General Discussion » Socrates Dow buy / sell signals - profit calculation

Armstrong has published the buy and sell signals for the Dow on the below long term chart. He has mentioned the "net profit/loss" number, but that in itself is not telling much about the real profit that could have been made. I've Iooked at every single position and calculated this chart with some real position and equity numbers. The following was the outcome.

Positions are additive and for simplicity I've taken the initial Dow at 7000 points = 7000$ for 1 position, but this can of course be scaled up or down. Depending on how much drawdown you are willing to accept (or capital / leverage is used), the below table shows the profit that could have been made.
Since the initial position size of 7000$ will change over time, the average position size during those 18 year was 10.500$ per position . The maximum number of open positions at one point was 9 positions which equals around 120.000$ in total. This was between 2004 and 2008 and all 9 open buy positions were closed in 2008 when the first sell signal came up. Then the first sell position was opened when the bear market ongoing. In 2002 the amount of sell positions was 9 positions (from 9 sell signals) which results to about 76.000$ in total, In Oct. 2002 all 9 sell positions were closed and a buy position was opened at the same time.
There was one period during 2008 and 2009 where 8 positions were accumulated (= 55.000$) and and in 2013 til 2015 it were 5 positions ( = 70.000$)
The average equity used over the 18 years was 35.000$ in this example.
The maximum drawdown happened during 1999 and 2011 were 3 consecutive open positions were closed with loses during a choppy period.
These numbers are calculated on the long term. There were 3 bull markets and 2 bear markets during that 18 year period. To take advantage of these numbers, one should to stick to those signals for at least 2 years (better 3 or ideally 18 years), I would say. As Armstrong also said, these signals work well during bull or bear markets. If the markets move sideways for a long time (several years), then signals don't work so well without timing.

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The below values are related to the average equity invested over the whole time period of 18 years. In this case it is 35.000$
9 simultaneously open positions max. = 120.000$ max. investment at some point.
Max. drawdown is related to the average equity.

Max. drawdown 9% profit 160% (56.000$ without leverage)
Max. drawdown 18% profit 320%
Max. drawdown 27% profit 480%
Max. drawdown 36% profit 640% (224.000$ - with a leverage of 4x per position)
Max. drawdown 45% profit 800%
Max. drawdown 55% profit 960% (336.000$ - with a leverage of 6x per position)

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Since having 120.000$ invested at some point might not be an option for everyone, I've calculated this for fewer positions as well
and skipping everything above that position number. This is given that the initial positions size is 7000$ per position and position size is growing over time.

3 simultaneously open positions max = (40.000$ max.) - 10.500$ in average per position , average equity used during the 18 years = 23.000$
The 50.000 for 3 positions were only when the Dow was at

Max. drawdown 15% profit 160% (37.000$ without leverage))
Max. drawdown 30% profit 320% (74.000$ - with a leverage of 2x per position)
Max. drawdown 45% profit 480% (111.000$ - with a leverage of 3x per position)
Max. drawdown 60% profit 640% (148.000$ - with a leverage of 4x per position)

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During 1997 til 2015 the Dow itself had a max. drawdown of 50% (in 2008) and a total profit of around 250%. However, who could have known that it really goes up to 17.000 - 18.000 in 2012 with all of the banking crisis and subprime crisis going on. Who would have bought and sold the Dow during the panic of 2001 or 2008 correctly?

So in my opinion those signals were very successful compared to the Dow itself and it is super-simple to follow. You just have to consider the buy and sell signals by looking once a month at Socrates.
What also needs to be considered is position size, leverage, duration of investment, trading tools (ETF's or alike), the max. number of positions and the max. drawdown that can be accepted. Profits could be re-invested and additional equity could be added over time so that one doesn't have to start with 120k or 35k equity from the beginning.
With only 3 open positions max. it may happen that one is not trading at all for 2 years because there were more than 3 positions open at the same time. Also a leverage of 2x - 3x would be good to compensate inflation.

This one took me several full days to collect the data and create the formulas. Quite some work...



*** Update 1 ***
some stats on 9 positions strategy : 49 trades in total - 36 win / 13 lost
some stats on 3 positions strategy : 49 trades in total - 30 traded (20 win / 10 lost) - 19 trades omited (more then 3 trade at the same time)