Part I and Part II discussed the good and bad points of the first incarnation of CASTrader, and this post will discuss the truly ugly. The truly ugly period is from 1967 to about 1983 (16 years out of 90) where CASTrader was truly baffled by the market (see graph at left). It seems CASTrader is finding patterns in the Dow Jones data for other periods (especially 1983-2006) which may or may not be tradeable, but the 1967-1983 period is unique and seems to confound CASTrader. The aggregate collection of traders gets the market wrong on a frequent basis, even though in aggregate, their exposure to the market is limited. This means they are calling the market even more wrong than it appears.Over this period, CASTrader loses 75% of it's capital.
Despite the performance in other periods, it is simply unacceptable to utilize a system that underperforms the market that bad for a full 16 years, especially during a period where the market is horrible anyway. It's unclear what is so unusual about this period, since CASTrader performed remarkably well during the Great Depression and the last five year's worth of sideways market movement.
A casual perusal of the simulations during the simulations shows that it may be partially the elite trader's fault. Although the elite traders are not yet dominant like in the 1990-2006 period, they typically have a large relative bankroll (10%) and are influential. They typically get slowly killed during this period and bleed away their dominance at a higher rate than the aggregate of traders (although the aggregate loses money too).
Whatever worked so good for the elites in the 1920-1967 period and later in the 1983-2006 period is simply absent from 1967-1983. Moreover, it doesn't just not work, it bleeds them.
Again, allowing the traders to earn interest on their relatively high cash stockpiles would help, especially with the high interest rates during parts of this period, but this may be offset or even worsened after factoring in trading costs.
Improving CASTrader's ability to adapt to a period like this may be the toughest challenge of all. I'll discuss some possible options in Part IV.
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