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World's Cheapest Trading System Goes Long

06/01/11 08:44:51 AM
by Donald W. Pendergast, Jr.

The world's cheapest trading system has once again decided to go long the Russell 2000 index. Will you be along for the ride?

Security:   .RUT, IWM
Position:   Buy

Recently, I wrote a couple of pieces here in Advantage regarding the trading logic, backtested performance, and subsequent trading signals of what I had dubbed "the world's cheapest trading system." It's cheap simply because all of the trading code and logic was clearly laid out in that first article (March 30, 2011) and is free for the taking, as long as you have access to MetaStock 11, as one of the better expert advisor templates (also described in that article) is a must-have in order to trade the method properly.

Since the two original articles dealing with the system have been written, the system has put in a mixed performance and its hypothetical equity value is slightly down from where it was by early April 2011, when it was in the midst of a solid winning streak. Could this new long signal mark the resumption of more good times for this bare-bones, yet reasonably effective trading method?

FIGURE 1: IWM, DAILY. Winner -- or loser in progress? If we only knew. Staying with a proven system is the only logical way to build long-term wealth, but how many people can actually do that for an extended period of time?
Graphic provided by: MetaStock.
Graphic provided by: MetaStock 11 CS Scientific expert advisor.
Of course, nobody can give a completely accurate answer to that question, because no one knows how the future will play out. However, if a system has had some good runs in the past and if you are confident in the trading logic that underpins it, then you may want to keep monitoring it in walkforward mode for a while before actually trading it with real money.

Creative, motivated readers might also decide to use the IWM/.RUT system as a guide to overall market bias rather than a trading system per se, instead choosing to focus on the strongest relative strength small-cap stocks when IWM/.RUT goes long (like now) or to focus on the weakest relative strength small caps when the system spits out a fresh short signal. I haven't tested that approach yet, but it's probably a good idea for dedicated stock traders to pursue -- one that might actually yield more profitable long term results than by trading IWM/.RUT only. See Figure 1.

Super-aggressive traders might also consider using leveraged small-cap exchange traded funds (ETFs) or even mini futures contracts, but just make sure you have confidence in the method before succumbing to the lure of leverage, as it can and usually will work against you at the worst possible time. Most traders are better suited for the stock market than any leveraged ETF or futures market anyway, and that's probably a good thing in a world that's already loaded with an inordinate amount of risk and uncertainty.

At any rate, this visually based system still appears to be worthy of further monitoring and possible tweaking in the weeks, months, and years ahead. Maybe you will be the one who is able to fine-tune and develop it into a truly first-class system of your own.

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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