Wednesday, August 06, 2008

Buy the 10 Day Low

The Clueless One asked about a system that bought the 10 day low and sold on the cross of the 20 DSMA. This is a long only system and contains no risk management stops. I'll play with this thing a bit more as the drawdown is a bit scary and can probably be scaled back considerably with either an ATR stop or a simple stop loss. It's on my "to do" list.
For now, here's the very simple code in TS2000i, with the usual caveats:

Inputs: Len1(10), Len2(20);
If Close = LowestFC(Close, Len1) Then Buy This Bar at Close;

If Close crosses Above Average(close,Len2) Then ExitLong This Bar at Close;
You can easily expand the code to include a short side component, but as noted below, that's contrary to the goals underlying the system.
I"ve also found that bullish entry signals are best executed with This Bar at Close commands, rather than At Market commands, which push execution of the trade into the next opening bar. Ditto for exit signals as with an impending reversal, the next opening is likely to gap down. The equity curve is also a bit rough when compared to the recent %R system. If we add additional entry conditions, we can probably smooth it out a bit without sacrificing too much of the gain. This system capitalizes on Larry Connor's backtesting model which verifies that the best risk management strategy over the long haul has been to simply buy weakness . . in this case 10 day lows.
Since I'm forever tinkering with these things, I optimized the system and found these results using 8 day lows and a 19 MA cross. The equity gain is definitely improved based on a similar number of trades over the 5 year test period with a slight decrease in drawdown but, again, no risk management stops are engaged.
While I enjoy being the driver for these studies, at some point in time the passengers have to assume some participatory responsibility (for example , running these systems in 10 and 60 minute bars and then posting the results). Failing that, I will likely discontinue future system studies and probably close the blog. My technical daytrading strategy is detailed in the How I Trade panel on the right of the blog, along with numerous linked examples. I find little value in repeating posts of the the same setups day after day . . . so, unless there's a clear cut technical lesson to be learned from the day's action, those posts will be few and far between. Since 90% of my trades are based on IWM and the Qs, I don't offer any great stock scans or screening tools, although I may occasionally profile an unusual stock situation.
Contrary to some other blogs, I don't carry ads, I don't collect revenue from links to other blogs and I don't sell CDs, books or study courses. I wouldn't buy 95% of the stuff run through google ads, etc., and I believe it's a shameful dis-service to other traders to suggest there's any value in many of the rather preposterous claims on these sites.
I have yet to perfect the BZBTrader Rags to Riches, Pot of Gold, End of The Rainbow, Can't Possibly Lose, Top Gun, Become a Millionaire While You Sleep Trading System. When I do. . .you'll be the first to know.
I do mentor traders on a one to one basis, but you've got to come to Oceanside and spend a couple days and a couple thousand and I only do that 4 times a year for qualified traders (this is not a solicitation).
Dr. Brett posted a nugget some time ago that should be a guide for your trader education and survival:
"If you're the smartest person in your group, you're in the wrong group."
Easily stated but difficult to implement. . . separating the wheat from the chaff is the hard part.
Beware the Golden Goose and Good Luck out there.


Unknown said...

BZB, thanks for all the hard work. I have certainly learnt much from your system testing and I thank you greatly for that. I always go off and test these myself in amibroker - its formulating the base ideas that I struggle with and you have provided plenty of material there!

One question regarding the buy on close. In practice, how would you trade such a system? How can you buy the close before you know what it is? Do you simply monitor the stock near the close and make a call as to whether it will close at a level that activates a signal and enter an order at market?

bzbtrader said...

Great question! There are a couple ways to tackle this. For us daytrader types who watch the markets in time intervals of 5, 2 and/or 1 minute bars. The answer is simple. Like the Cheaphooker system I profiled on July 4th, I typically run a daily bar system check 30 minutes pre close to see if any of the systems I follow have fired. If so, it then becomes a matter of finessing the trade into the close and to do that I monitor the 2 minute bars to see what the markets makers (MMs)are doing and to make sure the trend continues the way I anticipate for the system to continue valid into the close. The last 12-20 minutes can be volatile as the MMs settle trade imbalance and several large prop shops capitalize on this process to further skew market volatility. Since I'm bascially an options trader using the underlying to trade, it's not unusual for me trigger trades 2 minutes before the close, after the dust has settled and the next day's premiun decay has often already been built in. Since most of these trades are on Qs and IWM options, where the spreads are 1-2 cents, I don't take time finesse the trade with limit orders, I just go with the bid/ask.
OR, if your platform allows, you could just place a conditional MOC order (market on close) and let the MMs do their thing with the order.
Hope that helps. . .