This panel is located at the Rules Area.
It's used for defining the general rules of the strategy:
1. System: this rule defines whether the strategy switches (replaces) positions periodically at a certain date of the month. Or, switch positions continuously when any of them hit the Sell Filters.
If you have a restricted license, you may not see this rule. Thus your strategy will be locked in either Periodic or Continual switching (based on your license). Please contact our Customer Support at firstname.lastname@example.org if you wish to upgrade your license.
The “Periodically Switch Positions” will replace all old positions with new positions during the switch-date (each month). So old positions will be sold during this switch-date (even if they're still safe, not triggering the Sell Filters), and then you buy new instruments to replace them.
If a position hits a Sell Filter before the switch-date, you'll receive a signal to exit that position and then buy the cash-equivalent instrument.
These new positions are selected based on the strategy's Buy Filters (or Short Filters, if it's a short strategy); instruments that passed the Buy Filters are then ranked with the Ranking Rules. If the strategy holds open, say, 10 positions at any given time, then PB will recommend the top 10 (ranked) instruments for you to buy. Take a look at this diagram.
Keep in mind, all instruments within the strategy's Portfolio will be tested and ranked by the Buy Filters and Ranking Rules. So if an old position (the old instrument) passes the Buy Filter again and ranks in the top 10, PB will tell you to hold that position instead of replacing it.
The idea for periodic switching is that you're not bound to your current positions (unless an exit condition is met), lest there are more profitable positions to enter. PB will look for more profitable positions based on the Buy Filters and Ranking Rules.
In short, you don't want wasted opportunities by clinging onto your current positions for too long. Another advantage is that your trades mostly happen on a single, certain day of the month, thus reducing commission fees as well as minimizing slippage.
Another reason for periodic switching is that all Positions' weight (the money contained in each Position) will be distributed equally at the switch day. So if a Position wins huge, its gain will be used to fund other positions as well, instead of being locked into it in a lopsided weighting (which is the case in a continuously-switching strategy, unless all Positions meet their exit and all are parked into cash/cash-equivalent).
Now, if you choose “Continuously Switch Positions”, only positions that triggered the Sell Filter will be replaced with the new positions; there's no such thing as a switch-day. It allows you to ride a position all the way through until its exit condition is met. It is especially useful if you want to capitalize on short-term price fluctuations (thus a more frequent trading), or, if you firmly believe in a position's setup for entry and exit (hence riding it through no matter what).
If a potentially-profitable new position is found, PB will recommend you to enter that position. If no profitable replacement is found, PB will recommend you to buy into the cash-equivalent.
Once a cash-equivalent position is entered, PB continuously looks whether there is a more profitable position than the cash-equivalent (based on the Buy Filters and Ranking Rules). If that's found, the cash-equivalent will be sold, and you'll buy the new position. Such potentially-profitable instruments can be found on the Trade Signals Tab as shown below:
Regardless of Periodic or Continually Switching strategies, it is highly recommended that you use a Margin Account at your broker, instead of the Cash Account. This is because fund from a trade require a Settlement Date (usually 2 days after the trade is executed). You can use unsettled funds to buy new positions, but these positions can't be liquidated before the said funds are settled. Since Portfolio Boss's positions may be switched in quick successions, you may commit Good Faith Violation (or Free Riding Violation) unknowingly.
A Margin Account solves that problem as you can enter and exit positions freely without waiting for the funds to settle (by borrowing from your broker). If you must use a Cash Account for whatever reason, set aside some part of your fund (as reserve cash, instead of trading all your cash) to enter and exit Positions recommended by PB while waiting for the previous funds to settle.
A continuously-switching strategy requires that you have at least one Sell Filter. Otherwise there's a red warning and you can't backtest the strategy:
2. Monthly Switch on Open of: this rule is only visible if the previous “System” parameter is set to “Periodically Switch Positions”. It defines the switch-day for all your positions. You can set whatever date you want here.
One day before the switch-date, PB generates trading signals (on the Trade Signals Tab) to sell old positions and buy new ones.
Note, the switch-date the trading date of the month, not the actual (calendar) day of the month.
For example, a value of “6th” here means the 6th day that the market is open since the beginning of the month; i.e. not counting holidays and weekends.
The negative dates here represent the “Nth trading day before the next month begins”. For example, a value of -1 means the last trading day of the month; and a value of -4 means the fourth trading day before the next month begins, etc.
Obviously, changing the switch-date will affect the performance of your strategy, as each portion of the month has its own trading characteristics (more volatile, or trading more volume, etc).
