THE POWER OF MARKET INTERNALS

3 case studies to demonstrate the application of Market Internals in trading systems.

CASE STUDY 1: SWING BOSS System

For the first example I will show you one of my oldest trading systems (which you can download
from my website for free) called TOM’s BOSS ATS. This case is a slightly modified SWING variant
that doesn't close all positions at the end of the day (EOD exit), but it holds positions open for
several days. Besides this small difference I haven’t changed the system in any other way.

For this example I’ve chosen the ES market, but I have this system finalized for other index
markets too, and the target is pretty clear: -to improve the net profit to maximum- drawdown
ratio, improve the overall performance of the system, decrease the drawdown and smoothen the
equity curve.
Here you can see the original equity compiled from Out-Of-Sample (OOS) intervals (it is 100%
OOS equity, no In-Sample interval included):

I’m quite happy with this basic performance -It’s a very nice result for OOS intervals. But still, there
is some room for improvement - and that is exactly the task for Market Internals.

Regarding the system performance characteristics, all the important parameters are available in
this table:

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Again, you can see satisfactory parameters that theoretically don't need too much improvement -
especially in the context of my whole portfolio. However, I know what Market Internals can do and it
would be a shame not to at least try it. After a couple of test runs with my MI code, I have picked one of
my 40+ variants (i.e. one of my 40+ MI “over-filters”), which looks good on In-Sample optimization as
well as on Out-Of-Sample verification and which brings a number of improvements.

Let's take a look at the equity that, on the first sight, hasn't improved that much, but you can still
see some improvement:

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The equity is smoother and more stable, but you can see the real change when looking at the
final numbers:

Let's start with the Net Profit (NP): It’s not always bigger after an MI application (more often, the
drawdown is improved and therefore the NP/DD ratio is also). But in this case the NP has increased
from 68,300 USD to 70,550 USD, i.e. an improvement of 3.3%. Nothing breathtaking so far, but hold
on, it will get better!

You can see a really dramatic improvement when it comes to the drawdown, which has improved
from 6,137 USD to 3,525 USD, a reduction of almost half (42.6% to be exact)! Try to remember how
much effort you had to put into your systems last time you wanted to reduce the DD by at least
20%. Here, just by using a single tool, I have reduced the drawdown by almost half!

Similar impressive improvements can be seen in the Net Profit to Drawdown ratio, which has
changed from an already satisfying 11.13 to a fantastic 20.01 – an improvement of
And finally, the profit factor has improved from 1.49 to 1.83 (improved by 22.8%) and WIN%
from 41.47% to 50.53% (improved by 21.8%). All I had to do was to run one optimization and
wait approx. 60 minutes for the computer to give me the results.

Do you know understand why I call MI an unfair (super)advantage?

For easier comparison, I’ve prepared a table:

PARAMETER NP MaxDD NP/DD PF WIN% TRADES

BEFORE MI 68 300 6 137 11.13 1.49 41.47 % 504
AFTER MI 70 550 3 525 20.01 1.83 50.53 % 471
IMPROVED BY +3.3 % +42.6 % +79.7 % +22.8 % +21.8 % -6.5%

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CASE STUDY 2: BNR System

Ok, let's move to another example. What I’ve already shown you was just a warm up, because the
options you have when using Market Internals are much more diverse! In the second example, I
will show you one of the extreme applications of MI.

In 2011, I created a system I called BNR. I’ve never run it live because it failed my robustness
tests, which was a good decision - the system stopped working shortly after and had a
drawdown of over 10,000 USD. After all, see for yourself:

And the overall statistics were not so great either:

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However, what impressed me was how the system managed to get from the (quite large)
drawdown back to the new equity high and start making profits again. That made me curious, and I
started wondering if MI could improve the system performance. At least, it was a good idea to test
how powerful MI can be, to see if it can help in such an extreme situation and turn a bad system
into a good one.

