Adjusted Return Chart (J)
Introduction
Navigating the intricate world of trading requires effective tools. The J Chart, specifically designed for back-testing and analyzing historical trading strategies, emerges as an indispensable tool. It’s not just about viewing data; it’s about making informed decisions. Here’s your complete guide.
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What’s the J Chart?
Unlike regular technical indicator charts, the J Chart serves as a reflection of trading outcomes between the red and green tickers displayed in the FT Cloud chart. In essence, it visualizes the results of deploying a particular technical indicator, helping traders retrospectively gauge the efficiency of their trading strategies.
Core Aspects of the J Chart:
- Nature of the Chart: The J Chart isn’t a typical technical indicator. It neither generates buy/sell signals nor requires parameter setting. It shows the results of buying and selling based on an indicator.
- Visual Elements:
- The red line mirrors the T Chart‘s red line.
- The chart’s multicolor line (or alternating red-green segments) represents combined returns from trading the red and green line, based on the indicator cues from the chart above it.
- Clicking on the chart label displays values spanning the entire chart, independent of pole positions.
Why Embrace the J Chart?
- Efficient Strategy Review: J Charts seamlessly allow you to evaluate a trading strategy’s efficacy. Paired with funds and a single-day delay, they depict exact earnings a real investor could achieve.
- Investment Strategy: This tool is particularly crucial for strategies that emphasize staying fully invested in the assets spotlighted on the T Chart.
Deploying the J Chart
Timing with the J Chart
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The J Chart offers a nuanced perspective on the influence of timing over a traditional buy-and-hold strategy. Let’s unpack this using the provided example:
In the showcased image, we’ve employed a strategy to trade the junk bond fund JNK against the money market, relying on a 10-day short moving average coupled with a 100-day long moving average. Here’s how the mechanics unfold:
- When the short-term average slips below the long-term, the cue is to pivot towards the money market.
- Conversely, once it edges back above, the move gravitates to investing in JNK.
Over a span of three years, the returns paint an intriguing narrative. While JNK yields 11.65%, the adjusted return strategy slightly edges ahead at 12.67%. However, it’s the journey to these figures that brings the true value of the J Chart to light.
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In a side-by-side comparison:
- Drawdown: The adjusted return trajectory (illustrated in white) experiences a significantly softer dip, recording a 9.43% drop. In stark contrast, JNK alone faces a steeper decline at 22.9% within the same timeframe.
- Volatility: The story gets even more compelling here. The adjusted line showcases far steadier moves, slashing the standard deviation to a mere 1.66% monthly. JNK, on the other hand, witnesses a more tumultuous ride, registering a volatility of 3.06% monthly.
This analysis underscores the essence of the J Chart – it’s not merely about end percentages, but about the journey’s quality and the risks undertaken to reach those outcomes. With the J Chart’s insights, traders can aim for returns while cushioning against drastic market ebbs and flows.
For Selection
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The chart’s primary use is for picking between two issues. An exemplary strategy showcases switches based on the strength differentiators of the S&P 500 fund (SPY) and the Russell 2000 small cap fund (IWM). The insight? It reveals the small cap’s outperformance 4Q2020 to 1Q2021 relative to large caps.
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Enhancing the J Chart’s Usage:
- Reversing Signals: You can flip the red and green signals by accessing “Parameters” after right-clicking the chart and checking the “Reverse Signals” box. This technique is beneficial for trading a trendless issue.
Some Caveats:
- The Limitation of Timing: Pure timing, though reducing risk, might not consistently outperform a buy-and-hold strategy in the long run.
- Chart Limitations: Trading between market segments flourishes when segments exhibit distinct price movement characteristics. When using the J Chart, ensure both lines are similarly volatile. If there’s a significant disparity, the more volatile line can dominate, making the J Chart function like a smoothed moving average.
Conclusion:
Armed with the J Chart, traders have a powerful tool to retrospect and refine their trading strategies. Whether you’re a seasoned trader or just starting, understanding and leveraging the J Chart can set you on a path to more informed and strategic trading.
The J Chart shows the results of trading the technical indicator displayed in the chart directly above the J Chart.