Revising the Research and Modifying the System
Table 9.1 shows the results produced by the original system. This is a pretty good
start, showing a high percentage of profitable trading sequences and a decent prof-
it factor. The average profit per trade is, however, a little too low. If we can increase
the average profit per trade, we also should be able to increase the profit and risk
factors. Hopefully, this can be done while also increasing the risk–return ratio, cur-
rently at 0.60.
Because this is a relative-strength system that we later will try to use as a fil-
ter for the other short-term systems, we will start by trying to increase the average
trade length by getting rid of the stop loss. If the results change for the better or
remain relatively stable, the stop loss fulfilled little purpose anyway, and the fewer
rules we can get by with, the better off we are. Table 9.2 shows that this actually
improved results quite a bit. The average profit increased to $229.77, while the
profit and risk factors increased to 1.14 and 0.08, respectively. The risk–reward
ratio also increased, which indicates the system produces more homogeneous and
similar-looking trades. However, for a trend filter, the trading horizon is still a lit-
tle short at 6.18 days, on average.
Let’s keep testing the system without the stop loss, but try to come up with a
way to lengthen the number of days in a trade, while decreasing the time spent in
the market. To do this, the number of trades must be decreased; you could work
with a longer lookback period for the relative strength calculation. Table 9.3 shows
the result for a version of the system with a 20-day relative strength lookback. It
contains both good and bad news. The good news is that the average profit per
trade increased together with the profit and risk factors. The average trade lengthCHAPTER 9 RS System No. 1 107
Original system, long only PercProf: 70.00
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 405.60 38.64 53,487.76 155.09 Market
St. Dev: 74.9 13.86 90,677.39 257.4 14,865. 10 0.03
High: 480.51 42.50 144,165.15 412.50 5,020.19 Portfolio
Low: 330.69 34.78 (37,189.63) (102.31) (4,710.00) 0.60
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.09 0.06 98,225.82 53.55 56.61 5.68
St. Dev: 0.15 0.09 49,403.31 30.82 3.43 0.38
High: 1.25 0.15 147,629.13 84.37 60.04 6.06
Low: 0.94 (0.04) 48,822.50 22.73 53.19 5.31TABLE 9.1
Retesting of RS System No. 1