In this case, the testing was a little bit more difficult, as most of my Market Internals conditions
didn't provide an improvement. It turned out that such an extreme situation requires an extreme
solution and I had to implement an MI condition that lets the BNR strategy open the trade only
when the situation is really, really strong for either buying or selling.
This is a really significant filter that eliminates lots of trades, as it waits only for the best (and also most
extreme) possible situations - and therefore it also dramatically reduces the number of trades.

Here you can see the results and the new equity of the BNR system after 60 minutes of “work”:

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At first sight, you can see that the equity has changed dramatically and the numbers can only
confirm this assumption:

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The net profit has decreased from 57,660 USD to 29,990 USD, i.e. reduced by 48%. You can expect
that, when making such a dramatic reduction, however, the rest of the numbers are really quite
impressive.

The drawdown has been reduced from 11,340 to 3,510 - almost 70%! This has also led to a Net
Profit to Drawdown ratio improvement from a totally unacceptable 5.1 to an almost acceptable 8.5
– an improvement of almost 70%.

Even the profit factor has improved by 33% and the WIN% by 6.5%. Here is the overview table:

PARAMETER NP MaxDD NP/D PF WIN% TRADES

D
BEFORE MI 57 660 11 340 5.1 1.41 57.65 % 562
AFTER MI 29 990 3 510 8.5 1.88 61.41 % 184
IMPROVED BY -48 % +69 % +67 % +33 % +6.5 % -67%

The most important aspect of this case study is the fact that Market Internals can improve a
potentially bad system into a tradeable system! All you need is the knowledge and a couple
of minutes of computer time.

CASE STUDY 3: CORRECTOR-1 System

Now let's do something quite different - a very specific task for Market Internals.

In 2011, I created a totally atypical system that doesn't have any optimization parameters. The
system is based on one very strong observation and doesn't use any indicators or variables or
anything that could be optimized.

This has led to a very interesting situation. On one side I’ve managed to create a breakout system
that is very robust and doesn't use any optimization, but on the other side the system has such a
low average trade value that it is practically untradeable - and it is not possible to increase the
average profit by optimization - as there is nothing to be optimized!
Most traders would be helpless with this system in their hands and would have to throw this great
opportunity away. But not me - I have my unfair advantage, so let's get to it.

First, let's take a look at the equity. At first sight, it doesn't look like anything special, but don't
forget - it is a unique system that doesn't use any indicators or optimization parameters:

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Some of the parameters in the table below don't look too tempting either, but then again, it is
a totally unique system and all I need to improve is the average trade profit:

So, what can the targeted implementation of Market Internals provide for us this time?

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Let's start, for a change, with an overview of all the performance results for the new version after
the Market Internals filter application (and 60 minutes of computer time):

With MI, I’ve managed to improve the average trade profit from an untradeable 68.56 USD to
79.21 USD (an increase of 16%). My limit for tradability of a system in the E-mini Russell 2000
market is about 80 USD per trade, so in this case I have managed to get to this level and once again
I have modified an untradeable system into a tradeable one!

The rest of the parameters have improved just slightly, but there was an overall improvement.
The equity curve has some periods of stagnation but it hasn’t changed too much overall:

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After several years I was able to add this system to my portfolio - due to its uniqueness, I wanted this
system to be a part of it. This was possible only after I had discovered the world of Market Internals.

WANT MORE?
I hope these case studies have shown you the huge potential of Market Internals. It can be a very
powerful tool if you know how to apply it correctly.
Over the next few days, we’re going to send you MORE valuable Market Internals content, including:

• What’s so special about Market Internals and why you can’t ignore them ever again,

• How Market Internals can reduce your drawdowns by up to 50% - or even more!

• How to adapt to ever-changing market conditions better with more intelligent Market
Internals exits and trade management,

• Why it’s so hard to find good and reliable information on Market Internals that actually
works,

• Amazing success stories of other traders using these exact same Market Internals techniques
(with real-life examples) and how you can do it too.

Check your inbox tomorrow for the first installment.

Trade well!

Tomas, Andrew, and the rest of The Trading Market Internals team.

http://www.tradingmarketinternals.com – Page 10 of 12
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