Chapter
Hybrid System No. 1
Originally presented in September 2000, this is a short-term hybrid system that
falls somewhere between a bottom-picking strategy and a trend-following break-
out strategy. The system waits for a retracement to occur, then enters when the
market reverses by an amount equal to half the retracement. For example, if a
stock rallied to a new high at 80, then retraced to 70, the system would go long
when the stock moved back above 75 (halfway between the high and the retrace-
ment low).
As a bottom-picking strategy, it requires that the bottom be confirmed by a
move retracing half the previous decline. As a breakout system, it tries to antici-
pate the breakout by going long at the halfway point between the most recent highs
and lows.
Suggested Markets
Stocks, stock index futures, and index shares (SPDRs, DIAs, QQQs).
Original Rules
Enter long with a stop order after the market has made a nine-day low and then
retraced half the move from that low to the highest high of the last nine days.
Risk 0.5 percent of the available equity per trade. At the time of entry, cal-
culate the number of stocks per trade as 0.005 multiplied by available equity,
divided by the dollar value of the distance between the entry price and the lowest
low of the last nine days.
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