Suggested Markets
Stocks, stock index futures, index shares (SPYs, DIAs, QQQs), commodity
futures, and currencies.
Original Rules (Long Trades Only)
Go long on the next open if today’s high is higher than the high three days ago,
yesterday’s low is lower than the low two days ago, and the low two days ago is
lower than the low three days ago.
Risk 1 percent of available equity per trade for all trades.
Exit all trades with a loss if the market moves against the position by 4 per-
cent or more.
Exit all trades with a profit if the market moves in favor of the position by 12
percent or more.
Test Period
January 1992 to August 2001 (2,500 days of data per security).
Test Data
Daily stock prices for the 30 highest capitalized stocks in the NASDAQ 100,
excluding Intel and Microsoft (which also are in the Dow Jones Industrial Index).
A sum of $20 per trade has been deducted for slippage and commission.
Starting Equity
$100,000 (nominal).
System Pros and Cons
This version of the system does not take into account the opening price before the
trade is entered. One way to filter out a few likely losers is to enter a trade only on
those days the open confirms the previous day’s breakout, by either opening high-
er than the previous day’s close or at least not so low that the breakout is com-
pletely negated. Along the same lines, it also could be a good idea to make sure
the market doesn’t open too high above the breakout, lest the better part of the
move is over before you get a chance to enter.
The original 1:1 profit–loss relationship did not work very well. I therefore
arbitrarily changed it to a 4 percent stop loss and a 12 percent profit target. Both
stops are, however, completely unoptimized, which means a little fine-tuning
164 PART 2 Trading System Development