valid approach when you want to see how the system would have performed given
ideal conditions that could only be observed with the help of hindsight. It is not,
however, recommended that you trade a system with such a filter built into it. The
first thing to do in this round of renewed research is to get rid of the trend filter.
Originally, the system was also fitted with a 4 percent stop loss. As it turned
out, this stop loss made absolutely no difference whatsoever. It was only there for
money management purposes, but because we will address the money manage-
ment issue later, we can get rid of the stop loss for now and save ourselves an opti-
mizable variable. Table 13.3 shows that the system continues to perform well on
the long side without the stop loss and the trend filter. The average profit did
decrease by close to $200, but the risk–return ratio is still at a healthy 0.86 and,
because of a few more trades, the average net profit still came out to close to
$50,000. Unfortunately, however, the short side (Table 13.4) did not do as well as
the long side, primarily because of an increasing number of bad trades during the
long bull market in the 1990s. A profit factor of 0.92 and an average profit per
trade of $119 indicates that we are losing money at a slow but steady rate.
Just to make sure that the logic behind the system was correct, I decided to
test the entry rules. Instead of demanding the close to be lower than the volume-
weighted average for a long trend, I wanted it to be higher than the average, more
in line with a normal technical-analysis trend interpretation (reverse the reasoning
for the short side). But this did not better the results for either side. The same was
true for altering the way to calculate the average, as suggested at the end of the
original system presentation, by giving the latest closing price less weight the
higher the volume for the moving-average calculation. (No use in showing the
results for either one of these alterations.)156 PART 2 Trading System Development
Original system, short only PercProf: 39.68
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 19.40 36.87 (2,394.46) (28.61) Market
St. Dev: 4.24 13.04 26,927.83 1,654.87 4,875.63 (0.08)
High: 23.64 49.91 24,533.37 1,626.26 4,847.02 Portfolio
Low: 15.15 23.83 (29,322.29) (1,683.47) (4,904.24) (0.02)
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.21 0.00 21,910.62 20.05 1.93 3.90
St. Dev: 1.49 0.54 14,267.27 13.32 0.99 1.10
High: 2.70 0.54 36,177.89 33.36 2.92 5.00
Low: (0.28) (0.54) 7,643.35 6.73 0.94 2.80TABLE 13.2
Less Tantalizing Results for the Short Side