also is confirmed by a test of a 200-day lookback. Therefore, it seems best to stay
with a shorter lookback period for the short side. This also makes sense when
remembering that the original logic for the system said that the short side was only
going to work as catastrophe protection. Using a shorter lookback period, the sys-
tem will react faster to those swift moves against the general upward drift of the
markets.
With such a short lookback period of 20 to 60 days, to make sure the system
doesn’t trade too often or stop out the more long-term trades on the long side, keep
the standard deviation-based trigger level as far away from the average relative
strength as possible so that only the very weakest markets will be traded. Table
11.7 shows what happened when the standard deviation setting was altered from
two to three standard deviations. Note that the lookback period also is altered to
21 days. Other tests (not shown) with altering lookback periods confirmed that
this was the best combination.
What we would like to happen happens: The profitability of the system
increases considerably using a higher standard deviation setting. Table 11.7 shows
that for a lookback period of 21 days, combined with a three-standard-deviation
trigger level, the average profit per trade has increased to $323.92, the profit fac-
tor is now at a decent 1.52, and the risk factor indicates that we could make as
much as 16 cents per dollar risked, on average.
Having decided that we’re better off with a three-standard-deviation entry
level, it’s time to examine the stops applied directly to the market in question.
Table 11.8 shows that a system without stops has a higher average profit per trade
($449.59), but also lower profit and risk factors at 1.30 and 0.08, respectively. The
risk–reward ratio also is slightly lower at 0.17. However, although this version ofCHAPTER 11 Relative Strength Bands 131
Original system, short only PercProf: 40.00
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 56.32 32.23 (13,229.68) (281.39) Market
St. Dev: 33.20 10.23 29,241.64 1,022.98 4,477.42 (0.11)
High: 89.52 42.46 16,011.96 741.59 4,196.03 Portfolio
Low: 23.12 22.01 (42,471.31) (1,304.38) (4,758.81) (0.28)
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 0.88 (0.10) 34,525.10 32.43 8.82 5.09
St. Dev: 0.42 0.31 19,478.50 19.33 2.47 1.05
High: 1.30 0.21 54,003.60 51.75 11.29 6.14
Low: 0.46 (0.42) 15,046.60 13.10 6.35 4.05TABLE 11.6
Short Side Trading Using Original Relative Strength Bands