Original Rules
Enter long with a limit order if the market trades below the lower two standard
deviation meander boundary.
Risk 4 percent of available equity per trade.
Exit with a loss if the market drops below the entry price, minus the differ-
ence between the forecasted average price and the lower meander boundary.
Exit with a trailing stop (win or loss) if the trade is more than one day old
and the market once again falls below the forecasted lower meander boundary.
Exit with a profit if the market trades above the forecasted upper meander
boundary.Test Period
March 1, 1990 to November 11, 2000.Test Data
Daily stock prices for the 30 stocks included in the Dow Jones Industrial Average
(DJIA). A total of $20 per trade has been deducted for slippage and commission.Starting Equity
$100,000 (nominal).System Pros and Cons
Because this is a long-only system, it can stall during prolonged market correc-
tions. However, because the system has no trend filter to keep it out of the market
during the early and late stages of a trend, it should react very quickly to favorable
market conditions.
This system clearly illustrates the importance of having a stable profit fac-
tor and average profit per trade over a large number of markets and market con-
ditions, rather than a few higher but less robust values. In this case, only 15 out
of 30 markets had a profit factor above 1.10 when analyzed individually; no mar-
ket was above 1.4. Bottom line: A strategy that incorporates good money man-
agement and constantly grinds out even marginal profits can make good money
over time.
The total portfolio profit factor of only 1.2 isn’t eye grabbing. But that’s not
the point. The point is that despite this low profit factor, the system manages to
produce a risk–reward ratio well in line with the closest comparable market index
(DJIA) and a buy-and-hold strategy, while only spending a fraction of the time in114 PART 2 Trading System Development