were going to get a lower support price just at the resistance price to visually represent this a pop price we bought Ah ha is on the line like this. So every see prices moving beyond this line, It means that support prices have been broken and prices are likely to move down your as we go forward in time. This line recall creates itself always only taking the yours price off the most recent 30 days, or how many ever, How many other days we choose define. And he discussed the data beyond that for compressing. The bottom chart shows the lowest price for the last 10 days, and the top chart shows they always price for the last 30 days. Notice the support lying for the last 10 day reacts more frequent toe data and with the support lying for the last 30 days, reacts yes, frequent. You see and see that the support lying for the last 10 days is jumping over. The place jumps here. Jobs there whereby the support line for the last 30 days is quite firm and steady. It doesn't jump much. So kind of ignores the volunteer deed is going on another example off a different chart this time the Chinese more downtrend. So the top chart is for the 30 day reason yo and the bottom charges for the 10 day recently old now notice that the 10 day We X faster again is jumping over the place like so whereby the 30 day isn't jumping that much. It moves a big, but that's about it. We goes just a bit. Of course, if you increase that toe from 30 days to 100 day, it will even be smoother. You will not jump that much. So there we have it. This is how we put our horse on the support lying. 8. S02 Support and resistance 05 Chart setup: in this lecture, we're going to discuss how our trade our charts set up. Looks like you recall from the period signature. We already learned how to draw the support and resistance lines. All you need to do is support them together like so notice how the price gets sandwich in between two lines. This is how your charts set up shooting. Okay, you can put this lines using charting software like meta stocks or Emmy Broca. The functions in those software is hitch hitch V and LV function the hitches sri function, plus the highest high value. And this were part of the resistance line whereby the LV function will probably yours low value and this were part got the support. This function may differ in other software, but I've tried Emmy broker and metal stocks before, and these are the functions they have is the same. So I can tell you for sure that formato stocks Amy broker, this is the right function. But for other charting software out there, they might have different functions. So do better in mind 9. S02 Support and resistance 06 Trade setup: now that we know how to draw the support and resistance behind and you know how to set up your chart yet us go on to discuss trading setups. We first talked about buying setups. Remember, What we are trying to do is to follow the crowd is to fall and chase the breakout. We wait patiently for prices to break up from the resistance price the moment the price breaks up. This signals that there is a strong buying interest and there's momentum and prices. I like the to move up even higher. So what we do is off course with anticipation. Their prices are likely to move on, move higher. We quickly jumped in and by along with the book route once we once we are vested and we bought we right along with the momentum. So once you're in when we sell, that's where our support lines comes in. If prices brick B o this support lying, it signals that prices may crash down even further. And so with and dissipation that prices may crash. Now even further, we sell out and take our profit or our losses. So there we have it. The buy and sell set up. We buy when the price breaks, the resistance lying and we sell when the price breaks. Support lying. It's that simple. No, I know what some of you are thinking at home. We Why are we so stupid to wait for prices to four p four we behind? Why are we buying after the prices help, shouldn't we? Shouldn't we sell at the highest price over here and buy at the host point over here? Like so? Yes, you're right. Idea the we like toe sell at these points. And Noto we like to buy at this point to minimize our by price. And we got to sell at this highest point toe maximize ourselves price to make maximum profit. Unfortunately, it's not a simple has rethink their almost impossible toe does so consistent Me if you can piece teach me how to do it Don't try to pick tops and bottoms. Chances are you are never get it right. Our strategy is not to pick the exact top or bottom. Our strategy is to profit from the middle off the trend This is sufficient Dual make us profitable No notice that between the prices are are between the support and resistance between the support and resistance lying needs a get this gap is very deliberate. We take no action it prices for in this region and the price does not break resistance or support line. We are giving a good amount of wiggle room for the stock price toe jump up and down to dance up and down. If you're a beginner trader, you may not be psychologically prepared to take. Prefer to take losses on your positions? These gaps were Keep your race in check. With this risk management in place, you'll be psychologically prepared toe trait and also notice that this is a trend for ING system. If prices keep going up and they do not retrace back, be bor support line, we will be holding onto the stop indefinitely. And this is a good thing because we should get our profits run and cut our losses quick. So what about shot tricks? Shot treats was simply be the reverse off the young trading set up again. What we are trying to do is to for the crowd and chase the price crash. We wait patiently for the price to crash beyond a support line over here. The moment prices crash is true. This signals a strong selling interest in the market and prices may move down even further . We quickly jumped in to shot cell with thus background. So once you're in, when do we cover back? We cover back over here. This is where the resistance lying comes in. If prices break above this resistance line is knows that prices may move up even higher and we cover our shot when price breaks above. The resistance is lying. So there we have it. The shot and cover for our shot set up. We shot when the prices break, support lying and we cover back when the price break. The resistance line Is that simple now a what Off warning to all. Trade us to be frank. Unless you're an expert trader. Do not bother with shotting using this system. Always go home for the system. This is because in our back test results, shotting will almost always result in a loss. I'm teaching this to you for the computers off the costs in the later part. Off the catcher, I will prove to you that shotting is a sure way to use your money. Take This s Ah, Morning 10. S03 Test Results 01 Testing Results – Long Trades: All right, let's go on to the testing results. So we're gonna have a series of testing results, and we are going putting different perimeters, and that's see what perimeters that will give us good result and what after other parameters that we should avoid, Um, so that I really talked about the training set up when this ah ah signal to buy over here. When he breaks resistance, you buy. And then once it breaks, support your cell. So first off, uh, set up one dish one we are going to buy on tomorrow's open if today's closing price breaks above the 100 day highest high resistance. And we're going to sell into most open if today's closing price breaks Be old 50 day your so support. So this is the example of a successful trait. You see, this is very beautiful. We we have, ah, bricks break resistance. Over here. We buy in, be right along the trend, and we make the profit from over here toe over here, where way breaks the support. Let's see that treating results. All right, So here's the treating results for one dish, one trading system. Let's see what we get Ah, we get the annual return off 8.6%. All right, that's not too bad. Um, we have ah, weaning trade off 43%. Ah, Okay. We want this for about 50%. About 40. Tree for me is ok. And we have maximum consecutive losses off 25 that still find we have, ah, maximum system drawdown of C minus 52%. Quite a quite painful. This is our equity cuff. You know this that before 2000 everything was working well, the system is perfect. And after the 2000 crash, you are goingto have this system not working for maybe toe three years. And that's Jorge. Most traders will start to doubt this system, and once they doubt, they abandon it. After that, it seems to walk again until Mary 2000 and eight, under the financial crisis, where everything crashes back to square one home. Hope this is is very painful over here. And after that, it works and doesn't. He works, and it's just a stable and dozen. And so this part of the equity with this part of the equity curve is pretty worrying. I might not be ableto go true this portion. It doesn't seem to be working that way. I I will start to doubt the system at this product. Equity cough, of course. And this part of aquatic of I think it is. Ah, 10 years. Everything is very nice. So you can see that you're taking a lot of drawdowns at later later years. Other parts, everything is nice, but on the later years where that's where a lot drawdown comes in. All right, So what? Here's our treating results. Here's the probably distribution. Just to show you