SYSTEM DESIGN
Unlock Your Coding Potential
Finding Key Reversals
by Massimiliano Scorpio
Running this statistical test before creating a system can
prove to be helpful.
After spending several years analyzing traditional
indicators and developing moving averages and oscillator-based systems,
I have found that nothing works better in forecasting price movements than
price itself. This discovery led me to focus my efforts into searching
for and studying price configurations that could be useful in predicting
the next movements in price. I started creating systems in 1996 using what
was then Omega Research's EasyLanguage and tried to test several strategies,
writing numerous programs and solving many problems that popped up before
I could translate my ideas into a single mechanical strategy. A couple
of years ago, I decided to build a library of my favorite patterns and
setups to use as a basis for creating a system, and to statistically test
if there was indeed something to work on. This preparatory exercise turned
out to be very useful, and I would like to share it with my fellow traders.
THE STEPS
Before designing a system, you need to write down what pattern you wish
to write a program for. Describe your inputs and outputs, and the conditions
that would be valid if you were trading that pattern. Once you have created
a system, you will need to test it on historical data to determine if it
would have been successful in the past. When testing the system, you can
select charts of any market, but testing it on at least 10 to 15 noncorrelated
markets will make your results more reliable and valid.
The first step to writing an EasyLanguage function is to list all the
patterns you want to test. As an example, I will show you how to write
a function for a key reversal up day. The EasyLanguage code for the function
can be seen in sidebar 1. A key reversal up day is represented by a bar
where the low is lower than the previous low and the close is higher than
the previous close. You need to add the condition the actual close must
also be lower than the high, as displayed in Figure 1.
FIGURE 1: KEY REVERSAL UP. This is a key reversal up,
visually stated.
Next, you need to create a signal program, including the function, using
the "print" statement as can be seen in sidebar 2. If there is a key reversal
up, my objective is to determine how many times the high of the next bar
will be equal to or greater than the previous high. If I find the results
satisfactory, next I need to build a system where I would buy the key reversal
bar at the close and sell the position at the next bar at the previous
high for a profit (Figure 2). (See Traders' Tips on page 98.)
FIGURE 2: KEY REVERSAL SETUP. If the setup works, it is possible to buy on close and sell next bar at today's high.
...Continued in the December 2001 issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the December
2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2001, Technical Analysis, Inc.