3. Don't Switch if Position is Still in Top: This rule is visible only if you use a periodically-switching strategy. It allows you to keep an existing position if it still ranks highly.
So at the switch-day, if an existing position passed the Buy Filters and ranks within the top n% as defined in this rule (based on the Ranking Rules, in relation to all instruments that also passed the Buy Filters), that position will be kept, instead of being replaced with a new position. This is true even if there are other instruments that rank higher.
The idea is that, as long as existing positions are still potentially profitable (in the general top n% as you defined), you keep riding them out, instead of switching in and out incurring commission fees and slippage. Besides, these existing positions have shown their colors and performed well; who knows what the replacements will do.
4. If Position Triggers Sell Filter, Replace With: this rule is only available if your strategy is set to “Periodically Switch Positions”. There's a counterpart for a continually-switching strategy, explained later.
This defines the instrument to replace a liquidated position (e.g. if it hits a Sell Filter). That is, before you enter a new position at the switch-day, you better park your money into the cash-equivalent instrument.
Here you may choose either “Cash”, which means your money sits idle without being invested, or “Cash Equivalent”, so you may still profit (no matter how little) while waiting for that new position to enter.
Usually you want to invest in a more stable instrument, e.g. government bonds. To define such cash-equivalent instrument, go to the rule just below this (explained next). But “hard cash” can be useful if the market condition is so bad, that you must get out of all trading and investment activities, even in safe government bonds.
Do understand that once a position hits a Sell Filter, PB not only generates a sell signal for that position, but a buy signal as well for the cash-equivalent.
Note that some licenses do not allow you to choose the “Cash” option, therefore you're locked to use the “Cash Equivalent” only. If you wish to upgrade your license, please contact our Customer Support team.
5. Cash Equivalent: here's where you define the cash-equivalent instrument.
For example, if you want to park the liquidated fund into US government's treasury bonds, then type SHY here (and press enter). You can also type anything related to the instrument you're looking for, for example “treasury” or “bond”. Then choose (click) from the dropdown that appears. To view the price chart for that instrument, click the “chart” button next to it.
As a side note, the strategy's backtest period can be stretched backward with an older cash equivalent, like PTSHX. That way, the backtest becomes more accurate as it spans a longer period (make sure the strategy's Portfolios are also old enough to stretch the backtest period).
Once the strategy is ready to be deployed, type here a commonly used cash equivalent like SHY, as PTSHX can only be traded by large hedge funds. SHY is a highly liquid treasury bond with minimal volatility, and it's widely used by traders and investors alike.
This rule can be used to initiate a short position. For example, once a position is exited, instead of parking that money into low yield bonds or even cash, you can tell the strategy to buy an inverse ETF instrument as put on this rule.
But beware as shorting is a dangerous and (often) a losing game. You can only do this trick if you're certain the position is out due to general market breakdown. So it's useful if the strategy is merely trading one instrument, that is the index. For example it trades only SPY (representing the S&P 500), while the cash equivalent is the SH (the exact opposite of S&P 500).
6. If Position Triggers Sell Filter, It Will be Replaced with the Next Top Position. If There's no Next Top Position, Replace with: this rule is only available if the strategy is set to “Continuously Switch Positions”.
Essentially, a continuously-switching strategy always enters a new position to replace the one exited.
But if such position can't be found (e.g. no instruments passed the Buy Filters), it will enter either the cash-equivalent or raw cash position, depending on the value you set on this parameter. The “Cash” option can be useful if your strategy does frequent, short-term trading.
If you choose cash equivalent, the instrument can be defined on the “Cash Equivalent” rule previously explained.
7. Total Positions to Hold: this rule defines the maximum number of positions the strategy holds at any given time.
This number depends very much on your account size, risk tolerance, and the Portfolios you're trading. Smaller accounts need only to hold 3 to 6 positions at any given time. Increasing this number also lets you diversify, thus potentially reducing risk (drawdowns), at the expense of potentially lower returns, and vice versa.
This value also defines the top n instruments ranked by the Ranking Rules. For example, a value of 5 here means the strategy will enter instruments that passed the Buy Filters and ranked in the top 5, based on the Ranking Rules. Thus increasing the total positions may expose you to trade lower-ranked instruments.
This value can not be more than the distinct number of instruments in the strategy's Portfolios.
For example, your Portfolios contain seven different instruments, then you can only input a value of 7 in here, nothing more, but could be less. Otherwise, a warning will appear and you can't backtest the strategy.
