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-- Jim Johnson wrote:
> Secondly, I fiddled with your Outlier system last
> night on a lark. I had a cattle chart open so I put
> the system on it. With just a bit of optimization it
> had a 100% win rate on one time frame. I applied it
> another timeframe and got 86% hits...
Andy's indicator is what's known as a "high-pass filter". What that means is that the output signal shown by the indicator (and traded by the system) contains only the high frequency components of the price action. The low frequency, or trend, components have been stripped out. The system is buying or selling at short term extremes. (Now, here's a question: when do you want to buy a short term downward extreme? When do you want to sell a short term upward extreme?)
Andy's high pass filter, for those who are interested, is created by taking a raw signal (the closes) and subtracting a low pass filter output (the XAverage of the closes) from it. A low pass filter, you see, allows only the low frequency (or trend) components to "pass" through it. If you subtract these low frequency components from the original signal, you're left with only the high frequency components.
What's another very common high pass filter used in trading? "Momentum". A simple momentum indicator of the same duration as Andy's indicator will have a waveform very similar in shape to Andy's indicator. So what Andy's system does is sell upside momentum extremes and buy downside extremes. This approach can work, in the right price environment... Just remember not to expect "exact" buy/sell signals from this indicator/system alone. It will tell you when you are *near* a short term bottom or top, but if you use it to try to nail the top or bottom bar, you'll miss... Use it to put you in range, not to pick an exact bar.
One other note on Andy's indicator: Consider smoothing it a bit by substituting a short term MA for the Closes. Try something like XAverage(TypicalPrice,4). Note that the indicator will cycle up and down above the 0 level in an uptrend, around the 0 level in a sideways market, and below the 0 level in a downtrend... That's one way to identify the market's current trend...
Good trading,
The Omega Man
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