this is this is Monte Carlo. All right, so maybe the aquatic of doesn't nice. Maybe is due toa the, uh, perimeter's. Let's change the parameters a bit. Just change the a resistance. Nine from 100 day go back toe. 300 day. Look back and we are maintained. Ah, yours. Ah, we're meeting a support bicycle back 50 days. So the strategy is the same. The resistance eyeing once his brakes. You buying, you write it all. And once it breaks the support you sell away. Here's how one off the successful treaty suits like Rick Resistance you buy already on the way down. It breaks support you sell and you make the profit. Let's see how our trading results look like. All right, So he had a treating results. You get the annual return off 7%. Okay, not so bad. You have. Ah, win rate off. 44%. All right, fine. Maximum consecutive losses to any tree you have. Ah, maximum system drawdown off. Yes. Than 50% at at minors off 46%. Which is nice. Yes, You get a shot. All right. This chart is much better than the previous one. The pure is one Waas. Very bad. Doing no wants. Very back after the year 2000. So this is at this sloping upwards. It's not that bad. It is much improved here. Ah, again doing before the year 2000. Everything was nice when the year 2000 came in. You're gonna take a drawdown for three years, wondering whether this system works or not. And after three years, you may have abandoned the system, but that's where the system shines again. Toe give you very good profits and do the year 2000 and eight. And in 2000 and eight, we have a financial crisis. Everything came crashing town naked thief. 45% draw thou After that. Things are nice once again. Maybe this is a 2015 China market. Crashed Iwas some bad times. Well, I know over here it's all positive. So this does require good level of psychology toe treat. True because they are up there. Quite option down and your maximum drawdown is ah minus 46% Phone this year is great new human 800% right? Here's the profit distribution curve. Here's a Monte Carlo results. Okay, so that's talk the system again, People see, we're using the 100 day her highest high you back for resistance. So we changed the 300 seems to improve that Steve can improve this further. We're gonna increase this upto 500. So when we make a trade, we're going to wait very long until the perfect signal comes in and wants that perfect signal comes in way breaks above the highest high off the 500 day back. We buy in and we are going to be quite conservative conservative when it hits the 50 day, always low, we sell out. So we are increasing the highest high number from 100 to 300. And now it seems to work. We push it up to 500 and hope that that will give us some nice results. So this example is the highest high line. So it took us very young toe, have buy signal. And once it comes, we buy in. We right along the trend. And after that, it once you hit the lowest go support me. Sell out for profit from here to here. So how does this work for us? Let's have a look at the trading results. All right, so here the training, who is out after? We increase the highest higher back from 300 to 500. The annual return is heaven Percent doesn't seem like much improved. Maybe other things to improve the winner. It is also about the same 45%. 46%? No much of a difference, Max Consecutive losses Study too. Um, the system drawdown is that minus 42%? Okay, that's quite bearable. And this for me. And let's look at a critic of Oh, the Aquatica is so much nicer. Now you have a nice run up up to 2000 way crashes for three years. You start to doubt the system it runs hit toe 2000 and eight until the financial crisis crashes down. But it in Eddie's from from the year 2000 tree to 2000 you are a better position. You you have not taken ah white draw down, so that's better. You get how much it's still going up and in the year 2000 and eight, you carry on the system all the way up to the present day. You would have made some very nice profits were very, very old drawdown with a maximum off minus 20%. So that's that's pretty nice. We we see what are the maximum draw? Doubts The huge drawdowns came in after the tech bubble the year 2000 to 2000 Tree. This is very painful to bear and a huge draw it out came in during the great financial crisis in 2000 and eight. So these are the two recession years to look out for. Here is the the percentage win. No, sorry. Here's the percentage gains year to year. Here is the profit distribution. This is the Monte Carlo results. So Okay, no results are pretty much the same. But at least equity curve is so much nicer is a nice uptrend. I think I can. I can back through this kind of equity. Curves always is pretty nice. Let's just try some out of other numbers and pay around the figures. So we have adjusted this highest high toe 500. Let's see if you can adjust the support lying toe 150 day. Look back, people see it wasa 50 day you look back. Let us see if 150 day look back can give us any better trading results. So again, the strategy is by when the support when he breaks up from the resistance line cell when he breaks from the support Here's one example of a successful treat. This is very nice. You buy over here the stock quietly but surely moves out. We re almost so, uh, at some point, um and this is where we saw when When he breaks a support, your cell and and we also the profit comes from from here to there is pretty nice. Yet see the trading results. All right, so here's the training results. Any return of 7%. Pretty much to sing. Um uh, wieners at 46%. Also in much the same maximum consecutive losses. Study five. Quite painful to obey the system. Drawdown is at minus 50 tree percents. Up from the 46% we saw. Pretty much the same. Also. Yes, Ever. You get a chart. Oh, the chart is Ah, pretty, pretty painful. Um, you from this is nice again until 2000 the year 2000 to 2000 Tree. After that, you have a huge run up. But once you have the top, you have to come down. The great financial crises will bring you down again. So from 2003 to 2008 your thing that you are the king of the stock market, everything is going well for you. Your equity cuff is increasing. I met, but after that you'll be brought down toe again. You be humbled from 2000 and eight. The crash comes in, you take a drawdown off more than 50% and you you are brought back down to Earth. After that, things are, uh not so bad. So this the financial crisis years are are the worrying ones. Those will kill you. Other than that, uh, the other years are not so bad. So here is the year on your results. And this is the profit distribution. Maybe one off. The interesting fact about this profit distribution is that you are relying a lot on Elias . So these are fine. They are quite symmetrical. So these are the ones toe. Look up for these other huge gains that will That will help your portfolio a lot. So you have a yacht off. You want to capture these as much as possible. You have a lot off stocks that we'll give you beyond 210% return. So really, the eyes on you toe hold onto those stocks and not take quick profits. Really? Hold onto them right through the gains and the volatility comes along until you get very nice. Ah, multi bag over here. So this is one of the interesting thing to highlight for this system. That's see Monte Carlo. Yes, Pero the numbers again hope that we can find some better trading results. So we had the 500 day resistant lying privacy. Let's bring in the number down for 500 down to 300. So, um, again, the system is the same. Break the resistance, dying we buying. And once it practice support line, we sell out. And these are the resistance and support lying permit us that we're using. Here's one off the nice, successful trade. What they say you're taking a huge draw that I wish you could sell here, but it's impossible to tell. And we had to take quite a drawdown. Before we are finally out of the stock. You notice that we have left quite a huge chunk off the meat out. You just right from here to here. Oh, this is pretty much waste that I wish you could sell here. That's CDA trading with Okay, you get any return off? 10% down from previous results. You get the winning rate or 48%. Um, stupid. MRC media, maximum consecutive losses. 36. You have maximum system drawdown off 54% pretty high. Yes, you get a shot. All right. So the chart this system works up to the year 2000 and again at the year 2000. You take a huge draw down when the tech bubble bus you for three years and you'll be wondering if this system work or not for three years. And after that you feel like the king off the world where the system keeps giving you profit Until over here the pick on and when the financial crisis came in you are brought back down to earth and this is a huge drop. That's okay, this is more than 50% drawdown. So this is a huge drop and you are going to self doubt long, hot, kind of wonder. Why has your part for your drop in half and after that they some nice recovery along the way. Not as spectacular as the year 2013 but alright, finding some recovery. So here's the outlying charts again. Outlier multi baggers. They were give you a lot of profits. That's okay, Monte Carlo. All right, so that's see if there are any other way to test this. I call these the system one there. Six. I'm going to reduce the resistance lying a lot. I'm going to reduce it from 503 100 down to only 60 and I'm going to reduce the support lying down toe. Only 20. So this is Ah, pretty fast pace, Ma. First space system. You're going to move in and off the market a lot. It doesn't work. I don't know. Maybe you ah, pay our brokers more commission because you're moving off. You're moving and out off the market more often than the previous system. It may give you more profits. I do not know way only know after we done the test. So this is the same system. Just that we are going to reduce the resistance line. Look back down, toe 60 purity were using 100. 