A cost and capital audit of a Commodity Channel Index trade engine

An omitted-commission objection

A reader objected to a 2003 Commodity Channel Index system presentation because the published results omitted commissions. The objection treated those results as incomplete for a trade-engine-test, which converts indicator readings into a full sequence of executed trades and then scores the sequence after costs.

The commodity-channel-index is a quantitative oscillator computed from ordered price observations over a stated lookback and sampling interval, treated here as the forecast model under review.

Costs, tax, holding period, and required-capital

That objection identified a second scenario containing 7500 trades. Applying a 30-dollar round-trip-commission to those 7500 trades produced 227000 dollars of commission cost in the reader's arithmetic.

After an assumed 25 percent tax on net gains spread across eight years, the reader placed residual annual proceeds near 33000 dollars. The reader treated that residual figure as comparable to buying and holding a 5 percent Treasury bill for the same eight years, both on an after-tax basis.

The same critique stated that an 890000-dollar account was required to obtain the reported profit figure. Required-capital is the account base implied by a reported profit figure once trade count, sizing, and cost assumptions are held fixed.

From trade engine to reversal-alert

The original author replied that the presentation concluded the Commodity Channel Index should not be used as an automated trading system and that this rested on the statistics already shown there.

The author instead assigned the Commodity Channel Index the narrower role of an advance signal for large trend turns rather than a fully automated execution engine. A reversal-alert is a discretionary or confirmatory use of the same oscillator to flag a possible large trend turn rather than to fire every signal as a trade.

Editorial reading of the audit

Editorial note. Once commissions, tax, holding period, and required-capital sit in the same classroom table, the remaining question is role rather than a new forecast. The archive records a forecast series the reader rescored after costs, and an author who already limited the oscillator to a reversal-alert.