as a great developer of swing-trading strategies and good friend and inspirational
source for both of us.
For the relative-strength type systems, no inspirational source is greater than
Nelson Freeburg. Nelson’s systems usually follow a more long-term investor-like
philosophy, which makes it more natural for him to think in terms of the rotation
of assets based on relative strength and momentum.
Finally, no cooler trader exists than Dan Gramza. Without my discussions
with Dan, I would not have been able to develop my own philosophies surround-
ing where, how, and when to look for an exit, no matter which system I’m work-
ing on. This is especially true when it comes to the time-based stops for trades that
go nowhere. Dan knows how to not get married to his trades.
All systems presented in this book can be divided into four different system
categories, with a few of the systems belonging to several of these categories. In
the retracement and swing trading category, I count hybrid system No. 1, meander
system V. 1.0, the volume-weighted average system, the expert exits system, and
the Harris 3L-R pattern variation system.
Of these systems, the meander systemis the only one using limit orders for
the entry. In fact, it’s one of the few systems I have ever seen that produces con-
sistent results using limit orders. This system is based on my favorite indicator,
which I developed during my time with Futuresmagazine and while writing my
first book, Trading Systems That Work. I like that meander is both scientifically
correct and at the same time well suited for short-term trading. The logic and rea-
soning behind meander is not based on any homemade technical analysis mumbo
jumbo. Because I like this indicator so much, I also have tinkered around with it
quite a bit. Therefore, the code presented here is not the code presented with the
system in Active Tradermagazine. The function and the logic are the very same,
but this version runs much smoother and faster, and also holds the possibility for
altering the lookback period for the calculations, which the first version did not.
This is one of the best limit-order systems I’ve ever seen.
Another system that had a very scientific approach to its development is the
expert exitssystem. This system is interesting because I developed the exit rules
using the same type of surface charts I discuss in greater detail in Part 3. Using
this technique, there is no way you can optimize the system to any specific mar-
ket, type of market, or market condition. Instead, you’re bound to end up with a
system that will work, on average, equally as well over all types of markets and
market conditions. Whether it is profitable enough for you to trade is a different
story, but no other system will beat a system developed in this way when it comes
to robustness and stability.
Another cool concept among these systems is the volume-weighted average
system, which basically first calculates a stochastic indicator for the volume, mul-
tiplies that stochastic value by today’s price, and adds it to a running total, very
much in the same way as a regular exponential moving average is constructed.80 PART 2 Trading System Development