hindsight analysis is not the way to go during the final stages of your system
design and testing process, it is a valid approach in the initial stages, when you
want to know how the system would have operated in “the best of both worlds.”
This will give you an indication if the idea is worth pursuing any further.
Other than that, this system provides no other type of technical indicator to
measure the direction or strength of the longer-term trend. Therefore, it should be
possible to still achieve good results by substituting for the hindsight trend indica-
tor a good trend filter, such as a long-term moving average.
The nine-day lookback period for the VWA is totally unoptimized.
Experimenting with this number should make it possible to increase performance.
It also is possible to reverse the reasoning for the second equation in the composi-
tion of VWA and give the latest closing price less weight, the higher the volume.
The new formula would look like this: VWA (1 RV) * C RV * PVWA. In
this way, the distance between the VWA and the closing price widens during high-
volume breakouts, which gives the market more wiggle room when trending.Revising the Research and Modifying the System
From Tables 13.1 and 13.2, it seems that this system has held up well since it was
put together, and that it’s also doing exceptionally well on previously untested mar-
kets. Granted, the system is losing money on the short side, but that doesn’t have
to be a bad thing as long as the profits on the short side come when the long side
is doing bad.
For the original article in Active Tradermagazine, this system was fitted with
a trend filter that operated with the benefit of hindsight. As mentioned, this is aCHAPTER 13 Volume-weighted Average 155
Original system, long only PercProf: 87.30
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 78.94 44.73 52,768.38 758.85 Market
St. Dev: 27.48 7.82 46,759.75 870.70 4,889.35 0.14
High: 106.41 52.55 99,528.13 1,629.56 5,648.20 Portfolio
Low: 51.46 36.91 6,008.64 (111.85) (4,130.50) 0.87
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.70 0.34 25,968.61 20.06 10.13 5.42
St. Dev: 0.77 0.33 14,556.43 12.64 2.74 0.65
High: 2.46 0.67 40,525.04 32.69 12.87 6.07
Low: 0.93 0.01 11,412.18 7.42 7.39 4.77TABLE 13.1
Retesting Original Volume-weighted Average System