305 100. Now we're gonna bring it down to 60. And this is how one off the successful treating girls like you buying over here right up and sell. This looks very nice. And let's see how our trading results were. You All right? So these are trading results. We are trading in and out more often and on how our Henry return is Israel, but now is only 6.5%. Ah, we have paid our broke US $200,000 up. Workers will make a lot of money off us. Okay, So doesn't look as well. Maybe other factors may be the other redeeming factors. Winning percentage at only 40%. Not very good over here. Um, we have our maximum consecutive losses at 40 Tree. This is a huge number. Not very nice. Ah, and we have a Georgia off my s 52%. Also very painful to bear. Doesn't look like it's a court system. Let's have a look at a chart. All right? Everything works well. Undo the year 2000 as usual where it crashes down. After that, it costs up again on this. Is this really bad? You're taking drawdowns after drawdowns, you're gonna get whipped. So over here you will not see these whipsaw if you are. If you are experiencing in real life but you because it's a 15 year, 17 year whipsaw, you're going to go up and down, up and down, up and down. It's it's a waste of your time. It will make your broker which, that's for sure. But whether you make you rich or not Ah, you have toe B. You really have to right through this system with all your heart and I will not go. I will not take this system it up. Drawdown is very, very huge. You'll be bounced up and down for them and he years. So, after making all your money after either year 2000 and you're gonna give it back a lot, you're gonna get back after market. And this is how profit distribution curve looks like as to get Monte Carlo. So how this curve tells me a lot about this system is is gonna give you, Ah, 15 year whipsaw. Very painful. Maybe if you had the beauty toe predict this recession. It helps you a lot. Yes, it does help you a lot. But as we know, it is really hard to predict these drawdowns. So, um, if you couldn't use it with something, you could use it with a method that could predict these drawing doubts. It will really help a lot. All right. One last system. We're gonna have the one day, 17 1 day seven system. Here's a resistance. I he's a support line is the same thing. The magic numbers are tree tree zero and 310 You're going toe buy when the price breaks above the tree tree. Zero highest high resistance. And we're going to sell when in principio the tree. 10 support lying. Does this work? Well, this is one off the successful treats you buy here. You right along. And you sell here. And after selling the price moves are in your future. I can idiot. Why did you sell here? But that's part in parcel off trading. Maybe you have bought here again and things things goes up. So it is really impossible. Toe know that in the future it will recover. Uh, but if you stay to the system, maybe you'll get some some good results. Let's have a look at how this trading results Mystery trading system pop. All right, so here's treating results. The annual return is 14%. Okay, that's pretty nice. On the highest we've seen, the accuracy is 40% also pretty nice, and users at ah, you have a 35 maximum consecutive losses. That's us. That's pretty painful to bear. The maximum drawdown is that just above 50% at 51.8%. Pretty painful to ban. But it seems that all the all the systems around this kind off results that's have a look at our charts. All right, so our chart states that you are. If you are a king until the year 2000 Your puppets are fallible. Oh, this is nice. But then after that, you take a huge draw down off a round off. More than 50%. Very pain for you. After about, I think these 10 years, after 10 years, you have to give back to the market half of what you may. Okay, fine. I don't mind giving back because I gotta keep this part of the profits. And you are gonna wonder if this system works for three years. And after three years, everything is smooth for you. From 2000 and 3 to 2000 and eight for pure five years. You're enjoy wonderful profits. After that, the market crashes again. The year 2000 and eight financial crisis comes in and you're gonna take a drawdown off nearly 50% again. Enough that you're going toe right up feeling I king. Maybe it's gonna have another crash. I honestly don't know, because if I knew, I there will be a wonderful thing. But I do not know your kreisher. Not it may or may not. Oh, these are the the year on year and If you look at the profit distribution, you are off. Your profits are going to come from Mountie baggers over here. So you have to be be packed to write true or the all the volatility that stops bring to you . That's in Monte Carlo. So this is Monte Carlo. So with this chart, I would say that these are really painful years Togo through the year 2000 the year 2008 where the crisis comes in. So we have to be very wary off that were to try toe, find some way toe forecast these recessions. All right, so that is my That is the back test section. I hope you have a good all things We are going to go. We're gonna have a summary later on. We're gonna tab you all results and have a Sami. So do you true that in the later lecture 11. S03 Test Results 02 Testing Results – Short Trades: Now we're going toe Do some testing on shot traits we have done the ones for young creates . So the long treats Ah, kind of work. Well, so we're gonna have a look at how successful we are if we implement is on the shock on the shot site. So we have ah, system over here. We're cell shot on tomorrow's open. If today's closing price breaks be owed 150 day, your CEOs apart. So here's a support. It breaks true. And when it breaks true, we shot sell for profits until over here, like so and we'll cover if the coding price breaks above the 300 day highest high resistance. So here's a 300 day highest high resistance and we recover back and we make a profit from this shot cell. So it looks like it. And maybe something worth exploring doesn't make us money. Yes, have a look. Here is a example of a successful system. So it crashes. Be beyond the support lying. You write it down. And once it breaks above the resistance line, we we buy back and let's see how this system performs. Let's have a look at the trading results. All right, So here's the trading results. No. Oh, this is very bad. The any return is minus 9%. In fact, once I cities, I do no want toe Explore the system anymore. You looks like a show it to use money. Um, your wieners are at about 20%. Your Mexico consecutive losses. 65. Oh, this is really bad. Ah, Maximus System drawdown minus 94%. You're going to ruin your portfolio. And over years, echoed IQ of is showing that his is a show it who's money. You're goingto have 100 k And and by the end, off your you're treating career, you only have $6000. And this is how that this system is. I think you can just ignore this system and do not use it at all off. Traders are there thing that shot selling is very profitable. I'm telling you, it's not. It is not profitable. You're gonna use money. All right, So maybe the previous test wasif look, maybe we retook the perimeters here and there. We will get some better trading results, so I'm gonna bring down the numbers from Piercy. We had huge numbers so I'm going to bring it down toe 20 and 60. So we're going toe. So we're going to sell shot on tomorrow's open. If the closing price breaks b o the 20 days he goes, goes of pots over here, and we're gonna cover on to tomorrow's open if the closing price breaks above the 60 days. Highest high resistance over here. So it's the same set up just that we took the numbers and hopefully this will give us much better results. And let's see how you looks like. So this is a successful trade. Over here, we we shot cell, we write down, we write down the this, this downslope over here, and once it breaks the resistance, we cover our shot. The yolks very successful. Over here, let's have a look at our trading results. Here's our trading results and own hold. Annual return is about minus 13%. This is this is gonna make you use money. Winners are 23% makes consecutive losses. 57 very, very painful system to go true. And you're gonna have a Mexican system Jordan off minus 98%. You're going to use under your pence drop over here. The chart is also showing the same story. Everything goes down, everything goes in a pilot. This is a secret off losing money. So I'm not. I'm not going to go through any details. You can see that this is a very lousy system. Don't use the system. Don't short sell. Always go long, long will make you more money. And this I've proven you to you that short selling it's not worth your time and effort. 