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TRADING SYSTEMS


ARQL Long System Says Buy

01/10/12 09:04:06 AM
by Donald W. Pendergast, Jr.

Mechanical trading systems aren't necessarily the best way to trade the markets, but they can help enforce a measure of self-discipline that can make the path to profitability a bit easier.

Security:   ARQL
Position:   N/A

When I scan for stocks in MetaStock, I frequently rely on the Rahul Mohindar oscillator (RMO) trading system to scour the market for stock experiencing strong breakout and/or trending moves that are already under way. It's a very good system, but recently I identified another that might hold some promise for long-only traders who might want to do a little tweaking and fine-tuning of their own.

FIGURE 1: TOP RELATIVE STRENGTH STOCKS. The top relative strength stocks vs. the .SPX that are firing Fractal 2 trading system buy signals.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The Fractal 2 trading system (Figure 1) comes standard with MetaStock 11 and is a long-only system -- perfect for those who have also come to the conclusion that short-selling can often be an (expensive) exercise in frustration. On the daily chart of Arqule (ARQL) (Figure 2), you can see that the buy signals (green arrows) and the exit signals (blue markers) can at times produce winning outcomes, but they frequently come at the expense of suffering a lot of intratrade giveback and drawdown.

The system looks like it could be improved for the purposes of short-term, smash 'n grab trading, so I began to look at the system's entry triggers as a starting line for a short-term market footrace lasting no more than two bars after the trigger bar printed. Using a hypothetical entry a few ticks above the trigger bar high, I began to see how this would have panned out compared to letting the trades run till there was a normal system exit.

Generally speaking, the win percentage is higher, the amount of profit is a bit smaller, but there is far less time spent in the market as a result of this change -- a real benefit, because it offers a trader the ability to act upon other attractive trading opportunities in other markets as they appear.

Obviously, you're only seeing two completed trade examples here, plus a new long trigger setup bar that has yet to play out, so do yourself a favor and apply this system to your favorite charts and see if it doesn't also tend to produce consistent profits across a variety of markets. On these two trades, here are the differences in the way the two methods play out:

Fast exit:

Trade 1: Long at $4.62, exit at $4.79
Trade result: +0.0368%
Time in market: 2 days

Trade 2: Long at $5.70, exit at $5.90
Trade result: +0.0351%
Time in market: 2 days

Standard exit:

Trade 1: Long at $4.62, exit at $4.85
Trade result: +0.0498%
Time in market: 18 days

Trade 2: Long at $5.70, exit at $5.55
Trade result: (0.0263%)
Time in market: 17 days

Once you understand that a two-sample statistical test is not something you want to bet the family farm on, you can at least see the advantage of taking modest profits after a day or two rather than trying to hold on for those seemingly elusive, "never there when you need one" major trending moves. In fact, here are a number of stocks and exchange traded funds (ETFs) that I visually checked this method out with; plot this system in your own version of MetaStock and see if these ones don't also prove out in your own testing regimen:

FINL, HAO, SLV, AAPL, ALL, PSA, BMC, COP, INTU, SYMC

Looks promising, but remember, that does not mean the system will perform the same way in the future. In addition, be aware that this time-truncated version of the system seems to work better on stocks that have nice, stable swings rather than those that are extremely choppy or chaotic.

Also take note that when using the abbreviated version of the system, if the trigger bar hasn't been exceeded by the first or second bar following it, the setup is deemed null and void. If this is the case, just ignore it and wait for the next setup in another stock.

Anyway, for those readers who already own or lease MetaStock 11, you should have a lot of fun exploring the endless possibilities that this simple trading method may offer you. Check it out for yourself.



FIGURE 2: ARQL, DAILY. This system appears to be profitable as is, but cutting the holding period to a maximum of two days may offer a better time versus potential payoff for enterprising traders.
Graphic provided by: MetaStock.
Graphic provided by: Fractal 2 system signals from MetaStock 11.
 



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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