Z8 & Z9 questions

Hi jcl,

Appreciate your help to verify/clarify some things about Z8 & Z9:

a) The manual states that Z8's default assets were selected on the basis of "industry diversity and by their supposed long-term prospects". Z9 doesn't have the same statement, but presumably Z9's selection criteria is the same?

b) For both, the Heat Map goal is to be as blue as possible, correct?

c) If Z9 doesn't have anything to invest in, it moves to Treasuries - is this configurable? Can something else be selected as the "park" asset?

d) What portion of Z9's better performance is due to the different algorithm vs. the different assets? Can this be determined by running Z9 with the Z8 asset list (and/or vice versa)? Or is something else going on?

e) Z8 & Z9 both follow the square root withdrawal rule, correct?

Thanks!

I do not know the selection basis, but b) yes c) yes d) algorithm e) no. No Z system has a withdrawal rule.

To the first question: Z9 trades major market sectors. But it would probably also work with stocks.

Hi DdIV,

there is more issues you may face with the Z9 setup, like in my case - I can not buy Z9 ETFs, due to my European residency. Nevertheless, the Gary Antonacci Book - Dual Momentum Investing is the gem to better understand the principle of asset selection and the algorithm principle. I followed the chapters and selected the assets.csv from what was available in my trading account.

Not to forget the Z8 gem - the JCL BlackBook :-).

Thanks all!

@jcl: To phrase the 1st question another way, Z9, like Z8 needs assets that are diversified, as much as possible uncorrelated, that each have an increasing history, and are expected go higher than where they are currently, correct?

@jcl, petra: Re. c), how does one select a different "park" asset? I don't see that in the manual...

@jcl, petra: Re. e), for the AR strategies, that don't automatically reinvest, the square root "rule" limits the amount of profits that can be withdrawn in order to minimize the risk of strategy blow up. For the CAGR strategies that reinvest automatically, such as Z8 & Z9, there are statements amongst these strategies that the reinvest is done according to the square root rule, and the amount not reinvested is retained as a buffer. So, the question becomes, can anything be withdrawn safely before completely stopping the strategy? If so, how much? According to what "rule"/formula?

Thanks!

@jcl, @petra,

Would appreciate your comments.

Thanks.

No Z system will force you to reinvest. What you invest, reinvest, or withdraw is completely up to you. The bonds in Z9 are marked in the asset list as described in the manual, and you can use other assets instead of bonds if you want.

Thanks jcl. But I'm still confused...

Re. Reinvest: I'm not sure how "force" entered the conversation. I understand that our accounts are ours to put funds in or take them out. There is, however, the square root "rule" guideline that a prudent investor should follow vis-a-vis withdrawals from the high leverage strategies.

The confusion is being generated by this sentence from the manual's description for Z8: "The backtest reinvests the capital growth to the power of 0.9, and keeps the remaining profit as cash reserve on the account for buffering drawdowns.", this for Z9 "... reinvesting profit to the power of 0.9 ...", and this for Z13 "The system reinvests profits using the square root rule, with the exponent determined from leverage. With no leverage, as on a cash account, profits are linear reinvested.".

When the manual says "[t]he backtest reinvests" does it really mean "[t]he strategy reinvests"?

Bottom line: For Z8 & Z9, can any amount be safely withdrawn, and then simply adjust the Capital slider per the remaining account balance as if starting the strategy new as described in the manual? Or is there some other consideration(s) to take into account?

Re. the Z9 "safe asset": The manual description of Z9 includes "If no sector or index has any positive momentum, the system invests in treasury." Not only is "treasury" a non-specific term, I can't see this in AssetZ9.csv. I see 5 assets in AssetsZ9.csv marked as 1 (bond): AGG, HYG, IGSB, TLT, and VOO. Not all of these are gov't treasuries.

So, bottom line: Which asset in AssetZ9.csv is the specific "treasury" "safe asset"? Or, does "the system invests in treasury" really mean "the system invests in all (some?) assets marked as bond"? If so, in equal amounts? Or some other distribution?

Thanks.

The strategy does not invest or reinvest, it only distributes the money that you invest. The backtest does indeed reinvest profits.

"Bond" and "treasury" are used synonymously in the description. Both mean just assets of type 1.

Thanks jcl.

Re. Reinvest: So you're saying at each cycle the backtest computes

NewCapital = PreviousCycleStartCapital + 90% * ( PreviousCycleEndCapital - PreviousCycleStartCapital )

And then reinvests based on NewCapital, with the remaining 10% of growth staying in the Account uninvested?

Is this what someone running the strategy live should also do for safe trading?