12. S04 Summary 01 Summary of results and lessons learnt: So after doing all those back testing that see what all the results OK, here is a summary off results shot at by C G. R or percentage on your return, and that's observe what we can decipher from these. First off we look at our top five system. We observe that the number off look back days are really huge. They're not 20 or five days or 10 days the 300 days 500 days. I do not know why many instructors out there teach support and resistance behinds using short time periods, but in these costs you're seeing the approval. We don't doubt that young periods are better. You need long periods and invest for the long term to be successful. Yes, have a look at the drawdown. I think drawdowns are as important as our returns because your drawdowns tells us about the risk on DWhite. What are Reese that we have to take? The maximum draw downs are pretty huge. You get around 40 to 55% drawdown. Most off these draw downs occurred during the financial crisis, the dot com bubble, the 2008 financial crisis. I want you to appreciate the fact that right now you may be using a system that works well . You might be thinking that you are protected from losses. But let me tell you, it is right now that when the financial crisis come and they will come, you were going to massive drawdowns and be back the hut by the crisis. You need to be psychologically prepared to take this. You may have a portfolio off 100 K It can turn into 50 K It is very painful to watch, but eventually your portfolio will recover over the long run, and you can expect to take Ah 14% and your return using the metadata taught you. Yes, you get a win rate. They range from 50% toe, 45%. This is typical for trend forming system. A train foreign system can have many small losses and and a small amount with a small amount of wieners that give you huge gains. There are times where once, once it catches on to a long term trend, the payoff came in huge in trading and investing. It's not about your win re. It's about your told her profits. You can have 100 wins earning $1 each, but one single loss off $200. We'll wipe you out. Similarly, you can have 100 losses, losing $1 each and one singer. Huge gain off $200 can give you a lot of profits. Let's not forget about the using strategies. There is occur an obvious pattern here. The U Zings trading systems are all shot trading systems. You may be thinking that shotting is profitable. Well, I have news for you. I've proven to you that you use money over the long run if you shot. If you are new, trader or investor, do not do not ever shot some off the essence that organize follow. Firstly, you need to invest over the long term. You do not do your investments or trading over one or two hits. You need to consistently stay true to a system and stay vested in good and bad times so you can enjoy the long term benefits. They all come as a package deal. You take both the upside and drawdowns. The second lesson here is that you need to be prepared to take a 50 to 60% drawdown if another financial crisis were to hit. Here is the equity chart and the drawdown child. You had a zoom into the drawdown purists. You have seen how bad the drawdowns are during the financial crisis. It's for it's 50 to 60%. Imagine you have a portfolio of 100 K and due to the financial crisis, it becomes 40 key. Can you live with that? Where you go crazy? Well, you stay through the system and continue to stay vested. Even true. Periods off draw doubts. So be prepared and your true, these kind off situations here is the profit distribution chart. What do you see here? There. Many winners and uses, right? You in some. You some now? Yes. You get a long tail over here. Do you know notice that you have many huge multi bagger winnings? That tree that gives you above 200% return? This is the true power off a trend forming system. Like the support and resistance, it latches onto huge long term gains. So what if you're making 10% losses, 20% losses or even 30%? The masters? You get a 210% gain to make up for all those small losses. The stock market is four of trends and it's upto us to latch onto those huge trends for four begins. These huge gains are more than enough to cover for the losses. Now the very last yes, injuries that boom not shot the market. I've already shown you the secret of losing money. The secret off losing money is too short. The market you hurt many experience trader tell you that shopping is dangerous now I proven to you that if you shot using the support resistant system, you use all your money. Not only that, shorten shouting is more expensive as well because you need to borrow and finance your shares. So the transaction costs are already day. So peace do not shot the market is a surefire way to use your pants. 13. S09 Backtesting Basics 01 Introduction: back testing basics introduction. First of all, you may be wondering why there is Ah, back testing section. Most other constants are there were only teach you technical analysis based on cherry pick charts. They show you Ah, cherry pick examples where the chart work out and Mitt in, admit money you buy here and sell their you buy here, sell them, buy here, sell their, um So And they show that if you buy here and so that you will be successful Of course, that's on hindsight. I'm sure you are. You are smart enough to know that these technical set up our selector with the benefit of hindsight. And if you were to actually trade it in real time in life, you might get a company different set off results. In fact, it is dangerous for instructors to teach Tanika and other cities like this without any discussions on historical performance off the trading system. It gives false confidence and false hope. Those students and you may even lose money. So in this cause, we're gonna do something really different. I'm gonna teach you tanka analysis as promise and and then I will show you the back test performance results to prove, or this proof the trading method. Throughout the course, we are going tobe act as the technical analysis strategies they are taught in the course. You will need to know how to interpret back testing results. And more students are probably unfamiliar with back testing in Mason are foreign concept to them. So that is why in this section off the costs, we are going to talk about back testing. This section is meant for students who are unfamiliar with back testing. If you do not know what is back testing how to interpret aquatic of how to judge backed has performance. What is Monte Carlo or why do we even back that's in the first place? Yes. Do not skip this section. Of course, if you are familiar with back testing, your you know how to read the charts and all. You may go ahead to skip this section before we begin. I'm going to talk about a serious problem we all face in treating. The truth is that most of you are never going to make money in the long run. Why? This is because off something I call the cycle off death so What is this cycle of death I'm talking about? Let's assume now you start off trading, you get yourself a strategy. You might have developed a stretch of yourself. Or maybe you copied it from another trader. Or you might even about the strategy. Somewhere from the Internet and so on. It doesn't really matter. So now you have your strategy and you are about to start trading life of this. You're gonna put your money on the line, you start putting the trigger, and right off the bed, you made some money. Congratulations. Everything is great. And then the inevitable happens. You start losing money. The strategy starts taking money from your trading account. This does not feel comfortable. So you start to tweet your strategy. You start to make minor changes to your strategy, and then you go back to trading again. You make money, and now you have a seeming me perfect successful strategy. But then again, the inevitable happens. You start to use money. Every strategy will go through losing period. Now you adopt your you doubt your strategy again. So again, you start to tweak and make changes to the strategy. The same thing again happens, use money, you tweak again and then eventually After taking so many times, you're gonna completely use faith in that strategy. And you are going to try it out and start searching for another new strategy. You're going to dumb that strategy. You are going to hop between the old strategies and the new strategists. Same thing happens again. You start losing money, you start to make money and then you start losing money. And there you go round and round the cycle off. Death hopping in between strategists in the host that you will find that for Ariel Holy grill. Well, get this. The Holy Grail doesn't exist. So what is the solution to this problem? Fussy. You need to get confidence in the strategy. So how do you get confidence in the strategy? The solution is to fully back tester strategy. You need to try and the strategy true historical data. So you know the characteristics off that strategy. You need to know how the strategy were performed in winning periods and using periods. It's only when you know and expect that you are gonna have using periods. You're not gonna lose faith in the strategy and you're gonna continue moving forward. No knowing is going to give you profit that give you the prophet that you desire. So what What is this back best thing that I'm talking about? Let me visualize this for you. Yes. Draw. Lying to represent the passions off time we mark today with a green circle, right, So so anything before this marking is the past. Anything beyond this marking is the future. So if we have a strategy now, how can we check whether the strategy work or not? One