Your account size will be divided into this number of positions. For example, you're putting $100,000 into this strategy and you set this rule to 10 positions. Then each position initially will have $10,000 to buy its shares. During the course of holding each position, it may grow more or less than $10,000. If it's replaced by another position (due to hitting a Sell Filter), the new position will worth the same as the latest value. At the switch date, the total worth of all positions (whether gaining or losing) will again be divided evenly among the 10 positions.
8. Position Type: this rule defines the type of positions generated by the strategy, either long positions, or short positions. Note, this rule may not be available depending on your license, so you'll be using long positions by default.
“Long” is the normal position type, in which you actually buy instruments to enter the positions (preferably at a lower price), and sell them to exit the positions (preferably at a higher price).
“Short” is the exact opposite, where you sell (“sell short”) instruments to enter the positions, and then you buy back (a.k.a. “cover”) those instruments to exit the positions.
To short means to borrow stocks from your broker, and sell them at a price that you deem high enough. Now since you borrow the stocks, you must return them. So you buy back these stocks at a price lower than your selling price. In essence, you'll profit when the price falls, so you pocket the price difference between selling and buying back.
This “Short” mode changes the way the rules behave, so we'll cover it extensively in a later page.
9. Buy Order Type: this rule lets you choose between using a Market Order or a Limit Order when entering positions. Note, some licenses don't have the ability to use Limit Orders. Please contact our Customer Support to upgrade your license.
“Market Order” is the default order type. PB generates the buy signals; such signals are then entered by you to the broker (order). The broker in turn, will fill the orders based on whatever market price when they executed the orders (usually during the market open).
While a Limit Order (“N ATR Limit Order”) requires the broker to wait until a certain price (or lower) is met before executing the orders. This “limit price” can be set on the parameter below, called “Buy Order Limit” (only visible if you choose “N ATR Limit Order” on this rule).
So it goes like this: You set the limit price criteria with that “Buy Order Limit” rule. Then PB generates buy signals as usual. Those buy signals, along with the limit prices (calculated by PB based on your criteria), are sent to your broker.
Such limit prices are shown in dollar value, that is, “buy the instrument at this price or lower“. Each buy signal (each instrument) will have its own limit price.
The next day (the day after the buy signals were given to you), at the end of the day PB looks for that day's lowest prices (for each instrument to be bought) to decide whether or not the limit prices are met. If they're met, then PB considers those positions as already entered.
If some instruments didn't meet the limit price, then PB assumes those instruments are not entered as positions, thus they're listed as Cash until the next buy signals are given.
Limit Order is good for two things: to look for discounts when entering a position, and, to avoid slippage (difference in price between order entry and execution) which may seem small but will accumulate for all your trades, eating your account.
A Limit Order in PB only lasts for that single day; if you don't get the right price for the day, the Order is expired. Obviously, PB can only “assume” whether or not the Limit Order is filled; you may want to check with your broker to see if it's actually filled.
10. Buy Order Limit: this rule is only available if you set the previous rule into “N ATR Limit Order”. This rule defines the criteria for the limit price that you'll send to your broker.
The formula is pretty simple: essentially you'll buy the instrument if the price is lower than the previous day's close. But how low?
Enter the Average True Range (ATR). ATR measures an instrument's volatility (in dollar value) during a certain period. In other words, how much a stock goes up or down on average during the past certain days.
If a stock goes below the previous day's closing price, and such drop exceeds the ATR (but not too much), then the stock is more likely to rebound to conform with the established Average True Range. So, not only you enter the position at a big discount, you're also well placed for profit when the price rebounds.
Of course you can be on the conservative side as well, for example you'll buy if the drop is just a fraction of the ATR. You may only get a small discount when entering the position, but at least you don't risk the instrument reversing its trend. Besides, such Limit Order is more likely to get filled since it has a shallower entry price.
Either way, Limit Order allows you to get an extra discount, and the ATR gives you an idea of how likely the Limit Order will be filled (anything too much beyond that ATR and the order may never get filled).
This rule is pretty self explanatory:
“Buy the instrument if the price is equal or lower than: the previous day's close minus the multiplied ATR of the past certain days.”
The first parameter defines the ATR multiplier. Values greater than 1 mean you're looking at a price-drop greater than the ATR. Fractional values (like 0.33) mean you're looking at a price drop smaller than the ATR (i.e. one-third).
The second parameter defines the period for the Average True Range. That is, the number of days for the average price-volatility to be calculated. The usual periods are 2, 10, 14, or 20 days.
On the Instrument Tab, a Buy Limit indicator-line is overlaid on the price chart:
You want to look for a price-bar whose Low is lower than (or equal to) this indicator line.
