Trading Systems and Money Management : A Guide to Trading and Profiting in Any Market

Suggested Markets

Stocks, stock index futures, index tracking stocks (SPDRs, DIAs, QQQs), futures,

and currencies.

Original Rules (Reverse the Logic for Short Trades)

Yesterday’s high should be lower than the previous day’s high; yesterday’s close

should be lower than yesterday’s open; and today’s open should be lower than yes-

terday’s high.

Go long on a break above yesterday’s high.

Risk 2.5 percent of available capital per trade.

Exit with a loss if the market moves against you more than 1 percent.

Take profits if the market moves in your favor by more than 4.5 percent.

Liquidate any remaining trades after eight days.

Test Period

July 1992 to February 2002 (2,500 days of data per security).

Test Data

Daily stock prices for the 30 highest capitalized stocks in the NASDAQ 100. A

sum of $20 per trade has been deducted for slippage and commission.

Starting Equity

$100,000 (nominal).

System Pros and Cons

Unlike many other systems, this one trades the short side as well as the long—

a necessary criterion to keep the drawdown to a minimum during prolonged

downtrends, such as the one we’re currently experiencing. The system, in fact,

is in the midst of its worst drawdown since the start of the testing period, but so

is the NASDAQ 100 index; so far the system’s drawdown doesn’t come any-

where near that of the NASDAQ 100. Other than the recent drawdown, the sys-

tem’s history has been very good indeed, as indicated by the drawdown chart

(not shown).

Note that the average time spent in a trade—1.6 days—is very short. This, in

turn, results in a low average profit per trade of $70. This may not seem much, but

remember that it is the average profit for all trades, including losers. The average

174 PART 2 Trading System Development