Risk 0.5 percent of available equity per trade. At the time of entry, calculate
the number of shares to buy as 0.005 multiplied by available equity, divided by the
dollar value of the distance between the entry price and the stop loss.
Exit at the close when the volume-weighted relative-strength curve crosses
below one.
Exit with a loss if the market falls below the entry price minus 4 percent.Test Period
December 11, 1985 to July 12, 2000.Test Data
Daily stock prices for the 30 most actively traded NASDAQ 100 stocks, excluding
those stocks that also can be found in other indexes, such as Microsoft and Intel in
the Dow Jones Industrial Average and S&P 500 index. The amount of $20 per
trade has been deducted for slippage and commission.Starting Equity
$100,000 (nominal).System Pros and Cons
This is a long-only system, which makes it vulnerable to market conditions. The
system probably would benefit from the addition of a trend filter (such as a long-
term moving average) that would only allow trades in the direction of the prevail-
ing trend. Developing a similar strategy for the short side would make it possible
to make money no matter what direction the market is heading.
Although this system does better than buy-and-hold for both the Dow and
S&P 500, at first glance it doesn’t quite seem to keep up with the NASDAQ 100.
However, looking closer at the numbers reveals that the risk–reward ratio (in this
case, total return divided by maximum drawdown) for a buy-and-hold strategy for
the NASDAQ 100 comes out to 68.6. For this system, only risking 0.5 percent of
available equity per trade, the same number comes out to 80.8, which is a clear
indication that it allows you to make more money while risking less.
Another favorable aspect of the system is that a buy-and-hold strategy is
always in the market, risking 100 percent of available equity. While being in the
market all the time might not add to the risk, it sure adds to the agony. Finally,
some of the 30 stocks in the test portfolio were not listed until very recently (such
as Amazon.com, which didn’t start contributing to the portfolio equity until
August 1997).106 PART 2 Trading System Development