"Smart Money" ProxyTrader FAQ

Q: You currently have a "Smart Money" proxytrade signal indicated for the DOW, but I don't find any funds that will trade on a leveraged basis like the Profunds. What instrument should I be looking at trading this signal?

A: There currently are no SHORT  leveraged funds with goals of greater than 1 to 1. Potomac does have a 1 to 1.25 goal LONG fund, (PDOWX), which can give you some advantage on DOW buy signals. I will add it to the monitored list this week.

 If you can use margiin, then you can buy and sell the DIA or the IYW Dow Industrial  "Ishare" and get the benefit of the added gain. Within an IRA/401K program you would not be able to do this. 

Q: On your 1 week trade filter-trade by trade table on page 27, I understand the entry and exit columns with exception of one column. That is column 2 between B/S and Bar # under Entry which starts out with the number 84 and ends up with the number 1869. Also, It seems that if one takes the cumulative P/L and divide it by the Closed Price and multiply it by 2, the result is the number in the next line of the column stated above. WHAT DOES THE NUMBER IN THIS COLUMN MEAN?

A: The backtest program that was used to test this program has a couple of  idiosyncrasies that make the output somewhat confusing. As a result, it is not always clear what the column headers mean, so here is a breakdown.

Column 1: B for buy, S for sell...(that one was pretty easy)
Column 2:: The number in this column represents the number of shares of the index that could have theoretically been bought on that date, and is the basis for profit computations, i.e.. At the time of the first trade, the index was at 242.40  If we take our starting capital of $10,000 and divide it by 242.40, we get 41.25 "shares" of the index. Since we are using margin, we can buy twice as many shares, so the real number is 83 shares bought, but the program rounds to 82 which is the number you see in the first row of the second column. When the trade is over, the next trade takes the new balance, divides by price to figure the new number of "shares" bought ad infinitum.
Column 3:  Bar#...I get more mail on this one than any other. The testing program can't tell by itself if we are looking a ticks, minutes, hours, days or weeks in making the system evaluation. To simplify the process, it just calls each "period" a Bar, assuming that you already know what type of data you are working with. In this case, the Bar # refers to the number of weeks in the data base, so the first trade occurred in the 7th bar, or 7th week of the data.
Column 4:  ENTRY Date...obviously the date the trade was initiated.
Column 5:  Price: Index "price" on the day the trade was entered.
Column 6::  Bar #: Again the week that the trade was exited, in this case Bar # (week) 9.  We were in the trade for 2 weeks.
Column 7: EXIT Date: Again, obviously the day we exited the trade.
Column 8:  EXIT Price: Index price the day of the exit.
Column 9: Profit/Loss: how much did you make or lose on the trade, (does not include your original capital which must be added back in to figure your current account balance).

Q: Where can I trade these proxy and Fund products.

A: The SPY and DIA and QQQ can be traded long or short through any discount broker.

The specialized funds can be traded directly with the fund, or in many cases through a discounter who specializes in Mutual Funds. The minimum amount needed to invest is variable depending upon your individual situation, (in IRA/401K etc).

To trade mutual funds you will need to find a deep discount mutual fund broker (not the same as a stock broker). I am not affiliated with nor do I endorse any particular broker, however the following have been recommended by users: 1-800-323-3263 <http://www.jackwhiteco.com/>JACK WHITE & CO. offers flat fee mutual fund trading for $24 on-line and $27 over the phone.

Also check out <http://www.ameritrade.com>Ameritrade: they have $18 per trade for mutual funds, or only $36 round trip.

Also check out the reference to American Skandia below for an interesting alternative.

If you have found more alternatives, let me know and I will add them to the list.

Q. Are there any other alternatives for trading on a deferred tax basis when I am too old to start an IRA/401K that doesn't limit the amount I can put in?

