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TRADING SYSTEMS


The Cheapest Trading Method In The World?

04/01/11 10:52:33 AM
by Donald W. Pendergast, Jr.

Who says you need to spend $5,000 to buy a system? Here's a rough outline of a system idea that shows great promise, but it's up to you to do the hard work of getting it into tradable condition.

Security:   IWM
Position:   N/A

If you own or lease MetaStock 11 end-of-day trading software, you already have at your disposal a wonderful trading system -- the Rahul Mohindar (RMO) trading system that comes standard with the program. But did you know that there is also a MetaStock expert advisor that can also help you lay the foundation for a potentially successful trading system? It's called the CS Scientific Hybrid trade screen, and I've found a way to use it that may be of interest to you, especially if you're just learning to develop your own systems. See Figure 1.

FIGURE 1: IWM. A sample of six, eight, or even 30 trades isn't necessarily conclusive that this has the makings of a profitable system that you can trade for years. However, it does at least appear to be based on sound principles of momentum and risk control. How far you choose to go with this basic system concept is entirely up to you.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock 11 CS Scientific expert advisor.
 
First off, this should more accurately be labeled as a trading template, as it is not in automated form (but I imagine you can figure out a way to enable that, especially if you are well-versed in the MetaStock programming language).

Here is the system idea, as applied to IWM, traded on a daily bar chart. For long entries, all of the following must apply:

1. IWM closes above its nine-period exponential moving average
2. The daily close is also at least 1.382% higher than the previous trading session's close
3. The CS Scientific Hybrid trade screen ribbon (bottom of the chart) is either in the gray or the red and white "crosshatch" zone.

If all of these conditions apply, go long at the next session's open, using the current value of the nine-period exponential moving average (EMA) (less two ticks) as your initial stop and trailing stop-loss values. If in a long position, when IWM makes a daily close below the stop value, exit at the next session's open.

For short entries, simply reverse the same exact logic with the exception that the CS Scientific Hybrid trade screen ribbon must be colored yellow, thus ensuring a very strong down trend is in force. The initial stop/trailing-stop placement is the exact inverse of that for a long trade setup.

That's the system -- it's very simple, very visually oriented, and very easy to keep track of. Now, of course, here comes the $64,000 question -- can this thing actually make a trader money?

The answer is, of course, "Definitely maybe."

During strong, sustained uptrending market swings, the system does appear to make above-average money. During a portion of the recent bull run in the Russell 2000 index (late August 2010 through early January 2011), the system made the following hypothetical long trades:

Long @ 62.49 Exit @ 65.79 = +5.28% [Sept 2 to Sept 24 2010]
Long @ 67.01 Exit @ 69.84 = +4.22% [Sept 27 to Oct 20 2010]
Long @ 73.45 Exit @ 72.38 = (-1.46%) [Nov 5 to Nov 15 2010]
Long @ 72.00 Exit @ 72.76 = +1.05% [Nov 19 to Nov 24 2010]
Long @ 73.28 Exit @ 74.12 = +1.15% [Nov 26 to Dec 1 2010]
Long @ 74.47 Exit @ 78.94 = +6.00% [Dec 2 to Jan 3 2011]

Not bad, but remember, this is only a six-trade run from an exceptionally bullish period in market history. You should also know that the system does not appear to make as much money on the short side as it does on the long side, at least since early 2003. I'll leave it to you to decide if this system concept is worth pursuing, but from my own observation, it does appear to be based on a sound set of market dynamics, which, if fine-tuned, could offer a diligent trader a means to earn above-average returns (compared to simply buying and holding IWM as a long-term position) over a sustained period of time --particularly if it was traded from the long side only.

So, now it's your turn. If you have access to MetaStock 11, see if you can construct this same chart template and then go a little further and create your own exploration that will alert you to each daily close in IWM that is at least 1.382% higher (lower) than that of the previous close.

If you can do these simple tasks, maybe you will want to forward-test the method for a few more months (years) to see if it really is a good system concept. You're sure to learn something of value, no matter how the test results actually turn out. So are you up to the challenge of building and then testing your own objective trading template?





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: lineartradingsys@gmail.com

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