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Dear Trader,
Let me please express some thoughts for your reference.
Divergences never promised entry and exit points.
Their role is to consult about future possible movements or
to complement other signals. Of course you may miss an
entry, when you follow stochd()<=30 and the day of divergence
AAPL has stochd()=30.01.
Here is exactly the interesting point with Positive Divergence Issues
(PDI). You may miss AAPL,but if the same day 50 stocks of the group
that AAPL belongs to,diverged their stochd() and the group counts 60
stocks, then you have some indication that this group may follow an
uptrend the next days.
Something, not coincidental, forces the 80% of this group to present
a stochastic divergence.
Look a few days before. If the 85% was stochastic oversold (stochdOSI
got maximum values) and (above all) if YOU consider stochastic
divergence as a reliable criterion, then you may pay attention to
this group, NO MATTER IF AAPL MISSED THE CONDITION FOR 0.01/100.
This is the purpose of Breath Indicators in general. To consult that
something is "moving" in the market.
Dimitris Tsokakis
--- In amibroker@xxxx, traders10@xxxx wrote:
> --- In amibroker@xxxx, "David Holzgrefe" <dtholz@xxxx> wrote:
> > Maybe a few other could run it on there indexes to see if
performs
> the same ?
> >
> > an give me some feed back as the results seem a little to good ..
> >
> >
> > Thanks David
> >
> > prevclose = ref( close, -1);
> > signl = iif( close > prevclose , 1, 0 );
> >
> > BUY = CROSS(bbandbot(close, 15, 2),close) AND RSI(14) < 35 AND
> signl = 1;
> >
> > SELL = CROSS(bbandtop(close, 15, 2),close) AND RSI(14) > 70;
>
> > an give me some feed back as the results seem a little to good ..
> >
> >
> > Thanks David
> >
> > prevclose = ref( close, -1);
> > signl = iif( close > prevclose , 1, 0 );
> >
> > BUY = CROSS(bbandbot(close, 15, 2),close) AND RSI(14) < 35 AND
> signl = 1;
> >
> > SELL = CROSS(bbandtop(close, 15, 2),close) AND RSI(14) > 70;
>
> The major problem with this simple system is the huge drawdowns
> between those "winning" trades. Look at the last few months for
> AAPL, Apple Computer.
> The system did its last buy in late May 2000 at ~45, the stock then
> went to 14 in Dec 2000 before rallying. No one should or could
live
> with a drawdown like that....
>
> The problem is one that is commonly seen in a simple indicator
based
> system. You get the initial trade entry and then the exit
conditions
> are not satisfied for months or years. Meanwhile the price goes
> wrong and you are still in the stock. Sure it backtests "well"
with
> nice profits and a hit rate in the 70-90% area, but it is a bad
> system.
>
> The thing that most back tests is not telling you is the maximum
> drawdown (maximum adverse excursion) during the trade. Usually you
> are provided data that lists the drawdown from the entry point.
> While this is a useful number in its own right it can mislead you
> drasticaly.
>
> In the AAPL example, price got up to the 63 and change area. If
you
> had bought at the 45 price and exited at 55-60 you would have had a
> nice trade. However, once the price got to 63 it went to 14.
> Maximum drawdown for this trade was 63-14 = 49, really ugly....
>
> With this system there is no assurance the price will exceed the
> upper BB with an RSI above 70. Now that may be a good exit point
but
> it may never be reached. So, the system needs to have other exits
> added to it until you are guaranteed there will be a timely exit
that
> controls the max drawdown.
>
> As an aside, I have not looked at the work done recently by
Dimitris
> but I suspect the same problems may be there as well. Several
years
> ago I did a lot of work with divergences. They can provide really
> nice entries, but will miss some entries because there may not be a
> divergence. Even worse, they will miss exits because the
divergence
> may not occur. So you have to also include fixed exit levels or
> trailing stops or some other exit that will signal for "every" exit
> required. Again I have not had time to look at his work but I
would
> look for this possibility.
>
> Bottom line, back testing is a tricky business and one should
always
> examine the signals applied to the chart to see if the
signal "makes
> sense" by not missing entries or worse, missing exits. Take care
of
> the big drawdowns and the system profits will usually be fine.
>
> If you have questions on this, feel free to ask....
> Trader
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