A. This one was best answered by a subscriber who uses the Profunds through an Annuity. His input is provided below:

Henry, I've traded off and on the floor for over 15 years and I enjoy using your thoughts along with my own ,the new COT hist. reports help me to realize with more conviction what I already knew.  The reason for my email was to point out for your non qualified money that will be ravaged by taxes using your very efficient systems you might want to look at http://www.americanskandia.com This is a variable annuity co. which has a lot of the options that would allow you to implement your system, the fees will be a little higher but if you don't select any death benefit your fees and ease of execution without taxes will far exceed that, the only drawback would be for the pre 59 1/2 user but even a 10 % pre dist. would probably be less than the taxes after 3 years, just a thought .....thank you TM

Q:  I have a question about the S&P Proxy system. I had asked your IMF staff what the annual rate of return was and How it compared to the Mutual Funds system.  I see that the annual rate of return is around 1200%. But, I don't see how this can be for every year. This must be an average annual return with the biggest return being in the latter years because of the compounding effect. I am trying to project a forecast for a $100K or a $15K account and what I can expect (with the understanding that past performance is not indicative of future performance).

A: The comparison for the two systems has been computed differently because of the nature of the testing program. It is simply a difference in expression.

In the case of the Mutual Funds, the rate of return is based upon a true average of each of the year's gains and that rate is of course then compounded. In the case of the Proxytrader, the program looks at the starting capital vs. ending account balance and simply does a division of the gain by the number of years.  The result is an 18,624% gain over 15 years, or an ending gain of 1248% per year. If we were to look at the Mutual funds over the same period evaluated the same way it would be roughly 4500% gain, or 300% per year.... There is also confusion over the terms "Compounded Gain" and "Annualized Gain" Annualized gain takes into affect the effect the compounding, but is technically a simple average  gain. as opposed to a number which you can punch into your handy dandy calculator and get a "Compounded Gain" figure. Somebody did, and came up with about 43% per year compounded, but of course this is not a reasonable method either, as it does not take into account the extremes.

It's a matter of comparing apples to apples...obviously, the SPproxyTrader does a better job, but the power of both systems is in their ability to compound the investment.

Q:  I just get your "Smart Money" Proxy Trader. I found on page. 20 you stated it produced an 82% per year compounded gain of 1231% over 15 year period which is incorrect. The true compound gain is : exp( ln(12.31+1)/15) -1 = .188 or 18.8% Yon can check the result as: Total gain = 10000 * (1.188 *15) -10000= 122,509 (due to rounding error) Granted, even at 18.8% compounded is very impressive. But 89% compound gain is not correct.   Your best result of profit at 2,230,183 (on page 27) has a compound gain of 43.4%/year.

A:  See the answer directly above.

Q:  I purchased your Proxy Trader System. It is similar to Larry Williams methods of spotting "commercial" buying. Anyway, you did a great job putting the futures' data to good use; while making it "tradable" in the stock market. Although, the reason I am writing to you is to let you know that I think you may have underestimated the results of the system. I inputted the Trades (with the 1 week Trade Filter) into an excel spreadsheet and calculated the returns (see attached spreadsheet). As you can see, the returns were much higher. Please verify my formulas, however, I believe the system results are much better than stated in the manual. If I am wrong, please let me know.

A:  No, you are right. The numbers were so good, we decided early on not to "Push It", and let others discover just how much better it could be. We took worst case pricing in every case. Also, if you trade the Monday open or close, which is easier for most normal (non-daytraders), then you will find the returns are even higher. Also, using the Proxy Funds shows considerably better returns, but they were not available for the entire period.

Q:Under your listing for "All Trades" you show the profit on $10,000. But you show the average losing trade as $41,133.06. Does this mean that, due to use of margin, leverage or whatever, if I had started with $10,000 as my investment, my average loss would have been $41,133.06? Under "Short Trades" you also show "Biggest Loser" as $159,812. Isn't that a lot of money for a "Small Trader" to risk on just one trade.

A: Another common question. Again, because the backtesting program is not designed to produce the nice simple numbers we would like to see, it tends to exaggerate loss perception by expressing losses as hard dollars as opposed to "% loss during trade' which works out to a max loss of around 16.5%.  That means that if you started with $10,000, the largest drawdown you would have experienced would have been $16.5% of your starting capital. We all feel more comfortable seeing it expressed this way.  At some point I will go back and change all the print-outs to reflect % changes as opposed to portfolio $.

