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Trading SharesSo far, all the stock trading systems that I have posted on this website have been for trading market indices and never for trading the market's individual shares. In this experiment, I am going to compare how a system designed for trading a specific stock market index performs when it is used for trading shares. One of the most common problems with mechanical trading systems is that often the ones with the best winnings to losses ratio in term of points (or pips) won to points lost don't tend to trade very much, so while these systems have a very significant edge, sometimes they don't provide enough opportunities to actually apply that edge. One of the ways we can get round the problem of a system not trading frequently enough is to trade the system on many different markets simultaneously. Since there are relatively few major market indices to trade it would be a great benefit if a system designed for trading a specific index also worked on the indices underlying individual component shares. The system I am going to test on stock market indices and some of the individual component shares of each index is an end of day system that uses the market's closing price data only. The system uses the following components –
Going Long,When the price closes above the 200 day SMA and the price also closes below the lowest closing price of the previous 10 days; then go long and hold the long position until the market makes a new 10 day closing price high at least 40 days after the trade was entered. If the price closes above the highest closing price of the previous 10 days before the trade has been open for at least 40 days ignore it and continue to hold the position as we are exiting on the first new 10 day closing price high after 40 days. Only open one position for each share or index, if you continue to get long signals after the first long position has been entered but not yet closed ignore them. Going Short,
When the price closes below the 200 day SMA and the price also closes above the highest closing price of the previous 10 days; then go short and hold the short position until the market makes a new 10 day closing price low at least 40 days after the trade was entered. If the price closes below the lowest closing price of the previous 10 days before the trade has been open for at least 40 days ignore it and continue to hold the position as we are exiting on the first new 10 day closing price low after 40 days. Only open one position for each share or index, if you continue to get short signals after the first short position has been entered but not yet closed ignore them. Trading Shares: The System In Pseudo Code,
Or, for those who are technically minded and want to program the system, the system in pseudo code would be - Trading Shares: The Logic Behind This System,The logic behind this simple, crude and (hopefully) effective set of rules is something like this... Share prices and the indexes they make up usually have a long-term directional bias (or trend), up in bull markets and down in bear markets. But share prices are driven mainly by speculators and therefore the trend tends to move in a 'zigzag' pattern of small peaks and troughs as speculators aim to buy low and sell high whilst they trade the price off the various support and resistance levels that their collective activities cause to emerge. Due to the strong effects of support and resistance it is probably not a good idea to buy new highs and sell new lows when one is trading shares; waiting for price retracements is more likely to be a better strategy in markets like these. To trade such a market we are first need to a establish the direction of the long-term underlying trend (i.e. it's directional bias) which we do with the 200 day simple moving average of the market's closing price. We will only take long positions in bull markets, and only take short positions in bear markets. In this system we decide if we are in a bull or bear market by comparing the closing price to the 200 day simple moving average, but you could actually use any suitable long-term trend filter. During an uptrend (or bull market) we will go long when the price is relatively low (in this case closing lower than any closing price in the previous 10 days). Once we are in a long position we will give the long-term trend time to work and take the price higher, in this case 40 days, after which time we will look for a relatively favourable high price to close the long position which in this system's case this is the price closing higher than any closing price in the previous 10 days. During a downtrend (or bear market) we will go short when the price is relatively high (in this case closing higher than any closing price in the previous 10 days). Once we are in a short position we will give the long-term trend time to work and take the price lower, in this case 40 days, after which time we will look for a relatively favourable low price to close the short position which in this system's case is the price closing lower than any closing price in the previous 10 days. Trading Shares: The System's Testing,I will test this system on the UK's FTSE 100, and the American Dow Jones Industrial Average and S&P 500, and on ten large stocks/shares trading on each index. Due to the difficulty in getting data going back decades for individual component shares I will test this system from the beginning of the year 2003 to June 2011, 7 ½ years. The results are as follows - Trading Shares: The Results for the FTSE 100 and ten randomly selected component shares,
Trading Shares: The Results for the S&P 500 and ten randomly selected component shares,
Trading Shares: The Results for the Dow Jones Industrial Average and ten randomly selected component shares,
Trading Shares: My Conclusion,This system seems to produce a tradable edge but very few trading opportunities, therefore such a system would only be worth while if it were traded on many different markets at once. I am now going to see if I can improve the number of trading opportunities by modifying the exit strategy. For more information, see Trading Shares: Exit Strategies. |
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