The volume-weighted averagesystem also belongs to the volume-related
systems, together with RS system No. 1, which really doesn’t care that much about
the price of the market that is about to get traded, other than how the momentum
of the price compares to a comparable index. This system also is a so-called
relative-strength systemand also belongs to that group of systems, together with
the relative-strength bands systemand the rotation system; as such, it stands out
among these three systems as the only one where the market to be traded is com-
pared to an index (which otherwise is the most common way to do it) instead of a
group of other markets, as the other two systems do.
The relative-strength bands and rotation systems are a little different from
most relative-strength systems in that they compare the stock in question with sev-
eral other stocks, rather than a comparable index. For this book, I picked all stocks
completely at random, but for your own research, I suggest you group them
according to sectors and industry groups. It also is possible to trade various index-
es against each other and thereby set up market-neutral positions, or positions that
are more or less biased according to your current beliefs about the market. In this
part of the book, I look at all the relative-strength systems individually, but in Parts
3 and 4 we primarily use them as filters together with the other systems.
For the relative-strength bands system, an error appeared in the original text
in Active Tradermagazine. Instead of computing the Bollinger bands for the RSL
lines, as originally stated, the bands should be computed on the product of all RSV
lines (PRSV). The original code did it correctly, but the original system logic
explained it incorrectly.
Among the breakout systems, the hybrid system No. 1seems to have with-
stood the test of time very well. This was one of the first systems featured in Active
Tradermagazine. When I put it together, no one knew how severe the subsequent
bear market would be and, being busy with other things, I did not look at it again
until it was time to write this book.
By the way, none of these systems is picked because of their extraordinary
profits or anything like that, but rather only because they represent different con-
cepts and learning experiences. As a matter of fact, as I re-do the research, it’s
apparent that most of them have not coped all that well with the most recent bear
market. As such, they also represent additional challenges for getting back in
shape (more about this in a little while).
One of the systems that I had to tweak most was the Harris 3L-R pattern
variation; although not because it hadn’t held up over time. Rather, the original
logic for the system called for a profit target too far away from the entry price,
which made it too long-term in nature. This, however, had nothing to do with the
original and clever entry idea by Michael Harris.
Over the next several pages, I indulge in a lot of tweaking and modifications
to the original systems, which some of you might call curve fitting after the fact.
I do not call it that, however, and my arguments for that are several. First, I am notPART 2 Trading System Development 81