TRADING SYSTEMS
Trading When Less Is More
Restrictive Trading Systems
by Anthony Trongone, PhD, CFP, CTA
Looking for a trading system that offers more success and less risk?
Try this one.
When it comes to profitable trading systems,
not much has been written on those with restrictive trading conditions.
Although a system that generates less trading activity may demonstrate
a strong and consistent record of success, it does not have the same allure
as a system without restrictions. It can, however, offer more success with
less exposure to risk.
When trading price patterns with restrictive conditions, patience is
a precious resource. You should not be discouraged if you are not playing
your system on a regular basis, especially if you can uncover a handful
of highly dependable plays to supplement your trading activity.
This article focuses on a single strategy that was applicable in 29
of 334 trading days (8.68%) from January 1, 2002, to April 30, 2003. Although
the system is restrictive (one playing day for every 11.52 trading days),
the results are worth the wait.
SYSTEM ADVANTAGES
There are several benefits to this trading strategy. First, it involves
simple trading conditions. You do not have to place your trades during
the regular trading day, when the market fluctuations can be distracting
and sway you from implementing your strategy. Your trades can be executed
between 16:00 and 20:00 ET. Although you can also place your trade during
the premarket trading session, this should be done before the market begins
to move from the previous day's closing price.
This trading system requires the undemanding calculation of the percentage
change between the closing prices and the percentage change between closing
volume. For example, if the previous price was $10 and the closing price
is $12, then the percentage change in price is a 20% gain ((12-10)/(10))(100).
The percentage change in volume is a comparison between an eight-day simple
moving average of volume and the volume for the trading day you are investigating.
I tracked the price patterns of two instruments continually gaining
in popularity: SPDRs (SPY) and the cubes or triple Qs (QQQ).
There are compelling incentives for trading these instruments. First, they
allow investors to participate in the collective performance of a portfolio
of companies. Since they each represent the intraday movements of a price
index (cubes include 100 stocks; SPDRs include 500 stocks), they trade
as a single security. With such diversification, a large percentage decline
in any particular company has a less dramatic impact on either the cubes
or the SPDRs. Other advantages when trading either the SPDRs or the cubes
include small spreads and a longer trading session. In addition, the restricting
downtick rule does not apply when shorting either instrument.
...Continued in the February issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the February 2004
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2004, Technical Analysis, Inc.
Return to February 2004 Contents
