Magazine article Modern Trader

In the Pudding

Magazine article Modern Trader

In the Pudding

Article excerpt

In "Fading Away' (Futures, January 1999), we concluded it is possible to trade marginally profitably with random entries in the direction of the long-term trend when using a consistent exit strategy.

Well, here's the proof in the pudding: With the long-term trend defined by a 200-day exponential moving average and with every trade lasting for five days, come rain or come shine, we hypothetically traded 14 markets. We simulated this system -- remember, it's random, so with each simulation the entries change -10 times, with historical data from Jan. 1,1983, to Dec. 4,1998. Each day had a 20% probability for taking a trade. With each market traded 10 times, this means that the system should have entered a trade on an average of two times on each bar, but with no two combinations of trades being exactly the same.

"Fat chance" shows the results from this strategy compared to the same random entry strategy, but without the moving average filter. The most interesting is to compare the two profit factor columns to each other. The profit factor measures how likely you are to win for every dollar lost. For instance, with a profit factor of 1.08 (as is the case for coffee with the 200-day moving average filter), you are likely to win 1.08 dollars for every dollar lost, ending up with a total profit of 88.

Without the 200-day moving average filter the average profit factor is 1.02 for all markets, with almost all individual markets sporting a profit factor above one, indicating they might be slightly profitable. However, the column titled "lower limit," which shows the lower 95% confidence limit for each market, reveals that none of the markets tested had a lower confidence limit above one. …

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