Exit with a trailing stop if the market falls below the lowest low of the last
nine days.
Exit with a loss if the market is below the entry price after nine days.Test Period
January 1, 1990 to July 12, 2000.Test Data
Daily stock prices for the 25 most-traded stocks on the NASDAQ 100 list, exclud-
ing those stocks that also can be found in other indexes, such as Microsoft and
Intel in the Dow Jones Industrial Average and S&P 500 index.Starting Equity
$100,000 (nominal).System Pros and Cons
The long-only trend-following nature of the system makes it vulnerable to market
corrections, which explains the rather extensive drawdowns over the last few
months (not shown). This system would probably benefit from the addition of a
trend filter (such as a long-term moving average) that would only allow trades in
the direction of the prevailing trend.
Other enhancements include only trading those stocks that show the highest
relative strength compared to the market as a whole (i.e., the underlying index), or
including some sort of volume confirmation, such as an increasing on balance vol-
ume (OBV) value.
Although this system does better than buy-and-hold for both the Dow and
S&P 500, it doesn’t manage to keep up with the NASDAQ 100. Note, however,
that the system only risks 0.5 percent of available equity per trade, which trans-
lates into a risk–reward ratio of 21.8 (in this case, calculated as total return divid-
ed by max drawdown). For a buy-and-hold strategy for the NASDAQ 100, the
same ratio is 40.9. However, a buy-and-hold strategy is in the market all the time,
which also adds to the risk, albeit on a more subjective level.
Risking 1 percent per trade produced a return and drawdown of 1,514 per-
cent and 52.89 percent, respectively, for a risk–reward ratio of 28.6 (1,514 / 52.89).
(Note that in some of the original system texts, I defined the risk–reward ratio as
the net profit divided by the largest drawdown. This is not the best or correct def-
inition, but only an easy and commonly used way to get a first feel for the system
compared to other systems.) This is still not as good as a buy-and-hold, but some98 PART 2 Trading System Development