Avoiding sector risk - Part 1

Today I took my second largest loss of the year. This is after taking my largest loss of the year last week. Both trades were in the energy sector which has been hit quite hard lately. Someone recommended that maybe I should avoid the sector until things turn around. So I decided to look into this a further and back up my claim that the best/worst trades tend to cluster.

The best example I can think of is bank stocks during the financial crisis. What would happen if we use a large (2x average) loss to eliminate that sector from our trading universe? Testing is done using the previously discussed RSI(2) system.

Equity

Statistics

	All trades	Long trades	Short trades
Initial capital	50000.00	50000.00	50000.00
Ending capital	52245.98	52245.98	50000.00
Net Profit	2245.98	2245.98	0.00
Net Profit %	4.49%	4.49%	0.00%
Exposure %	7.06%	7.06%	0.00%
Net Risk Adjusted Return %	63.59%	63.59%	N/A
Annual Return %	2.95%	2.95%	0.00%
Risk Adjusted Return %	41.73%	41.73%	N/A
Total transaction costs	84.12	84.12	0.00
All trades	56	56 (100.00 %)	0 (0.00 %)
Avg. Profit/Loss	40.11	40.11	N/A
Avg. Profit/Loss %	0.82%	0.82%	N/A
Avg. Bars Held	5.95	5.95	N/A
Winners	38 (67.86 %)	38 (67.86 %)	0 (0.00 %)
Total Profit	5515.73	5515.73	0.00
Avg. Profit	145.15	145.15	N/A
Avg. Profit %	2.91%	2.91%	N/A
Avg. Bars Held	4.79	4.79	N/A
Max. Consecutive	6	6	0
Largest win	417.12	417.12	0.00
# bars in largest win	2	2	0
Losers	18 (32.14 %)	18 (32.14 %)	0 (0.00 %)
Total Loss	-3269.75	-3269.75	0.00
Avg. Loss	-181.65	-181.65	N/A
Avg. Loss %	-3.57%	-3.57%	N/A
Avg. Bars Held	8.39	8.39	N/A
Max. Consecutive	3	3	0
Largest loss	-516.24	-516.24	0.00
# bars in largest loss	12	12	0
Max. trade drawdown	-783.54	-783.54	0.00
Max. trade % drawdown	-15.13	-15.13	0.00
Max. system drawdown	-1413.49	-1413.49	0.00
Max. system % drawdown	-2.78%	-2.78%	0.00%
Recovery Factor	1.59	1.59	N/A
CAR/MaxDD	1.06	1.06	N/A
RAR/MaxDD	15.03	15.03	N/A
Profit Factor	1.69	1.69	N/A
Payoff Ratio	0.80	0.80	N/A
Standard Error	468.36	468.36	0.00
Risk-Reward Ratio	3.41	3.41	N/A
Ulcer Index	0.84	0.84	0.00
Ulcer Performance Index	-2.92	-2.92	N/A
Sharpe Ratio of trades	1.18	1.18	0.00
K-Ratio	0.08	0.08	N/A

Drawdowns

Conclusion

This is our baseline and where we would have removed the banks from our universe due to a large loss. I've define a large loss as a loss greater then 7% which is two times the average loss for our system. The start of our testing period is 1/1/2007 and the cut off date is set to the first time we see a loss over that level, which happen on 7/8/2008.