2012 Performance Evaluation (Part 7)

As discussed in my last post (http://www.optionfanatic.com/2013/02/18/2012-performance-evaluation-part-6/), 2012 was calm for stocks as compared to any of the preceding four years.  Give me any tame market and my account should flourish.  Indeed, last year I returned over 53% when the best-performing index returned under 16%.  What a windfall!  Don’t you just wish I managed your money?  Do you want to be like me?

Not just yet.

As for the other two questions, no and no.

I cannot depend on quiescence in order to succeed.  I will only be a good trader when I can make money in calm markets and avoid losing big in violent ones.  With the exception of 2008, I have yet to demonstrate success with the latter.

I now want to adjust my focus from monthly to weekly performance numbers.  The basis for this discussion involves tracking account value alongside its moving average (MA).  The MA serves as a “loss filter” by signaling to stop trading real money in favor of paper trading when the equity curve crosses below the MA.  When the hypothetical account value crosses above the MA then trading may resume with real money.

While I think this concept has merit, I worry about the potential for curve fitting.  I would not want to optimize and pick the best MA period without surveying the parameter space to make sure good results are seen with neighboring values.  I also worry about sample size.  I have less than five years of weekly account values available and in that time, I may only have a handful of instances where account value has crossed its MA.  If I don’t have enough cases to form a valid sample then the door is left open to curve-fit results and decreased probability of future profit with real trading.

In the next post I will discuss a variation on this theme.