make a new attempt to come up with a better, more robust system, given the ini-
tial logic.
One major reason for why the results haven’t held up is because the original
system was only tested on three markets, which is far too few to produce results
that can be trusted in the long run. To come to grips with that, I expanded the
research for this book by adding two more indexes to the equation, so that the rel-
ative strength of one market was calculated in relation to four other markets,
instead of only two. The code below is set to calculate the relative strength between
the market to be traded and the four markets it’s compared to.
Adding only two more indexes would give us a total of just five trading
sequences, which still isn’t enough. Therefore, I also picked 10 markets each from
the NASDAQ 100 index and the DJIA, respectively, to be compared to eight other
markets each, from their respective indexes. All markets were selected at random.
For example, from the DJIA group, I randomly picked American Express (AXP)
to be compared against Citigroup (C), Eastman Kodak (EK), General Electric
(GE), Home Depot (HD), IBM, United Technologies (UTX), 3M (MMM), and
Merck (MRK). Only AXP would be traded. The other markets are only there to
construct a randomly created RSI for American Express to generate trading sig-
nals. In total, this gives us 25 different trading sequences to analyze. Because the
original model was asymmetric in nature, with different rules for long and short
trades, each side will be analyzed individually.
Table 11.1 shows the results of the original model, tested on our 25 differ-
ent markets. With an average profit of $52.69, a profit factor just above one,
and a risk factor just below zero, the results are not satisfactory, and the conclu-126 PART 2 Trading System Development
Original system, long only PercProf: 48.00
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 150.24 36.94 (5,312.70) (52.69) Market
St. Dev: 60.55 5.36 50,710.57 402.95 4,294.81 (0.01)
High: 210.79 42.30 45,397.88 350.27 4,242.13 Portfolio
Low: 89.69 31.58 (56,023.27) (455.64) (4,347.50) (0.13)
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.01 (0.00) 55,162.30 42.18 25.43 5.22
St. Dev: 0.29 0.18 27,778.81 24.46 2.57 0.58
High: 1.30 0.18 82,941.11 66.65 28.00 5.80
Low: 0.72 (0.18) 27,383.48 17.72 22.86 4.64TABLE 11.1
Trading Original Relative Strength Bands