thing we could do is execute a strategy right now, over here today and wait for the passage of time to see how it performs in the future. We do not need to resent capita because we can always paper treat. So we will run that strategy day in, day out until maybe a few months. The data we can get some results on whether the strategy work or not. And this it's known as back testing on future results. Now what is strong with this particular method? The problem is that we need to wait many months ahead just to test one single strategy. By the time we are done with the testing. We probably need 10 years to compete. So a better way to do this is a test. The data In the past, we said like two points in the past. That's a point A and point B. So we were paper treat that strategist nothing. We point a and end the strategy at point B and after which we will immediately have its performance results. And based on this performance results, we can determine whether the strategy is profitable or not, and whether we want to use this strategy for our future treats when we put life money on the line. Notice that we can do this as many times as we like without spending many months into the future. Unlike the pack testing over here toe future data, we can always strange change the strategy. Maybe instead, off moving. Using moving at marriage crossover, we can change the strategy to use our size indicators or some candlestick formations. We can also change the task period, my shifting point A and point B around. Maybe if we like a longer time period, we can simply put a toe the extreme yes and pull be toe today. This way, we you have a full set off back tests results 14. S09 Backtesting Basics 02 Markets and time period: back testing, basics, market and time period. In our practice, we need to define our trading universe. Which exchange are we going to treat on? Is it the NASDAQ over here, or is it the New York Stock Exchange? Or maybe if you and supple your trading the sample stock exchange, SGX. Or maybe you're interested in all these markets and define your trading universe as a combination of Autry. Whatever it is, you need to first define the universal stocks that you are going to treat and on and obtained the end off day data required for those exchange time period talks about the starting and ending dates, which we are interested in. Maybe we are only interested in 2000 to 2017. ONI, or maybe we are interested to find out whether there any exploitable patterns in the past, Let's say, from 19 nineties toe 2000 Technica another cease methods They have work wonderful in the past may not be working now, So by defining a time period, we are able to zoom our analysis into a very specific pure in history. Now, why would time periods like should make a huge impact on our performance test results. If you define your time period during booming years like over here, the green section are booming years. How I know it's a booming here is because of stock market keeps going up. So those are booming. Yes, then obviously, he will get amazing results. If you're by buying and selling for profit, let's say you define your testing performance from the period off 2003 to 2007. The results may not be the results may not be caught. Be because you are treating Matter is so period by The result is probably due to the inherent bullishness off the market during a period. Likewise, if you define your performance testing from the period off 2000 toe 2000 and three, the results are probably ready. Pet. It's not because your trading meant that itself is that it is due to the inherent downtrend off the market. Now what we prefer is toe have a time period with a good mix off booze and deaths because the typical investor or trader will be trading for many years dropped his life. So it's a good idea to mix in periods off, up and down When you invest on tree, you have to take the losses and enjoy the profit. It comes in as a pack issue. There's no way you can 100% avoid taking losses because we can't predict when the recession were becoming. When we view our treating method or system, we seek to reduce losses as much as possible during those periods where we have mountain off course we like to intimidate. The loss is entirely, but that would be near impossible, even high probability. Off Jen trading. You have to take losses once in a while. 15. S09 Backtesting Basics 03 Annualized returns: back testing basics. Annualize returns. First, we discussed about annualized returns and annualized holder return is the geo metric average amount off money on by an investment. It's year. Given our over given over a given time period, it is calculated as geometric average to show what an investor wooden doing a period of time if the annual return waas compounded. Whoa, that's really a mouthful. Let's break this down. What is this Joe Metric average return that we were talking about? So here's the formula for any ice return over here, and U. S return can sometimes because C a g r which means compounded annual growth rate. So in this formula, we can ducking the variables and saw for C A g r C a G R considers compounding effect off money. This year you made profit $2000. We assume you have intention to reinvest these $2000 compound it as part off your ongoing investment journey. It is really important that when we are comparing across different investments, most rates or investment results are expressed as CIA JIA compound and your girlfriend Oh, annualized return. So by expressing your returns as ch er you can compare epper toe EPO. Now this Caucasian gets more complicated if we were running a real part for you because if you were running a Bria portfolio, you have to use time wait return, which is really much more complex. This is because when you run a really portfolio, you'll be putting money into your portfolio, and sometimes you may be rejoined money out from the portfolio. We need to use time with the calculations toe account for such, she narrows for now. Don't worry too much about it. We only have to know the simpler concept off C, J R and D. Nice return, where we do not take or and any money into always from a portfolio during the investment. Now I didn t see some comments on students who are really interested in time weighted return. So let me just in cook into the cost for completeness. And I can honestly tell you that after learning the formula for time waiter return, you were probably not use it for your rear part for your calculation, because it's really quite a lot of work to do so here it is before we learn time weighted return The first thing that you need to know in learn is what is holding period return or hitch P. R. Let me draw a timeline that saw from 2000 and 14 to 2017 throughout the period, and investor puts money into his investment portfolio, for example, the investment the investor receive salary and we should put his Arian as off the portfolio . So this is considered a deposit into his portfolio. The money is going into his portfolio. Throughout the years, the investor were also we draw money away from the portfolio. So let me just draw this deposit. So sometimes, um, the investor needs to take money away from portfolio for number. Maybe the investors car broke down and need some quick cash to repair it. He has no money from his bank and needs to read or money from his investment, maybe first by decree stating some off his stocks and after liquidating it, meaning after starting the stocks here, some money and your transfer that money out from his portfolio. So this is ah, we draw ra, and every time there's an addition or we draw like this, this is an external money flow and extend our money flow. Is money flowing up from off the portfolio or into the portfolio due to external factors? Do not be confused with dividend or interest. Dividends and interest are not classified as external flows. They are classified as internal flows because they are considered returns generated by the investment assets. So, whatever you have an external money flow, we need to define that as a stand alone holding period return. So let me just show you how he looks like you have another time that you deposit money into the portfolio. So this is another holding period on holding period too. So maybe over here you suddenly need toe, Rejoice some money and you have a re Giora. So this is a holding period Return number tree. So every time you have a deposit Hori Drogba, you have to define as a new holding period. So so this example there is a total deposits tree deposits and to read or a so every time there is a deposit or read rubble. We define that as a new holding period so you can see here everything every time there's a deposit in New Georgia, we defy in your holding period if you We draw and put money every day. Oh, you need to defy a new holding period. Heavy day Do no deposits and re drawer can happen any time. It may not necessary be at end off the year or the beginning after off the year. Now that you know what is holding period, let me tell you what you must do with each holding period. Do not worry so much. I mean, just print this down for you right now you need to calculate Evie purists heavy Pierre's hole holding period return and the formula is as follow for that particle holding period return it is and the one meaning ending market value minus and the zero meaning beginning market value plus any dividends or interest that came in and plus or minus any Castro from