11. Sell Order Type: this rule lets you exit positions with either a Market Order, or a Limit Order. Note that some licenses can't use Limit Orders (thus defaulting to Market Order); please contact our Customer Support if you wish to upgrade your license.
Usually you don't want any obstacles when exiting the positions. Exiting positions should be easy, otherwise you're in for greater losses. You don't need to wait for a certain price level once a sell signal is given to you. Hence, this rule is usually set to “Market Order”, which means you enter the sell order to your broker, and they'll execute it based on whatever market price the stock is trading at.
Now, obviously you can also enter a sell Limit Order to your broker (with the option “N ATR Limit Order” here). This can be useful not as a stop-loss, but as a way to squeeze that last drop of profit when you sell the instruments. Once you choose “N ATR Limit Order” in this rule, another rule shows up below this, “Sell Order Limit”, which defines how the Limit Price is calculated.
Sell Limit Order is only applicable for positions that hit Sell Filters specifically set to use Limit Order (explained later). Each position that hits such Sell Filters will be sold with a Limit Order, stated in dollar value, i.e. sell at this price or higher. Sell Filters other than that don't trigger the use of Limit Order, ditto positions that will be sold due to switch-day won't use Limit Order.
So, once the sell signals and the limit prices are sent to your broker, the next day PB looks at the High prices of the day (for all positions that hit Limit Sell Filters). If such High prices are equal or greater than the limit prices, then PB assumes the positions as already exited.
Otherwise it maintains the positions, and tries to sell them every single day (with the latest limit prices) provided the sell signal is still valid.
Now, as stated before, some Sell Filters must be specifically set to use Limit Order. You can do this by going to the Sell Filters panel, and set at least one of the filters to “Limit Order” instead of “Market Order”. If no Sell Filter is set to use Limit Order, this rule shows a warning and you can't backtest the strategy.
If the Sell Filter triggers a sell signal, the “N ATR Limit Order” will be set in place. But if it's triggered by a Sell Filter with a “Market Order”, obviously no Limit Order will be set in place.
It's good to set at least one of the Sell Filters to “Market Order”, so even if the Limit Order doesn't get through, you may still exit out of that position with the Market Order (if the price continues to deteriorate).
12. Sell Order Limit: this rule is only available if you set the previous one to “N ATR Limit Order”. This rule lets you define the way the sell limit price is calculated. In essence, you'll only sell if the price is equal or higher than: the previous day's closing-price plus the multiplied-ATR of the past certain days.
The first parameter defines the ATR multiplier. You can set it higher than 1 if you're looking for a greater profit. Or be conservative and set it less than 1 so your order is likely to be filled (since the average price range is not exceeded).
Keep in mind, you may set this multiplier to a negative value, which means the limit price is below the previous day's close and upward. This can be useful to lower the selling barrier so your Sell Limit Order is more likely to get filled. If such is the case, set this multiplier to a negative fractional value (for example, -0.33).
The second parameter defines how many days (past) to look for the Average True Range.
Note, if you use the Sell Limit Order, a “Sell Limit” indicator will be overlaid on the instrument's price-chart. Look for a bar whose High is higher than (or equal to) this indicator line.
13. Add Option: located at the top-right corner of this “System Settings” panel, this button allows you to add another rule (optional) on your strategy.
Click the button, and a dialog shows up so you can select and add the additional rule. Once added, it's listed at the bottom of this panel.
The rule we're talking about is “Slippage”. So a word about slippage: when a broker executes your order, the fill price may actually be different than the price when you entered the order. This is due to micro-second volatility of the market.
In PB, unless you're using Limit Orders, most positions are entered and exited at market open (the most liquid, but also the most volatile). So slippage denotes execution price different from the day's opening price. This rule simulates the slippage that'll happen on your orders.
This allows you to have a more realistic return on your strategy.
This slippage is a percentage of the stock's price range for the day. For example a stock moves 1 dollar between the high and low of the day, so a slippage of 5% will get you an estimate of 5 cent off while buying or selling it for the day. The strategy's metrics reflect a reduced gain due to slippage.
Keep in mind, if you have a larger account, you want to simulate a slippage of about 10% on all your trades. Otherwise, a value of 5% or lower is about right. That's because larger accounts tend to trade larger volumes of shares (orders may take a while to be entirely filled) so price difference would be more obvious. Not to mention you may offset the price balance with your large orders (the law of supply and demand).
You can disable this option by unchecking it (disable its checkbox on the left), or simply delete it by clicking the trash-bin icon on the right.