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Attached are a couple of screen shots of a system trading the NDX from
1991-present.
The idea of the system is simple: (1) enter the market at extremes,
(2) use a money management stop (i.e., stop loss), (3) take profits if a profit
target is hit:
(this is a stop reverse system if there is currently an active trade,
otherwise after a stop is hit it is neutral and may open a long or short
trade depending upon which buy/sell rule is hit first.)
Buy if today's close minus yesterday's close is greater than 1.6 times
the 10 day average true range.
Sell if today's close minus yesterday's close is less than -1.6 times
the 10 day average true range.
Those two rules above make for quite a profitable system on their own.
Obviously, this is a pure stop and reverse system.
Profit target: close the current position and go flat if there are 1200
points in profit.
Stop loss: close the position and go flat if the position moves -250 points
or more against your opening trade level. (this is not a trailing stop).
Before we go to the stats, let me say the I would've preferred a percent
stop loss and a percent target, but the software I'm using (Tradestation 4)
doesn't have that built in, and I'm too lazy to program it at the moment.
Still, since the overall system was quite profitable without these stops,
I don't feel too bad about using these dollar-based stops. They do however
foul up the early results because there were situations in which a percentage
stop would've saved a lot of money.
The system made 36 trades in 11 years (or about 3 trades per year), was 72%
accurate with a 2.5 ratio of average win to loss. It's win percentage was
little
higher on the long side at 78%, but it still had 67% winners on the short side,
which is quite good given the upward 10 year trend in NDX. The system can be
improved
by using slightly different thresholds for buy and sell. Generally, most values
between
the range of 1.5 to 1.75 worked well. The best values seemed to be 1.65 for the
buy
threshold and 1.7 for the sell threshold.
One of the failings of this system is that it made most of its money in the
1998 through 2000
time frame by taking three 1200 point profit targets, and then sat out most of
the rest of 2000.
That's okay in one sense because that particular period of time was quite
choppy and difficult
to trade, but it may be difficult trading a system that goes flat for nine
months.
The basic idea here is to show that NDX tends to demonstrate exhaustion moves
at turning
points, and it is typically profitable to counter trade those moves. The other
theme is
that profit-taking on over-sized moves makes sense, especially on the long side
because
rallies often demonstrate rather low interday volatility, and thus a short, or
sell signal
never comes along that would ensure profits are taken.
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