me draw from external. If it is a deposit, you subtract it. If it is Ah, Redrow. Ah, where money is taken away from the investment toe. Maybe fix your car as investor you and and you think the holding divided by beginning market value. So if you have a read or every single day you have the cockpit your holding period return every single day. Too bad. Who asked you to withdraw your money so often? All right, so now you know how to cook. Okay. Holding period return. The next step involves ka grating the geometric return off order holding periods. You string them together and multiply them together like so And you obtain the Joe Metric return. Once that is done, it is time to any ice this geometric return number. So here is a standard and utilization formula. You convert it into a single year return, you need to analyze it. You analyze it so that you squeeze the timeframe toe one year timeframe and you can compare epper toe tapper with other assets cast or similar investments. Opportunity. The formula for analyzing is as follows analyzed. Time later, Return equals toe one plus geometric return. You take the whole time to the power one over Why and you take the whole thing minus one. Why equals to a number of years where the geometric return is concrete? That that's a number off years is tree. Then why ecosoc three? Let's say the number of years is 2.5 or 2.6. Then why equals to 2.5 or 2.6? It does not necessary. I need a B on India, so that is the culprit. There's a calculation for time with the return. It's really a lot of work to do. They're one of the hardest things one. The hardest part is getting your part for your value because most investors won't have this number on hand to do them has. If you are lost, this is okay. I don't expect students to do this. Were pot for your tracking anyway? It's do toe this time with the return Caucasian that most people don't even know the performance off their own part for your gold up, Henny off your investment friends, Ask them once the airport for the return and how do they complete it? I usually have no idea, because they are the usual dumb border with doing time Later returns. So for time with the return, if you can get somewhere around 20% it's pretty good as a retail investor or trader. If you're somewhat good, you can get around 25 to 35% try toe set up for at these 10% C E G R for good compressing warm buff. It does around 21.6% over a period off 49 years. He has one of the most imaginary investment trying were caught around? No, just because his returns around a high 20% C g r. But because off the time period and the huge size off his portfolio, be well informed that once you skill up and you have huge amount of money to manage, getting high returns is not easy at all. Because when you have a huge amount of cash to manage, your investment options are limited. My own track record is around 28% time with return. But does that mean that I'm much better than warm buffet for me? I think it's much easier for me to achieve toe up, perform warmer fit because my portfolio is much, much more than his. I have access to investments that Warren Buffett does not So on the EMI Broker Report here is where you find the annual return. This is usually the very first number I look out for after conducting a back test. We're looking for numbers that above 10% after broker fees Why? 10%? Yes, compared among some other numbers. Yet me Ask your question. What is invasion writ? The invasion rate is how much the prices off goods are generally rising per year in the U. S. Is about 1.5 to 3%. In recent times, our investment returns need to be higher than inflation. How otherwise? It doesn't make sense for us. Toe. Take stock market risks, don't you think? What is your investment return If you were to take absolutely no market wrists, is there even such a thing as risk US returned The truth Is this actually very little off such investment, or sometimes even no such thing as a resource investment? Heavy investments involves risk. Even if you go to college and and you're paying the high tuition fees, there's no guarantee that your investments into your Judy Yushin fees will hand you a job after graduation. But I miss just ou there is something to that effect in general. The financial industry agrees that the depth that d e B t the depth off the U. S. Government is risk free. Why? Because if the government needs cash, they can always set lost raise Texas or print more money. So if you were toe hand money to the government, how much were you? How How much do we Dave pay you? How much interest would it pay you for this? You can something called the 10 year tragedy you. So here's a tenure treasure. You you can see it around 1.5 to 3%. So compared is 1.5 to 3%. Toe your stock market trading returns. If you're you get returns. Yes, and 3% is maybe a better idea to invest in the 10 year Treasury. You don't you think it's no Horace the head? Now here's a chart off the Dow Jones. The Dow Jones is an index, which consists off a basket off stocks. It is a smaller basket. It's only study off the largest U. S companies, but it's a good representation off a variety off industries. It has been around for many years. Ah, since 1896 So this is ah, more than 100 years old. Off stock market track record. The annualized return off Dow Jones is around 7% So if you trade, you want to have your return to be more than 7%. Otherwise he will be better tojust put your money in an index fund and yet your money go passivity. So remember this magic 7% number. It is a number to beat. That is why I mentioned earlier on on ah, that we hope toe achieve at these 10% return. Otherwise we are better off investing in index funds. 16. S09 Backtesting Basics 04 Win rate: back testing basics win rate. Now we talk about measuring the trading system by win rate. What is this, Wing, Rick? Every time you buy and sell ah, treat you item ing money or use money If you were to be profitable and made some money that is calling if you lost money that is called a loss at the end of the year. At the end of the your period, you take the number of times you in and divided by all the number of Treacy me and that is your win rate. Ideally, we all want tohave high winged it. But practicality investment is not so straightforward. You may have high wind rates, but end up negative on your portfolio if the quantum off your losses exceed the quantum off the winds. For example, if you win $5 for 10 times, um and that would be, ah, win off $50 total. But you lost $100 in just once in the time you would have me losses. Overall, even though your win rate is 10 out of yehven used, you lost money. Converse e. You may have low win rid but end up positive on your portfolio. If the quantum off your winnings exit the quantum off your losses, So why am I talking about win rids? This is because off psychology, when your trading system got life, you need to know how often your sister makes money. If the system is profitable, then the wind really is. Ah, very go. Maybe eso if your system is not profitable if your system is profitable, but the wind grid is very low at only 10%. Can you psychologically withstand the many times that you have to take losses on your portfolio? It's not a nice booting. You might not sleep well at night. You may abandon the strategy and the system altogether, so always look at your portfolios. Win rid and decide if you can psychologically withstand this. Your win, Rick. Typical trend. Falling systems have your in right around 35 to 45% but when they win, they can capture Hugh trends and end up very profitable. A good test on your psychological is the sleep well and night tests. If you are losing money, are you able to sleep well tonight? If you can't, you are psychologically not prepared to take the role. Women. So here is the army brokers. That's a six report. Where do you see the win rate? You can see it right over here. How? At the inn rate. So this system has, ah, 43.7% win rate, but over is profitable. It's ah, annual return is 3.7 it. 17. S09 Backtesting Basics 05 Consecutive losses: back testing basics. Consecutive losses in this. The catcher we'll discuss about consecutive losses and why is it important? So why is consecutive losses when your trading a system life, you win some time and you are you sometime? So let's say you start trading and you start making a string off treats and he had the results. So your system is 50% win rate system. And so your typical win rich and lost mediocre this win yours wind. Thus los when Los winning win you us. Okay, this is still fine. All this is within the 50% win loss. Win rate expectation. Let's do this one more time. Let's say you start trading and you made a string off traits and here are the results. Wing loss mean the US those loss, loss, loss, loss and then you house again. Oh, no, no. One. If you suffer consecutive horses like this, there are seven Kozak Day three losses here, and this is still very possible for system with a 50% win rate. Now the question is whether you can psychologically withstand all these convective losses and continue trading. Or were you abandon your system altogether using in a strict that this is not a nice feeling tohave and like the previous win realism Bow you may you sleep over it due to psychological stress. So, you see, when you test the system, they show you your time. Your lodgers using shrink When you test the system, you need to understand that they are times