Tuesday, August 26, 2008

3 Day Lows & the Power of Stops

One characteristic of short term daily trading systems is that they tend to be hyper volatile, displaying considerable market "noise" in between those times when short term trends are played out. My buddy Clueless was playing with a 3 day low system the other day and (being the short term trader I am) this gave me some ideas for further exploration.
For today's test we'll look at the IWM.
Tomorrow, the Qs will become the focus of attention in an effort to identify a possible trading edge in what you trade short term. Other ETFs may also be profiled and, as always, you're encouraged to run this and other studies on your trading basket and post any results, pro or con.
My code is a little different than Clueless, as I've used the LowestFC function (Lowest returns the same values), which returns the lowest low over "n" days. . .in this case, 3.

The difference in the two scenarios is that the while the code commands are identical, a breakeven floor stop of $40 has been added to the lower study. The results are significant.
Although the stop model trades with 36% greater frequency, the ROI over the test period increases by 30% based on a similar gross profit. The number of consecutive losers remains the same (3), while the average hold time is knocked down 1 day as a result of the stop exits.
I've used a 7 day fixed exit, which tests out as a fairly reliable signal over a variety of time periods. There are many other exit strategies that could have been used and I always welcome reader input in that area.

TS2000i code is shown below.
The $40 breakeven floor stop needs to be added through the Strategy Builder.

Inputs: Len1(3), Len2(7);
If Close = LowestFC(Close, Len1)

Then Buy This Bar at Close;
If BarsSinceEntry = Len2
Then Exitlong This Bar at Close;

2 comments:

Raynd said...

Wow. I really Like your oppinions and Blog. If you are interested in Options and Market insights, definetely check out this blog linked below. He seems to be an advid reader of your blog as well.

http://criticalmassblog.blogspot.com/

GS751 said...

I wonder if the IWM has more profit potential because it is not as over arb'd as the Q's or SPY. I mean it is so damn liquid as are most of the derivatives traded on it.

Do you take into the account the historical significance of Small caps have outperformed large caps for x amounts of years so this small caps should be better. blah blah blah.?