Q: From the manual it seems that the results you publish are results from trading on the same day as the signal is given. If so, please explain how that can be done?  Are we supposed to trade on the following Monday? If so, are the results you publish the same for trades that occur on the following Monday?  If not, what are the results by trading on Mondays and not Fridays?

A: We used the Friday close in our computations to do the analysis because the data for decision making is available from the CoT web page between 13:25 and 13:30, a half hour before the market close. We considered this a worse case, because in actual trading, using the following Monday's opening price was actually more profitable. Most folks can't watch during the week anyway, so would put their market orders in for Monday's open, leaving you the weekend to do your research.

Q: When waiting for a signal you are using the S&P price change as a filter, you wait until you get the corresponding change in the price of S&P before making a trade. That is, once there is a Buy/Sell change, you wait until the S&P price changes - you do not have to wait for both a Buy/Sell and a S&P change to occur on the same Friday. Correct?

A: Indeed, once the net- long/net- short position has changed, the trade can be entered immediately if price change from the previous week meets the criteria.  If it does not, then you would wait for the week-over-week price change criteria to be satisfied, and then enter the trade. This one filter alone will help to keep you on the "right" side of the trade and minimize whipsaws, particularly at market turning points where volatility affects us most.  We recently had a DOW net- short switch indication on the CoT which was NOT confirmed by the price change, and indeed switched back to net long the following week. Price then subsequently confirmed this long signal. Traders who were long-stayed long, and the opportunity gave new money a chance to enter the trade.

Q: You refer to drawdown several times in the manual. I wasn't sure if you had pulled some of the funds out for use or to pay for commissions or what. You even refer to intra-trade draw downs.

A: This simply means what is the biggest hit that the account took during the life of the trade, or monitoring period.  Again, it would be much easier to understand if these things were expressed in percent as opposed to trade dollars, and I will eventually go in and modify the results page to reflect % changes throughout.

Q: The charts used on the web site, the COT charts, are unclear to me also. The numbers on the left side go from a positive at the top down to a negative on the bottom. The numbers on the right side go from a high positive at the top to zero at the bottom. With out understanding these the charts are of no use to me.

A: The charts are pretty simple to understand. The scale on the left hand side references the number of contracts long or short and is used for each of the Commercials, Large and Small traders. The scale on the right hand side is used to follow the action of the "OI" line, (Open Interest)---see next question..

Q: There is a green line going across the top of the SP chart. In the box a straight line was designated as interest. I wasn't sure if that was interest rates from the Feds or if that was interest by the traders in the funds.

A: Interest =OI or Open Interest, which is an indication of how many contracts are waiting in the wings for their Bid or Asked prices to be hit.

Q: Do the buy/sell signals on the web site use the straight approach or do they use the proprietary timing filter?

A: All the gains shown in the weekly table on the web site are based on the "standard" gains as taught in the strategy. The Proprietary signals are given as they occur and I will eventually get some comparative charts online for comparison.

Q:   How long do I have free access to the buy/sell signals on the web site? I assume you intend to provide this as a service (assuming access duration is limited). If so, what will the fee be?

A: You get two free weeks access to all of the website offerings except the Mutual Fund switching which is a long term vehicle. That means you can view the Long, Premium, Short signals each weekend, as well as "Henry's Nightly Market Commentary". Those who are current subscribers, or become current subscribers as a result of this strategy purchase will have access to the Weekly proxytrader signals free for the life of any subscribed service they chose. This only pertains to the Pitbull Investor site, not Stocktables.com. The address of the website is http://www.pitbull.com

Q: Regarding the Dow buy signal generated on 7-27-01, which proxy funds) should be purchased for correspondence? also, I noticed there is already a buy in place from 3-31-01 therefore can there be multiple buys (or sells) generated in the same direction after an initial buy or sell is generated?