when you're suffer using streaks and is always in the systems possibilities. Again. A good has on your psychology is a steep well and that tests if you're losing money, you're having consecutive losses and you're unable to sleep well at night. You are probably not psychologically prepared. Maybe you should take not usually use another system or not trade at all. So here's the Emmy Broker statistics report. Where do you see the concept of Colossus in the report? You can see over here as highlighter in rate. It shows you the maximum number off consecutive losses 18. S09 Backtesting Basics 06 Equity curve shape: back testing basics Equity cough shape. Now here, we're gonna discuss about equity co shape. So you'll be asking What is this expletive curve ship that we're talking about? Before we learned about this pattern, we need to understand what is part for the Oh, I could pick up part for your equity curve. Is the market value off part for your being represented as a graph over time so that we can graphical D. C how our SS grow or shrink with time? This also includes cash that is not invested. That is, within the portfolio. Here's as number often equity curve Where assets are product over 10 years or 10 periods. You can see over the time the overtime, the powerful your moves up and down, meaning the owner off the portfolio is going through periods off ups and down. Ideally, when we invest, we want to see our assets grow in a nice, consistent trend. Ah, as much as possible with Nitta. Drop s with as data drop as possible. So here's a nice idea. Equity curve. Notice how to overtime equity increases in value consistently. Sometimes they are bumps in the road, but on the whole and still going up. We try to aim for this kind off equity curve as much as possible. This kind of equity cough shows that our trading system has successfully captured a market inefficiency. Up next is a rodders exact equity cuff. It has ups and downs, but the general trend is due up. It is not as move as the consistent one that we discussed about periods. E. It's kind of like a tree steps back. One big step forward tree suspect ones. Big step forward. This is quite common for trend trading systems, where the rain rates are low and lost us our small. But when it wins two huge trends and capture huge profits, this equity cuff is still fine but require better psychology to trade in. Compared to the people's consecutive growing and chaotic of Onex. Up you have that this order echo. Tick off over here, By the way, I generated this using random numbers, never, ever border with this kind of equity cough. It doesn't have any uptrend. Your bank account simply strings strings up and down. You cannot go your wealth over time. He even the stock market itself isn't as random as this. Here's how alive Echo D curved. May you look like if the portfolio is well profitable in the stock market, there appears off, up and down, ideally alive. Equity curve should be going up during the good times and staying pretty for yet on the back In the bad times, every doesn't just stay flat. The losses should be kept in the minimum. The last kind off equity cuff then I like to introduce to you is the Martingale Equity cough. To understand this equity curve, you need to first understand what is the marketing girl betting strategy. So why this strategy about this is a gambling system off continuous E doubling the sticks in the hope off an inventor wind that you that will win you the net profit toe cover your losses. For example, for your first bad, you a paid $1. If you lose, you bet $2. And if you use again, you bet $4 the views again, you will bet $8. You keep the bedding amount you keep betting the amount that you lost. Unfortunately, saw strategy has unexpected outcome off zero return and you may see your equity eventually implode when you suffer a string off losses. This strategy is very common in binary options. Never, ever used this kind of tragedy. You already know the expected outcome and answer is zero. So why border? As many common computer simulations have shown the Martin tear the Martingale betting strategy does not work. Here's the Emmy Boca Equity Cuff report. This is how it looks like we will be visually inspecting these every time we conduct ah back tests. Notice how the pot for your go strip years off good times where the profits are growing and the investor is feeling very happy and also periods off bad times when the investor will be stressed out wondering if the trading system works or not. So when you treat this system, you need to ask yourselves whether you are able to undertake these periods off back time back at times again. A good test on your psychology. It's the state well and night, as if you are going to appear or bad times are you able to see where I night? If you can't, you are not psychologically prepare to take on the volatility that comes with the trade. Yes, the Montecarlo Equity Cuff Report in Emmy Boca if you don't know what is Monte Carlo yet? Do not worry. I will teach you. Get on. 19. S09 Backtesting Basics 07 Maximum drawdown: back testing basics. Maximum drawdown when traders straight the young undergo periods off ups and downs. UK may have two years or very profitable results, then have five years off unprofitable results. It's really an up and down for Costa, right? So we are interested in how bad this rollercoaster, right? Yes, especially during the down times. When the portfolio goes up, the trader gets to enjoy wonderful profits. I'm sure nobody will have problems handing this profits. The problem occurs when the portfolio goes down. When the portfolio goes down is really painful for any trader investor to right through them. We need some way to measure how bad this downturn is, and we need to do that by looking at drawdowns, particularly at the maximum drawdown where the worst case in narrow is being modeled. Let's look at this in detail when you actually backed Has on the EMI broker perform Yes, how the present the results. This is one off the test that I did from 1995 to 2015. The general trend is a consistent rise in portfolio until 2000 and eight. Like so there's a consistent writes in portfolio and then on to 2008 They waas meltdown. Then the pot for your continued toe power hit on 2 2014 And then there's another meltdown. These meltdown I call drawdowns. They're extremely painful to write. True, we could be writing through them for years before we see any form off increase in the equity. It is easy to see your equity grow nice T consistently from 1995 to 2000 in the greens ago . Market. Well, eventually pick, and so will your part for you. We need to be psychologically strong to stick tight and stay from toe our trading system, especially during the the drawdown periods. Even though I know my system is long term profitable, it is still hot for me to sit through the spirits. Another way to represent Drawdown is to use this chart. We define the drawdown from the recent high to the cardio and expressing as percentage. For example, if you are sitting here in the reds ago in 2009 you have lost more than 40% off your portfolio from me speak. This only recovered four years later, in 2013 in the Green circle for the whole test Pure it. Your maximum drawdown is 40%. This trading system requires you to stomach Ah, 40% He house on your portfolio and it will only recover after four years in a green second in agreeance Sic over here. So what I'm interested in is this maximum drawdown in any Broca. This maximum drawdown is supported by a relying over here where we encounter such maximum drawdown. Nobody knows for sure, but when the time comes, we have to be psychologically prepared Back testing is so powerful because it's psychologically people as us for such drawdown. When we going to such where we're going to use a system with the knowledge that ours, our strategy has positive expected see expectancy over the long period Time again. A good test on your psychology is the steep well, and night as if you're going through periods off drawdown. Are you able to sleep well tonight? If you can, you are psychologically not prepared to take on the drawdowns 20. S10 Trading basics 01 Diversification: trading basics diversification. I'm sure off you hurt off how important it is to diversify. The guys who are starting new funds will be saying how superior they are. Fans are due to the investigations CEOs off this, the companies will say how they're diversifying their businesses toe last risky areas. This is actually true. And they're spot on when they say it's important. Our natio and insider with insider information or you have a risk US investment giving you high returns. You really need to diversify and spread your risks across different Countess. Even if you you have the art in your favor, you can use money you can use. Do you need to diversify? Oh, yeah. Straight days. We're gonna do some fun calling, flipping simulations. You realize that even if you have tow us in your favor and if you do not diversify, you will ruin yourself. All right, so this is our coin flipping simulator. The game is like this. We're gonna have an unfair coin. The coin has the 55% chance off getting hits and 45% chance off getting tales, and we are going toe off the obviously bad hits all the time. It sounds like a good game to play. And we're definitely win. Right? Let me continue. We start off with $10 over here, I so and every time we bet we decide how much cash to bet