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Post# of 47097
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aptus

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aptus

Re: Myst post# 6625

Tuesday, 12/31/2002 6:07:41 AM

Tuesday, December 31, 2002 6:07:41 AM

Post# of 47097
My original post was to inquire about the facts behind a claim of using x-dev to obtain 100% a year gains with less risk than Standard AIM.

I certainly didn't expect to delve this deeply into the AIM/x-dev thing, however your post has peaked my interest. So here are some comments on your post...

AIM generates its signals based on the Portfolio Control (which when a portfolio is first set up is equal to the initial investment in equity, but then increases based on the value of subsequent purchases). This can be thought of as a "running total" or a proxy of the amount you've invested in equity (note that this is not a one to one relationship as sales are not taken into account and only 50% of purchases are recorded).

This means that AIM's recommendations are based loosely on the amount of money you have invested in the market. The current equity value is compared to this "running total," so to speak, in order to generate recommendations. This results in its recommendations being based on two things: running total and price.

x-dev generates its signals based on a moving average of an equity's price. There is absolutely no unique portfolio history recorded so a "running total" does not exist. Therefore recommendations are given based on price alone. Only when a recommendation event occurs does the portfolio value come into play -- and it is used solely to size the trade. It doesn't take part in triggering the recommendation event.

"The only difference is the way the buys and sells are 'sized' as Aptus would put it. "

As noted above, this statement is incorrect because there are two differences: the first is in the way a recommendation event is triggered (i.e. based on running total and price for AIM compared with just price for x-dev).

This is a significant difference (if you don't believe me try changing your Portfolio Control value by a large amount, leaving price history unchanged, and note the vastly different recommendations).

The second difference is, as you say, the way trades are sized. This is also a significant difference because AIM sizes trades based, again, on the running total (i.e. Portfolio Control) while x-dev doesn't.

"In most cases AIM signals and X_DEV signals are the same (and I have the spreadsheets to prove it)."

Based on the two significant differences, mentioned above, I'd be quite surprised if AIM signals and x-dev signals were the same in most cases. Even if we ignore the fact that x-dev signals are shorter-term in nature while the AIM signals' term is longer, the fact that a recommendation event is triggered by such different underlying conditions leads me to believe that in most cases the signals cannot be the same. It just doesn't make sense.

If the signals were the same, then that would imply the Portfolio Control value is strongly correlated with the equity's price.

However we know this isn't the case because, as we've seen in the past two years, many deep divers have relatively low prices, yet their portfolio's Portfolio Control remains relatively high (whereas their moving average declines).

"AIM BTB can not alter its sizes and assumes 'one size fits all'"

Again, this statement is not correct. Lichello states that you can vary the minimum amount you'd like to trade (and actually changes it from 5% to 10% in the 4th edition of his book), so in effect you can alter the trade size.

In addition, today, most AIMers also use Tom Veale's invention of an adjustable split-SAFE. Some choose to keep the 10/10 SAFE values while others use different values. So you can definitely size the trade according to your wishes -- this is not an x-dev specific innovation.

"I feel the AIM derivatives are like people.........not better or worse, just different."

I disagree with this statement. Leaving the people out of the equation there are definitely some AIM derivatives that ARE worse than others (and I've tested quite a few of them).

That's why it's important to properly test a method before using it. And proper testing does not mean finding a few good results and trumpeting them. Rather it means following a statistically valid testing method that encompasses a wide variety of market conditions and includes a large enough sample of data. Even so there is no guarantee that the method will work in the future, but at least it inspires some confidence.

Five years ago a great investment method was to buy any new Internet IPO and sell it 2 weeks later. You could make a ton of money doing this, however you could hardly call it a good system to make money over the long-term -- as many "investors" found out the hard way. And that's a good example of why robust testing is not a luxury, but a necessity.

"AIM BTB can be called a mechanical system, but as soon as you alter it, doesn't it become a trading tool?"

No, it doesn't. A mechanical system is any system based on a set of well defined rules. The inputs are usually things out of your control (such as price and volume). You also usually have "knobs" that you can use to tune the system in some way before you start it.

The "mechanical" part comes from the fact that once you've started it you rarely have to fiddle with the knobs. If you start fiddling with the knobs based on non-mechanical inputs (such as emotion), then the system is no longer a mechanical one.

In addition you can have mechanical investment systems (such as AIM) and mechanical trading systems. By altering AIM you don't necessarily turn it into a trading tool (although it is possible, but then some would argue that it is no longer AIM) just as altering a mechanical trading system doesn't necessarily turn it into an investment tool.

"The premise of X_DEV is 'capturing short term trading opportunities for long term performance'."

That's also the premise of day trading. However that doesn't make day trading strategies the same as long-term investment strategies. It would be ridiculous to equate a day trading algorithm with a buy and hold algorithm. Sure their goals are the same (i.e. make money), but the paths they take to get there and the risks involved are very different -- and I wouldn't advise the average grandmother living on a pension to start day trading.

"If I X_DEV the same stock for 1, 5, 10, 25 years can you label X_DEV as a 'mechanical system' or a 'trading tool'?"

I'm not sure why you're using "mechanical system" and "trading tool" in this way. These terms are not mutually exclusive. x-dev is a trading tool, in my opinion, but it can also be a mechanical system (although if you have to constantly change the setups over relatively short periods of time based on non-mechanical inputs, then I'd say it wasn't a mechanical system -- but the point is that it can be).

Again I'll state my point from my previous post. x-dev is not an AIM derivative. It is a completely different system that borrows AIM's trade sizing CONCEPT. However the actual IMPLEMENTATION leads to very different, and non-AIM-like, results.

There are other strategies that include AIM-like concepts, but none of them claim to be AIM derivatives or suitable for AIM investors -- I suppose if they did we'd have a new SDR being sent out every week.

Experienced AIMers probably already know the two algorithms are significantly different. However new AIMers might not know this and thereby mistakenly believe that by using x-dev they're using a more aggressive form of AIM. That's not the case. In reality they'd be using a different system (as I've shown above).

Does x-dev work over the long-term in different market conditions? I don't know because I haven't seen any robust test results. Perhaps as x-dev matures this data will become available.

However that point is moot. My goal is not compare the relative merits of AIM and x-dev, but to show that x-dev is not an AIM derivative -- but a new system altogether.


Regards,
Mark

http://www.automaticinvestor.com
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