Two ADX Variations
The average directional index is a widely, used measure of trendiness. A test of two small variations of an ADX system showed that the absolute value of the ADX has no particular significance. The test used a 1,500 stop and allowed 100 for slippage and commissions on the following markets British pound, coffee, cotton, crude oil, deutsche mark, Eurodollar, gold, Japanese yen, U.S. bond, and wheat. All available data from January 1, 1975, through July 10, 1995, were used. The first system tested...
Equity Curve DM 65sma3cc
Figure 6.14 Monthly equity curve for deutsche mark calculations with rollover contracts. Figure 6.14 Monthly equity curve for deutsche mark calculations with rollover contracts. uity curve clearly shows a need to check those charts if you had not checked them already. Our usual summary does not tell us what the equity changes are over periods of 1, 2, 3, 4, 5, 6, or 12 months. Yet we need this type of information to understand the impact of the trading strategy on account equity. So, let us...
Measuring the Smoothness of the Equity Curve
This section shows how to use linear regression analysis to measure the smoothness of an equity curve. We will use contrived data to perform actual calculations. You will understand how to use standard error and how to calculate the risk reward ratio. In later sections of this chapter we apply these ideas to market data and trading system calculations. The main advantage of using linear regression analysis is that it provides a consistent framework to analyze every equity curve. The equity...
The Pullback System
An old market maxim says, Buy on a pullback into support. Many traders like to trade the pullback because it often provides an entry point with relatively low risk. Contrast this philosophy with trading the ADX systems, which buy on strength or sell on weakness. The pullback maxim, however, is not a precise statement of a trading system. We have to define what we mean by pullback and what represents support. This system is a variation of the CB-PB system examined in chapter 4. Here the pullback...
Developing New Trading Systems Table 412 ADX burst system performance with 5000
this system was in the market about 35 to 45 percent of the time, indicating it has a rather large neutral zone. A trading system with a neutral zone is out of the market unless it rises above stiff entry barriers. The 65sma-3cc system is always in the market, and is a reversal-type system, whereas the ADX burst system steps aside 55 to 65 percent of the time. We used a wide initial stop of 5,000 in these calculations to isolate the performance of the system. Table 4.13 includes performance...
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Figure 4.23 A rising 18-day ADX can be a good indicator of a trending market. Figure 4.23 A rising 18-day ADX can be a good indicator of a trending market. point, an ADX burst. Figure 4.24 shows the March 1993 U.S. bond contract with the histogram of the ADX burst superimposed on the 18-day ADX line. As the trend accelerates, the daily ADX changes are more than 1, and you can see relatively large bars associated with this ADX Figure 4.24 The histogram of ADX burst momentum shows daily changes...
Channel BreakoutPull Back Pattern
This section discusses a trading system based on a pattern observed in mature markets, that is, markets with a large volume of institutional activity. In these markets, the big players have a tendency to fade market moves. Thus, they will resist advances and support declines. For example, when a market makes a new 20-day high, many big players will short it heavily, and push the market back into the previous consolidation. If the fundamental forces underlying the market are strong, the up trend...
Adding Exit Rules to the 65sma3cc System
Selecting general and powerful exit rules is a difficult challenge in system design because the markets exhibit many different price patterns. One form of exit that is particularly easy to implement is the initial money-management stop. If the stop is hit, you exit the trade, no questions asked. However, taking profits is another matter, since you must design reentry rules should the trade continue on after meeting your exit criteria. In the 65sma-3cc system, the approach of using entry rules...
The 65sma3cc TrendFollowing System
This section discusses how to formulate and test a simple, nonoptimized, trend-following system that makes as few assumptions as possible about price action. It arbitrarily uses a 65-day simple moving average of the daily close to measure the trend. Sixty-five days is simply the daily equivalent of a 13-week SMA 13x5 65 , representing one-quarter of the year. This is an intermediate length moving average that will consistently follow a market's major trend. As shown in Figure 4.1, when the...