at each instance in time, we can risk more and make more on a few well-selected
stocks, than we could trading all stocks at all times. This will become clearer to
you in Part 4, where we discuss various money management issues and how to
always risk the most optimal amount according to your own scientifically deter-
mined preferences.
Given that the average trade length is rather high, the most obvious alteration
would be to shorten the lookback periods for the relative strength calculations.
However, doing so would most likely also result in more losing trades, and because
we don’t have that many winners to begin with, I decided to leave the testing of
different lookback periods until last. The first thing then, is to see if we can get rid
of any other variables or criteria. In this case, the most obvious one is the trailing
stop. Doing without it resulted in a slight deterioration of most performance meas-
ures (as can be seen in Table 12.2), but because the changes were rather small, it
is still wise to get rid of this criterion to keep the complexity of the system to a
minimum.
Because we started by looking at the stops, the next logical step would be to
look at alternative settings for the stop-loss and profit-target levels. However, as it
turned out, the original settings worked best. Having settled for the exit levels, it
is time to move on to the true range variables, which monitor the volatility of the
market. Altering the lookback period for the long-term true range between 10 and
60 days indicated that the model would work better, the shorter the lookback peri-
od. Table 12.3 shows that what we lost in reliability by taking away the trailing
stop, we gained back by making the system more sensitive to the changes in
volatility. The average profit per trade is now at $1,577.59 and the profit factor at
1.46. The risk–reward ratio is its highest so far, at 0.49.140 PART 2 Trading System Development
Original system, long only PercProf: 68.00
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 47.08 37.44 57,123.57 1,197.99 Market
St. Dev: 23.77 9.40 82,533.95 2,684.63 10,348.07 0.11
High: 70.85 46.84 139,657.53 3,882.63 11,546.07 Portfolio
Low: 23.31 28.04 (25,410.38) (1,486.64) (9,150.08) 0.45
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.49 0.25 44,060.96 31.05 43.96 29.20
St. Dev: 0.71 0.40 20,939.63 18.61 11.49 13.82
High: 2.20 0.65 65,000.59 49.66 55.44 43.02
Low: 0.77 (0.15) 23,121.33 12.44 32.47 15.39TABLE 12.1
Trading Original Rotation System