if it ends his we were doubled the amount that we bet. And if it the instills will use all the money that we bet we keep doing this for about 300 times and that c house our results. How is our profit? And over here, this is where I can adjust the percentage of my portfolio to bet. So over here is a diversification that I can't just so number Tree means that I speak my portfolio in tow. Tree diversification is the crew guns are buying tree. Different stocks are spitting my portfolio to buying tree different stocks. If the number is that, say 10. That means I is the cooling off me, spitting my portfolio in tow. 10 different stocks like so So let's pretend that we only speak this into a tree so effectively will be batting 33.3% off our our money. Every time we flipped a coin right over here it shows how much profit I have at the end of the game. Ah, and that is if I'm still in the game and down here, it shows whether I ruin my portfolio or not. So if I start with $10 loose money so much down to a very goal number that say, like, 50 cents, I consider myself ruin and off the game $10 may not be a great amount, but if you were to magnify this over a typical persons that are saving off that's a $100,000 is equivalent to having a portfolio drop from 100 K tau honey. Five k having 100 k dropped toe. Only five k is definitely a ruin. Yeah, I've saving. So let us begin. We assume that we are going toe diversify into a tree. Stocks. So we end the tree over here light. So we run the stimulations a few times, like so I'm hitting amateur hitting at night. And we we see that, um, whether we ruin our part for the or not And okay, no ruin, no ruin, no ruin, no ruling. And we get very good returns. Ah ha! That's one ruin Okay, so this time that we get are for the ruling. Ah, here's another time that we have our portfolio being ruined. Okay, So I'm continuously heating f to refresh, so you can see that, Um, if you could be quite unlucky sometimes. Okay. Here's another time you got ruined. If you are quite unlucky, sometimes you can ruin your portfolio If you're only diversified in tow Tree stocks. And remember the also already in your favor. You You have a 5% each. And yet it issue possible toe grew in your portfolio. If let's say we push this number down toe to and that is very detailed, I viscous that diversification. You realize that it is much easier toe ring your portfolio. Okay. So almost every time I refresh, I I get a ruin portfolio is very painful to watch. Okay? It's almost every time. No, let's say we diversify across, then stocks. Uh, I'm gonna type in 10 over here. 10. Okay. So All right. There's no ruin. How does the yolks so far I keep refreshing and yolks up pretty good. We almost never ruin our portfolio. Okay, maybe we bring the number down to fall we may get some ruins here and there, but it's better than Ah, here's one ruling over here. Yes, another ruin so forced you get us some ruin portfolio. No. So with this simulation, the moral of the story is that you must diversify and diversify into a basket off stocks. I will say 10 is a good minimum number to go for. 21. S10 Trading basics 02 Asymmetry of returns: trading basics and symmetry off returns. Here's an important concept that you must know. If you are an experienced reader, you might already know it already, but if you're just starting out, you need to understand the concept off asymmetry off return for So what is this? A signature of return that, say, you bought a share at maybe, um, $9 over here and it tumbles down to $6 with dissent. So how many percentage have you lost? It is actually you lost. Ah, minus 27%. Now let's say you bought the Sheshiah at $6.6.50 and the rise us to dined on us. How many percentage have you gain? Is it also Ah, 27%. The answer is no is actually a different number is from police from 27% that she 38% instead of 27%. We pull this back even further. Let's say you bought a share at $15 drops down to $6. 50 cents? How many percent have few laws? You punched a cop creator and your losses is 57%. No, let's say you bought the share here at $6.50 and the rise US toe $15 is again. Right? So how many percent have you gained? Is it also 57%? Ah, the answer is no. Is far from 57 is much, much brother is actually 130%. No, The point that I want to bring across is that when you use 57% again off, 57% is not sufficient for you just to break even. You need again off 130% just to break even. How often do you get 100? 30% return. So do not let that small number for you that small, negative 50 per swifty sample send them before you in that Your fact is telling you that you need a return off 100% 130% just to break even and 130% is not an easy feat. And this brings us to our next point. When we use, we want to keep it. Theo, we prefer this house situation. And when we re in money, we before this kind of situation, we want to keep it as high as possible. And hence the famous cliche. Cut your hoses quick, and yet your profits run. This is not just some why saying Based on no evidence, you can see that this famous Chris Shea is actually mathematically proven. Now here's a chart wish you can refer to when you cut your losses. At 1% you need a 1% of brick even all right, not so difficult when you cut your losses. A 2% unique are also around 2% to break even again is very easy, going down from 10 percents Unity, 11% to break even. Very easy again. But a city called down You see that it's stuck still get tougher and tougher. Uh, 30% loss. You need 43% gain to pick, even at 40% loss, you need again off 67% just to break even and 50% los you need again off 100%. Just break even. The number becomes exponential as you use more and more At 99% Haas, you need again off 9009 and 900 gain just to break even. How enough is that even possible on 9000 900% gain? So remember, the rule is toe cut your losses quick 22. S10 Trading basics 03 Risk and reward: trading basics, wrists and reward. Yes, 1/2 the well known secret off making money in treating the secret is that you you take low res for high reward. And sadly, most readers to know know this and the end up losing a lot of money when they try to invest their own money. Ni many reasons for this but one of the most common reason comes from the inability off individual investors or traders. Toe mensch Rece Reese We What is a common term in the financial world? But what does it mean? Simply put, investing money in the markets has a high degree of risk. And if you're going to take a risk, the amount off money you stand to potentially gain must be large enough more than cover. The risk that you take otherwise is going to be pretty stupid. Toe take on the res in the first place, right? If some stranger comes to you asking for $100 loan and you offer and that stranger offers to pay you $120 in two weeks, it might not be worth the Reese, but what if they offer to pay you $300? The res off losing $100 for the chance off. Making $200 can be quite appearing now. This is a 1 to 2 risk to reward ratio, which is a racial where a lot of professional investors start to get interested. A 1 to 2 ratio allows the investor to double their money. If that person offered you $400 then the ratio goes toe Treat one. Now Just look at this in terms off the stock market, I assume you did your research and you found a stock that you like. You know this, that this stock they like is cost on X and is treating at around $50. Right now over here is treating at $50 and is down from a recent high off $58. You believe that if you buy now in the not so distant future, start X will go back up to $58 you can cash in. You put the trigger and you bought the chefs. You did all the research, but do you know your risk reward ratio? If you are like most investors, you proper be don't before we done. If our stock extra is good idea. For Marie's perspective. What else should we know about this restore? We want ratio first, although a bit off got Fuding, is there restore reward is more objective. It is a Caucasian, and numbers do not lie. Secondly, each individual investors has their own Horan's forests. You, me off writing the role, costa. But someone else may have a penny attack just thinking about it. The calculation ofrece reward is very easy. You simply divide your net profit, meaning the net profit. So we want by the price off your maximum risk. We've stopped excess our example. If the stock went up, so that's a $58. Your profit is $8. But what if you use you may use your entire investments on $50 so here the reason is like a 50 $50. You take 50 units off Reese for eight units off the what? Now that doesn't sound like a wise thing to do right now. Stop prices, usually one go to the euro. Unless something really bad happens in real life, you can actually control how much losses toe take by setting a stop loss. Us. A stop loss is a price that you will sell out to stop the trade and a vote any future losses. So for a reiss reward off, one is a two. You take four units off risk for eight units of reward. You could plan your trip like this. You said a stop loss. At $46 you take on four units of Reese and yourself at 4 to $6 to Mattawa and admit that you have lost money and this allowed the trick and you take the losses that command you said your profit target at $58. It means that once the price hits $50 or buff, use out to take the profit. In this way, when you set up your tragedy, I saw your Reese to reward is one is a two, which is okay, is a good thing to do.