Ask and Ye Shall Receive

A reader forwarded the following question regarding Frank’s Modified Ned Davies Method for position trading the Russell 2000:

 

“In the article about Modified Davis Method Frank never explained what other thresholds besides buy and sell exist, but then he posted information about being 50% long or short. Is it possible to be say 42% short or 0, 50% and 100% are the only possible values. It would be great if he explained this part in more details.

There are other parts that are lacking, for example how market breadth is used to determine sell signals and how exactly he constructed trend line (regression or something similar?).”

 

RUTThe Russell 2000, monthly, over the past 20 years, via BarChart – click to enlarge.

 

Here is Frank’s reply:

Across the forward test that went for more than 50 years, different thresholds proved to be the best at different times.  I let them vary for about 2 percentage points either side of 4% for each back test.  The thresholds that worked the best for each back test were used for the next trade, on data that the method had not seen before.

I could list the results for different thresholds but I don’t think that would help anyone very much.  Russell 2000 data is readily available and the original Davis method is about as simple as any trading method could be.  I would encourage people to program that and try their own different values and ideas on how to modify it.

As for 50% short vs. 42% short or some other number, I did not try anything like that.  I am sure that varying this number would change the results, and the farther one got from 50%, the more different the results would be, but probably not radically until values like 10% or 90% were used.  50% is a personal choice.  If the market declines but breadth is still strong, I want to be 50% invested. That’s about it.

I look for a decline in breadth as a bull market advances.  There are several ways to do this, described in the public domain for decades.  There are different ways to construct a trend line.  I spent a lot of time creating one that works well, which I consider proprietary and don’t want to reveal.

What I hope my article will do is inspire people to do their own programming and testing, trying their own ideas to see what they come up with.  I believe strongly that the best trading method for YOU is the one that YOU work out yourself, that trades in a way that is most comfortable for you.  Some methods are better than others, but no method is perfect.  The really hard part is learning the discipline to use the method, whatever it is.

 

 

 

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