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“Keeping It Real”

|Includes: SPDR S&P 500 Trust ETF (SPY)

Conservative approach to displaying trade results.

Prices trade "through" our limit targets.

Trade with the long-term in mind.

InvestiQuant’s CEO and co-founder Scott Andrews shares his thoughts and tips

Using the moniker “The Gap Guy,” I started writing a trading blog in September of 2007 — just months before the 2008 market crash (learn more about InvestiQuant’s unique history here.) It gathered a sizable following quickly and I’d like to think it was because of my writing skills… but I know better (long ago my plebe year English instructor at West Point pre-empted any chance of such delusional fantasies).

I believe the main attraction to the blog was my commitment to sharing “the good, the bad, and the ugly” of my own personal trading. Readers told me it was refreshing not to be bombarded with “the good, the great, and the unbelievable” as so many others endlessly promote in this industry. Keeping it real was the best way I could help other aspiring self-directed investors. And I still believe that today, because the best way to make the most money over the long term, is to stay in the game over the long term. Having realistic expectations is integral to staying motivated, disciplined and patient year in and year out.

One of the many ways we help our automated portfolio clients maintain realistic expectations is related to how we identify and track “winners” in historical and live trading performance reports. To be considered a winning trade, we require that prices trade through our limit targets. If not, we assume that we would not have been filled on a touch of the price (though in reality we often are). As a result, our hypothetical results look worse at times than they were in reality.

An example of this happened in one of the trades in the ES (S&P 500 e-mini futures) on Friday, June 30th. In this example, one of our strategies went short the ES at 2425.50 at 9:30 AM ET with a target of 2418.50. At 10:16 AM its target was hit. The ES bounced off our target and returned to that same exact price again at 10:51 AM and bounced yet again, and then, almost unbelievably, it happened a third time at 11:30 AM. From there the market rallied before selling off a bit at the end of the session without ever trading through our target price of 2418.50.

We heard from several clients that they did get filled at the target price of 2418.50. However, we recorded the trade as having exited at the end of the day for a 5 point win. Had price reversed and touched our stop we would have counted it as a sizable losing trade, even though we know many, if not all, of our clients were filled for a very nice profit.

This conservative approach may not sound like a big deal to you, but it is not uncommon for a given strategy to have a “touch no fill” event several times (or more) per year. And since InvestiQuant’s portfolios utilize multiple strategies, the aggregate impact of our “trade through” requirement on hypothetical back-tested and live trading results can be quite significant — deflating historical performance and tempering clients’ expectations appropriately. And while this conservative approach doesn’t directly help our sales, it’s the right thing to do.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SPY over the next 72 hours.

Additional disclosure: Basic information on how one automated trading company describes performance metrics - conservatively.