CHAPTER 16
Evaluating System Performance
Before we move on to Part 3, let’s make a few individual observations for all the
systems and a few more general observations.
The meander system had not done well after it was first featured in Active
Tradermagazine, but because it was apparent that it still did a good job finding
many good trading opportunities, it was possible to put the performance on track
again, by letting the system ride the good trades for a little longer. This was pos-
sible because the original average trade length was very short in the first place.
Unfortunately, the system did not function that well on the short side when
using the same rules as for the long side. There probably are two major reasons for
this. First, a down move does not behave the same as an up move, which means
the initial risk–reward relationship going into a trade must be different from that
for a long trade. Second, the long version of the system operates with limit orders.
Because of the inherent upside bias in the stock market, it probably would be bet-
ter to trade the short side using stop orders.
The expert exits system (Chapter 15) wasn’t really featured here to illustrate
a specific entry technique, but rather as a way of optimizing the stops and exits
over several different market conditions and markets. However, the entry tech-
nique is worth studying, because it works really well in its simplicity—at least on
the long side. A relatively low percentage of profitable trades can make this sys-
tem difficult to trade for those of us who demand immediate positive feedback on
our trading.
As far as the average trade length goes, it could be argued that perhaps it is
a little too short, and perhaps we could make more of the winning trades by allow-
ing them to go on for a little longer. If that were to happen, however, we must do185Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.