I wanted to set one of the controls described in my Jensen Modified Sharpe paper: setting the desired profit level. From the paper, it is said that you can preset the sum of profits generated. It is not said that you will reach them; the governing equation is dependant on the size and nature of the price fluctuations and that can not be guarantied.
However, controls can be implemented in the “should prices move in such and such a way sense”, then the holding function can be scaled to reach profit levels. This is a remarkable attribute of the Alpha Power methodology. You want more profits; you preset more pressure on the holding function controls.
The chart below presents simulations done on the old WL4 site on May 10th. What can be seen is that as the level control increases, profits increase as well as the quantity of trades. The level control regulates the holding function.
The price series over the trading interval is the same for all. It is the trading strategy, the manipulation of the holding function that will make a difference. In all these tests, the bet size was 5k for each trade and by allowing gradually more trades at each level produced higher overall profits.
What ever the script I design, I most often use RIMM as testing candidate. Some 6 years ago, it could easily have been chosen to be part of a portfolio: it was only going up. However, over the last 6 years, RIMM has gone from a high of $ 140 down to $ 45. For someone wishing to trade on stocks that go up long term, RIMM is certainly not the best candidate for the job. Nevertheless, the methodology survived and produced scaled profits based on the pressure applied to the holding function.
Personally, I find the concept interesting.
Created on ... May 11, 2011 © Guy R. Fleury. All rights reserved.