## Measuring the Smoothness of the Equity Curve 185 Hypothetical equity curves with perfect negative correlation

Figure 6.5 Hypothetical equity curves that are perfectly negatively correlated combining them reduces the SE to zero in this contrived example, because the resultant equity curve is a perfect straight line. Figure 6.5 Hypothetical equity curves that are perfectly negatively correlated combining them reduces the SE to zero in this contrived example, because the resultant equity curve is a perfect straight line. We can extend the linear regression-based analysis to calculate the risk-reward ratio...

## Statistical Significance of Channel Breakout Variations

One of the key questions you must ask when you see system variations is whether the differences in the performance are statistically significant. There are many ways to differentiate systems other than comparing their net profits. For example, one system may produce fewer trades. Another system may produce a smaller drawdown. Some systems may have a higher percentage of profitable trades. A variation may be useful precisely because it suits your trading style. A paired t-test compares the means...

## Analysis of Monthly Equity Changes

The impact of a given system on your equity curve will depend on system design and money-management decisions. In this section we look at the monthly equity curve, to understand month-to-month performance. We follow standard accounting procedures and look at the profit and loss figures at the end of each month. You may wish to look at the equity curves on a weekly basis, but the random noise in the market often complicates the analysis of such detailed data. We saw in the previous section that...

The average directional index is a widely, used measure of trendiness. A test of two small variations of an ADX system showed that the absolute value of the ADX has no particular significance. The test used a 1,500 stop and allowed 100 for slippage and commissions on the following markets British pound, coffee, cotton, crude oil, deutsche mark, Eurodollar, gold, Japanese yen, U.S. bond, and wheat. All available data from January 1, 1975, through July 10, 1995, were used. The first system tested...

## The Pullback System

An old market maxim says, Buy on a pullback into support. Many traders like to trade the pullback because it often provides an entry point with relatively low risk. Contrast this philosophy with trading the ADX systems, which buy on strength or sell on weakness. The pullback maxim, however, is not a precise statement of a trading system. We have to define what we mean by pullback and what represents support. This system is a variation of the CB-PB system examined in chapter 4. Here the pullback...

## Developing New Trading Systems Table 412 ADX burst system performance with 5000 initial stop

This system was in the market about 35 to 45 percent of the time, indicating it has a rather large neutral zone. A trading system with a neutral zone is out of the market unless it rises above stiff entry barriers. The 65sma-3cc system is always in the market, and is a reversal-type system, whereas the ADX burst system steps aside 55 to 65 percent of the time. We used a wide initial stop of 5,000 in these calculations to isolate the performance of the system. Table 4.13 includes performance...

## The 65sma3cc Trend Following System

This section discusses how to formulate and test a simple, nonoptimized, trend-following system that makes as few assumptions as possible about price action. It arbitrarily uses a 65-day simple moving average of the daily close to measure the trend. Sixty-five days is simply the daily equivalent of a 13-week SMA 13x5 65 , representing one-quarter of the year. This is an intermediate length moving average that will consistently follow a market's major trend. As shown in Figure 4.1, when the...