THE POWER OF MARKET INTERNALS

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

CASE STUDY 1: SWING BOSS system

As 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 opened even 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 was pretty clear - to improve the net profit to max. 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 intervals (it is 100% OOS equity,
no In-Sample interval is 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 try it at least. 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 also NP/DD ratio). But in this case the NP has increased from
68 300 USD to 70 550 USD, i.e. an improvement of 3.3%. So far, nothing breathtaking, 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 give to 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 79.7%! 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 bigger! 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,
and it 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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On the 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 3510, i.e. 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 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 and 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. On 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 us this time?

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Let's start, for a change, with an overview of all 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 emini 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 - for its uniqueness I want 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:

 An exclusive step-by-step video showing exactly how Tomas implements Market Internals in
his own trading strategies

 A downloadable workbook with all the code for the ‘845 breakout strategy’ plus the special
Market Internals condition we used, so you can test it yourself (and apply it to your own
trading today!)

 The MI-5 framework uncovered, with 3 simple steps to transform your trading results quickly
with Market Internals

 6 powerful ideas to build effective Market Internals conditions using Moving Averages

 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.

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