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The Perfect R Portfolio

 

I was recently watching a short video hosted by Market Club. This particular video was a presentation on their “Perfect R Portfolio”. The Perfect R Portfolio is a portfolio of four ETFs (SPY, USO, GLD, and FXE) that are traded based upon Market Club’s “Trade Triangles” technology. The system rules are simple and clear. For each trade you dedicate 25% of your trading capital. Go long when you see a green Trade Triangle and close the position on the red Trade Triangle. These green and red signals are actually price levels that allow you to place your buy stop and sell stop orders and wait for the market to fill your orders. These values are updated weekly. It does not get any easier than that. Such a simple greenlight/redlight system can be very appealing. In short, the Perfect R Portfolio is a complete trading system that provides you exact entry and exit levels.

 

Because the portfolio contains ETFs, does not trade very often and only takes long positions (there is no shorting in the Perfect Portfolio) it seems suitable for trading in retirement accounts such as a 401K. In fact, I do believe this is what the creators had in mind when developing the system.

 

How Do They Do It?

 

I enjoy attempting to figure out what is going on when I see a trading system demonstrated on-line. It’s a challenge and great fun to reverse engineer signals. Market Club’s Trade Triangles were no exception. Don’t get me wrong, I have nothing against Market Club and I do believe they provide a valuable service. However, how they generate signals became an interest for me and in the end, the concept they are using is well known, simple and totally free. Market Club does provide a nice looking chart where buy/sell signals (Trade Triangles) are nicely displayed on-screen.

 

When I examined the entry and exit signals over time I came to the conclusion that the Trade Triangles are nothing more than a classic breakout indicator. That is, they simply take the highest high over the past N days to determine when to go long and then determine the lowest low over the past N days to determine when to close that same long position. More specifically in the case for the Perfect R Portfolio they use a three month channel of price extremes to determine market direction (trend) and use a three week channel to determine entry/exit price levels. Trend trading based upon price channels is well documented and continues to be a valid trading method.

 

Trend: Three month price extreme.

Signal: Three week price extreme.

 

The trend component of the system is used to filter out bearish market conditions since the system only goes long. So, during bearish times we are in cash or cash equivalents waiting for a trend change to bullish.

 

For example, given an ETF we first determine the overall trend. This is done by determining the price extremes based on a monthly chart of the last three bars. Price touching these extreme levels on a daily chart would determine the trend either bullish or bearish.

 

Once the trend is determined a three bar price extreme based on a weekly chart is used to determine when to exit and when to initiate new trades. When the trend changes from bullish to bearish all trades are closed and we don’t open new long positions until the trend becomes bullish.

 

It’s that simple. Below is a trade example.

 

attachment.php?attachmentid=22808&stc=1&d=1288869712

 

 

Cloning The System Logic

 

But how well has the Perfect R Portfolio done? Well, the portfolio is rather new so they don’t provide much backtesting data. Market Club does provide a short PDF report demonstrating how well the system performed during the 2008 market crash. However, Market Clubs price channel breakout concept can be programmed into TradeStation rather easily. TradeStations ability to access several timeframes on a single chart will be required to make this trading system. First, all trades are executed on a daily chart, buy/sell price levels are determined on a weekly chart and trend is determined on a monthly chart. All three of these timeframes can be placed within one chart and accessed by a single TradeStation strategy.

 

Programmer speaking coming up so be warned.

 

First I’ll create a workspace with a chart of one of the ETFs used in the Perfect R Portfolio. I’ll select GLD. I will want to place trades on a daily chart so I set my GLD chart to daily price data. Next I want to generate buy/sell signals based upon a weekly chart. To do this I create a sub-chart of GLD to hold weekly price data within my chart. I can then access this data programmatically by referencing “data2″ in my Easy Language code. I do the same thing for the monthly timeframe of GLD and can access that data by referencing “data3″.

 

Data1 = Daily chart

Data2 = Weekly chart

Data3 = Monthly chart

 

I created a clone of the system and tested the system with the four ETFs over the life of each ETF. Unfortunately TradeStation does not have the ability to test a portfolio of ETFs given a single strategy. This weakness is rumored to be fixed in version nine of TradeStation. Until then we’ll have to test each ETF individually. So how did it do? Not bad for such a simple system. The results are in the table in the section below. You will see that over the life of the system it is profitable. The life of the system is only from 2004 - October 31, 2010. Most of the ETF data only goes back that far!

 

attachment.php?attachmentid=22807&stc=1&d=1288869600

 

Modified R Portfolio With Risk Management

 

The most obvious drawback I see with the Perfect R Portfolio is the lack of a position sizing algorithm based upon the risk per trade. That is, the dollar amount you’re willing to lose based upon the stop level. I might be inclined to use the Percent Risk Model to calculate the number of shares to purchase based upon a 2% risk-per-trade. This would help normalize risk by reducing the number of shares when the market conditions are volatile and increase the number of shares when volatility is waning. Instead the Perfect R Portfolio uses a fixed percentage (25%) of equity for each new trade regardless of risk.

 

In a future post I will add a position sizing algorithm to see if we can improve the results. If you can't wait check out this blog post where I already have posted the updated version. There is also a short video that explains the inputs to the system.

 

Download

 

I was having trouble uploading the TradeStation Workspace to this post but the EasyLanguage code should be attached. You can also download a copy of the Workspace or the EasyLanguage code at my blog. This code is for TradeStation 8.8.

 

If anyone finds an errors in the code or would like to make a suggestion please let me know.

 

Thanks,

Jeff

5aa71040ef38c_PerfectRPortfolio.png.1d90217bc3cf9dbd12e30b3b114e6233.png

Perfect-R-Portfolio-Trades-on-GLD.png.6b416059d963a45aa1b29b668d7d43d9.png

PERFECT_R_PORTFOLIO_CLONE.ELD

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How closely does the clone match the real deal? Good question.

 

Market Club just posted an alert in regards to their Perfect R Portfolio going long today in USO. They purchased USO at $37.13. The Perfect R Portfolio Clone with data from TradeStation triggered a buy signal today @ $37.31.

 

Occasionally I've noticed these slight price differences and I would assume they are due to the data being supplied from different vendors.

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Hi Jeff thanks for your post.....i am using on forex as per market club ......looks very good......here tha chart daily on EURUSD......do you see all correct ?

Thanks

EURUSD.png.71ffc728fd907a9fdb0a3580ff2c264f.png

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Hi Jeff thanks for your post.....i am using on forex as per market club ......looks very good......here tha chart daily on EURUSD......do you see all correct ?

Thanks

 

Looks good Dirk. Never thought to try it on forex.

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Looks good Dirk. Never thought to try it on forex.

 

thanks Jeff......in any case the signals must be filtered ...in market club there is a score and they suggest to take the trade at + 70 for long or - 70 for short.......

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thanks Jeff......in any case the signals must be filtered ...in market club there is a score and they suggest to take the trade at + 70 for long or - 70 for short.......

 

 

How do you compute a 70 or a -70?

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Hi Jeff , this is an example of the score......i don't have idea how to calculate....

 

I believe the score is a numerical representation of the trading rules. The code posted above does use a trend filter to filter trades.

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