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<<Troy experienced a double top in equity.. Now this is really good
since he can do some fiddling in the next several days with all the
great feedback and experiece a break out from a double top..>>
Troy:
Don't get carried away by the enthusiasm. Remember what Edwards and
Magee say about double tops: "Consider a penetration and close beyond
the limit of the correction between the tops as a signal of reversal,
and make new commitments on rallies or reactions....[alternatively],
make new commitments upon penetration of the double top." I do not know
the statistical liklihood of which way it will go, but if you had any
divergence of oscillators on the 2nd peak, you are likely to see a
decline rather than upside breakout in equity.
By assigning a 1 or a 0 to each trade (or each day of trading) on an
Excel spreadsheet, (one for a winning day, 0 for a losing day), you can
create a %winning trade (the sum of 30 trades * 3.33) and moving
averages of that column can create valuable divergences as an oscillator
compared to the equity. Similarly, ongoing trade (or daily) profit
plus loss moving averages can created divergences with the equity which
are valuable in determining overbought or oversold situations. One may
then make adjustments in position size and exposure during times of
divergence of equity with %wins or P+L.
See gif below. This is an actual record of mechanical system trading
which looks phenomenal to begin with, but following the double top,
resulted in a nearly career ending drawdown, since the gains occured in
one year and the losses in the next, creating a huge tax liability
without any ability to average the losses into the gains. This is
presented as an object for discussion on ways to monitor equity. I have
noted similar features to monitoring equity, mentioned by NormanW.
Obviously, from my experience, a double top in equity would be a strong
signal to "get small" in preparation for the "big one" in terms of
equity drawdown. You might consider setting up some oscillators on your
spreadsheet (if you haven't already- I didn't open the file either) to
see what the second peak looks like.
Take care,
Don
Attachment Converted: "c:\eudora\attach\snap0508eq.gif"
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