tem does a good job in catching the anticipated move early with its original rules,
instead of waiting for the move to get started.
Having tested the logic behind the system (which was obviously there for
some reason I had forgotten about), it is time to test the lookback periods for the
volume-weighted average and its highest high and lowest low values. As it turned
out, there was no rhyme or reason to how the results changed with individual
changes in the lookback periods. Therefore, I set both lookback periods to the
same value and thereby got rid of another optimizable variable before I tested for
lookback periods longer and shorter than the original nine days.
The testing indicated that the long side worked best, with a slightly longer
lookback period of 21 days, which also equals one month. Good results for sur-
rounding lookback periods, such as 18 to 25 days confirmed that this also is a
robust solution. For the short side, the best and most robust results came with a
lookback period of 10 days, or two weeks. By the way, I like it when the lookback
periods align themselves with calendar periods: It helps me make sense of and put
trust in the logic behind the system, even though I shouldn’t have a problem with
that, since I built it myself in the first place.
Table 13.5 shows that the average profit for the long side now is $661, with
a risk–reward ratio of 0.95. These very good numbers indicate that the system has
a large likelihood to be profitable in the future as well as in the past. This is fur-
ther confirmed by the lower standard deviation boundaries for the profit and risk
factors, which both are safely above one and zero, respectively. The risk factor tells
us that we can expect to make 26 cents for every dollar risked, which is very good
indeed.158 PART 2 Trading System Development
Long only: No trend filter, no stop loss,
21-day lookback PercProf: 87.30
Trades PercWin NetProfit AvgProfit ProfitStD RiskRatio
Average: 110.92 42.80 64,023.40 661.56 Market
St. Dev: 30.86 6.58 56,981.64 695.88 5,423.76 0.11
High: 141.78 49.39 121,005.04 1,357.45 6,085.32 Portfolio
Low: 80.06 36.22 7,041.77 (34.32) (4,762.20) 0.95
ProfitFactor RiskFactor MaxDD PercDD PercTime AvgLength
Average: 1.49 0.26 37,481.14 24.85 15.08 5.64
St. Dev: 0.47 0.23 18,477.53 14.51 3.00 0.75
High: 1.96 0.49 55,958.67 39.36 18.08 6.40
Low: 1.02 0.03 19,003.61 10.34 12.07 4.89TABLE 13.5
Altering Lookback Period for Long-side Trading