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One For Three Ain't Bad At All

06/23/10 08:12:33 AM
by Donald W. Pendergast, Jr.

If you want to trade a system successfully, you need to stay in the game to come out a winner.

Security:   TFU10, IWM, .RUT
Position:   N/A

A few articles back, I showed the results of one of my emini Russell 2000 trading systems on a day that had three consecutive losing trades followed by one large winning trade — one that made the entire day profitable. Here's a look at the same system in today's market action, and the lesson is much the same: Patience and faith really do pay off for traders who believe in the underlying foundation of their system's market logic.

FIGURE 1: TFU10. In the major leagues, a hitter with a batting average of .300 is looked at with respect; in the world of trading systems, trend-following methods usually win about 40% to 50% of the time (a .400 to .500 "batting average"), and the TF trends system is no exception. Winning trades are nearly twice the size of losers, however, and that is the real key to success with a trend-following methodology.
Graphic provided by: TradeStation.
If you were daytrading on Tuesday or simply monitoring the intraday activity, you were probably aware of just how lackluster much of the action was until about 1:30 pm ET. My system fired off a short sell signal at 10:45 am ET, one that lost 3.70 points ($370 before commissions) in less than an hour. Soon after, the system went long at 11:40 am ET, this time shedding another 1.50 points, caught as it was in the directionless tizzy of the "waiting on the Fed, waiting on the oil drilling moratorium" market gyrations that characterized the first four hours of the daily session. See Figure 1.

After lunch, however, the market began to break intraday support levels (floor trader pivot points and key moving averages, and so on) and started to build some heavy downward momentum by the time the system fired another short entry signal at 2:40 pm ET. Entering a short (long) position in the direction of the trend after a market has already made a strong move does take some getting used to, especially for traders who like to use oscillators and trading bands in an attempt to buy near cycle highs and lows, but the large gains made possible by trend-following methods (like this particular system) seem to weigh in favor of this approach for those traders who prefer a slightly less frantic pace of intraday trading.

The trade stopped out at 4:00 pm ET for a 9.20-point gain, or $920 before commissions for every contract traded. So for the day, the system racked up gains of four emini Russell points, or $400 before commissions. Again, that was for a one-contract trader; at TradeStation Securities, this particular contract requires $4,000 margin (in some cases, that amount can be reduced dramatically, contact TradeStation Securities for the details). Over at PFG Best, all you need is $2,000 per contract.

System trading isn't for everyone; this system typically sports a winning percentage of only 44%, with a (healthy) profit factor of 1.44. It's also had as many as five losing trades in a row, with the average loss coming in at $170. By way of contrast, the average winner is nearly double that amount at $317, with a maximum of five winning trades in a row.

One of the most interesting aspects of this daytrading method is how radically it limits a trader's exposure to the market; believe it or not, you'd only be in the market for 6.85% of the time that the Russell 2000 trades during the day session (9:30 am to 4:15 pm ET). Since it's a completely automated mechanical system (no trader discretion involved at all), you don't need to sit hunched over your computer screen all day, tearing your hair (or what's left of it) out as you try to determine entry and exit points on your own.

With more than 184 trades on this particular build, the TF trends system has shown remarkably consistent results since late February 2010. Even better, since the basic logic of this system is based on enduring principles of supply/demand and momentum that aren't ever likely to be radically altered in the decades to come, it is possible that this system will only need a minor amount of tweaking in order to keep it healthy and strong, no matter what kind of market environment it may be deployed in.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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