A: The DOW can be traded using the DIA. There is no corresponding highly leveraged DOW product such as Profunds or Rydex offer on the SP500 as yet.

Q: you have numbered funds 1-6 for S&P and 7-10 for NASDAQ on your free screen sample today, what proxy funds might they correspond to?  can one buy these indices directly too?

A: The fund names and symbols have been removed to "protect the innocent" on the sample page which is available to non-subscribers/strategy purchasers. For subscribers or trials, the page inside the subscriber area at http://www.pitbull.com lists all the names and symbols.  As we find other trading vehicles, these will be updated.

Q: I have just finished reading the proxy-trader manual.  I am impressed with its simplicity and the consistency of winners using the filters.  Using this strategy, which has performed better the S&P or NASD 100?  How would this perform using puts and calls on the underlying?

A: NASDAQ is much more volatile and more losses with larger drawdowns, but the filters make it more profitable over the long haul. Options are an excellent medium for those who understand how to implement them.

Q:  Can you walk me through just the first trade on page 27 of the strategy, I am having trouble figuring out how you got the numbers you did.

A:  Sure.... We start with $10,000 and Let's round everything to keep it simple.

That buys you 42.30 shares of the SP@ 236.36, (but because it is on margin, actually twice that amount, or 84.60 shares), for a total leveraged to $20,000)

When you sell, you receive 328.07 x 84.60 x 2 or $27,756. Subtracting your original $10K and the margin you are left with a net gain of $7756...Your account balance is now 17,760 and your buying power for the next transaction has a starting basis of $35,520.

Q: To what extent and how is the "additional proprietary timing filter" curve-fitted.

A:I do not believe in curve fitting, averages or lagging indicators, so none of those things apply.

Q:  Will you provide any further info re the proprietary filter?

A:  The signals, for the time being will be available free for any subscriber to any Pitbull Service for the life of their subscription. This will include standard as well as proprietary signals, but there is no further disclosure considered at this time.

Q:  Will you provide an ongoing service only providing this filter and the related signals (Dow, Russell, etc)?

A: We have no current plans to spin this off as a separate service, but would rather include it as a free bonus to our regular subscribers.

Q: Should I apply the "One Week Reversal Filter" described on pages 24 through 27 to your website signals?

A: No...they are already built into the displayed numbers.

Q: Do the signals you provide on the website currently incorporate the One Week Reversal Filter?

A: Again, yes.

Q:  Are performance numbers you detail in the manual based on the date of the signal or the trade date?

A: They are based on the Friday report release, which occurs 30 minutes before the close. In actual practice, better returns were indicated by taking the following Monday open.

Q. What day of the week do you put your signals on the web?

A: Generally we will put the signals up on the web on the day of the CFTC release. The charts are updated over the weekend.

Q: I just read the manual with great interest.  I have a couple of questions:       

1. The spyder (spy) only started in 1993-What did you use to get the profit back to 1986?   

 A: The comps were done using the S&P index cash price based one a 1$ per point move. The SPY was not available through the entire period, so you would have either had to trade the options or futures. Now you have the option of doing the Rydex or Profunds.

2.You stated in the manual that this was a free service but how can I use it if you did not tell me how to figure the proprietary timing signal?

 A: The Free data is available from CFTC. The Proprietary signal which improves the returns is available from us if you should choose any of our other services, but is not necessary to follow the other examples in the manual. The "Standard" return was not based on the proprietary signal. We will be publishing the proprietary signals as they occur and put up charts for comparison as we get time.

Q: You refer to drawdown several times in the manual. I wasn't sure if you had pulled some of the funds out for use or to pay for commissions or what. You even refer to intra-trade draw downs.

A: This refers to declining capital from the time you enter a trade. What would be the worst loss if you had entered the trade at less than an optimum time. The numbers are deceiving the worst case was over $100,000, but you must remember that at that time the account was over 2,000,000.  It would be better expressed as a % drawdown which you could then relate to the amount of capital you actually had in play, but the backtesting program does not do it that way.

I'll add more as I get 'em....Henry