Re. Bond/treasury:

a) Suggestion: In the manual, use "Bonds" - maybe something like "Bonds, e.g. Treasuries".

b) If one has 10 Bonds in AssetsZ9.csv, when "no sector or index has any positive momentum" does each of those bonds get 10% (i.e., evenly distributed)?

Thanks.

Hi jcl. Would appreciate your clarifications to the above questions.

Also, in Z9, does the distinction between 0 for sectors and 2 for non-US indexes mean these are traded differently? Or is this only for the user's self-documentation?

Thanks.

As to my knowledge, they are not traded differently at the moment, but could be in a future version.

The backtest reinvests similar to the square root rule, but with exponent 0.9. The exponent is close to 1 due to the low drawdown/margin ratio. The original square root rule for trading with high drawdown and low margin uses exponent 0.5.

Thanks jcl.

So mathematically, if one starts with $1,000 and it grows to $2,000 after the 1st cycle,

- the square root rule would give reinvest of $1,414

- the ".9 rule" gives a reinvest of $1,866, with $134 maintained on account for safety.

Is this the recommended way to trade Z8/Z9? In the example above, the next Trade should be with $1,866 capital, not the account's $2,000 balance?

Or is this just to add a bit of conservatism to the backtest and in Trading one should use $2,000?

Thanks.

Hi jcl,

I've run some further Tests of Z9, and have these remaining questions:

a) When Trading live, is it recommended to follow the ".9 rule" for reinvesting, as described above?

b) Various Tests have shown Z9 invest in nothing, only Bonds, or both Bonds and other assets in the list. When in all Bonds, it is (so far) never in equal proportions across the Bond assets, so presumably by the OptF. There are no messages in the Test Log that say "nothing's good - going all bonds", so I wonder about the manual's description: In what way are Bonds treated differently? Or are all 3 asset classes (0, 1, & 2) in reality treated the same?

c) When a class 3 asset is specified, it is traded. I.e., it isn't exclusively used to detect a market crash. There is also no message in the Log like "market crash! doing <whatever>", but having an asset of class 3 obviously affects results since it's traded. So, how can we tell when the class 3 asset sees a crash and what happens specifically because of that? As opposed to Z9 just investing in the class 3 asset as it does all the others?

Thanks.

@jcl, would appreciate your comments re. the above. Sorry for the OptF mention - brain fart - obviously it doesn't apply here & weighting is done differently...

You can follow the .9 rule. For this there is an investment calculator included in the scripts.

Bonds are not treated differently except when you enforce a bond percentage with the slider. Z9 does not trade assets class 3. It prints a message when a market crash is detected. But since it uses a simple SMA comparison for determining a crash, this is of somewhat limited use.

Thanks jcl.

a) I see the Bond% slider, but don't see a description of it in the manual. It defaults to 0% yet bonds are still traded, so what does this % actually mean?

b) I ran Z9 using the default AssetsZ9.csv with SPY uncommented (set as Type 3) and SPY was traded. It seems Type 3 assets are in fact traded. Or is there some other setting that controls this?

c) I have not been able to find a Type 3 asset that produces a crash message in the log. Is this only active in Trade mode? If it's supposed to be active in Test mode as well, do you have an asset that will generate a crash message?

Thanks.

The slider determines which percentage of your portfolio is invested in bonds. Of course the strategy can allocate more bonds when they are currently more profitable than stocks.

There are market crashs detected with SPY, f.i. in 2007, and it is not traded, at least according to my documentation. Are you using the default asset list or have you changed something?

Thanks jcl.

a) Coincidentally I hovered over the Bond% slider and a pop-up appears that says "Minimum bond allocation". So, it appears to be NOT the absolute % - i.e., 0% does not mean NEVER invest in bonds. It instead sets the minimum capital % that must remain in bonds at all times, and (100-Bond%)% of capital is available for other investing (including more in bonds, possibly)?

b) Type 3 assets ARE traded, contrary to your statement above - is this a bug?

c) In the default asset list SPY is commented out. I uncommented it but didn't see any different message. So, to clarify, is there supposed to be a log message? Something like "SPY detects Market Crash! Selling all Type 0 Sector assets!"? Or is this all hidden and no messages ever appear?

Thanks.

Yes, the slider sets the minimum bonds allocation. As to the problem with a type 3 asset traded, can you send the log and asset list to support? They'll check it. And make sure that you're using the latest Zorro version - old versions had no type 3 assets. The message reads "Market currently down - exit all positions" and appears only when you have no bonds. Otherwise the capital is invested in bonds in case of a market crash, and no message appears.