June 2003
Research:In Search of the Holy Grail
by Howard Arrington
In literature, the 'Holy Grail' is generally considered to be the cup from
which Christ drank at the Last Supper and the one used by Joseph of Arimathea to
catch his blood as he hung on the cross. The term 'holy grail' has been
used among traders to represent the ultimate mechanical trading system that
would return unlimited wealth. Though many seasoned traders say the Holy
Grail does not exist, it is a never ending pursuit of many traders to find a
Holy Grail. Armed with a computer as a research tool, thousands of traders
have tested their ideas against historical data sets in search of the ultimate
trading system. Many ideas are marketed, surrounded by claims of phenomenal
success with graphs showing the hypothetical accumulation of wealth if
the system had been used to trade financial markets over the past few
years. Many of these mechanical systems are promoted with 'rags-to-riches'
testimonials in the advertising literature which arrives unsolicited in my mail
box each week. Perhaps it has been my luck to just be unlucky. The $3000
systems I am familiar with have ended up being more phony than legitimate.
Thus, my bias is more likely to embrace the philosophy that the Holy Grail
does not exist. I consider the following are very valid questions to ask
about any system being offered.
- Why does an author bother to sell a trading system if it does all that the
author claims?
- Why doesn't the author acquire unlimited wealth by using his Holy Grail,
instead of being bothered with advertising, marketing, trade shows, customer
support, and criticism?
- Has the system withstood the test of time? If it was 'holy' a
decade ago, shouldn't it still be highly sought after now?
- What happened to the 'rags-to-riches' folks who had their testimonials
published a year ago?
Sorry I do not have the answers to these questions. However, the real
purpose of this article is to discuss the challenges of designing mechanical
trading systems. Consideration of these principles in one's design should
be helpful to those who engage in a search for the Holy Grail.
1) Type of Market We all realize that there are different types of
markets, namely: trending, swing, and choppy. Different systems try
to take advantage of a particular type of market, and their results look great
when applied to the type of market they were designed for. These systems
have poor results in the wrong type of market. System designers feel
they have a great system if they can put money in the bank when the market is
the right type, and break even when the market is the wrong type. Studies
serve as a basis for the design of many trading system, or are used as either a
filter or a signal in the system design. The following common
studies have been categorized by the type of market they work best with.
- Trending - Moving Averages, Parabolic Stop, Volatility Stop,
Trailing Stop, Directional Movement Index, Channels
- Swing - Stochastics, Relative Strength Index, MACD, Commodity
Channel Index, Pesavento Patterns, Fibonacci, Divergence
- Choppy - can't think of anything that works well with choppy.
Most traders prefer to stand aside in choppy markets.
Traders often try to label the Elliot wave counts so they can anticipate the
type of market unfolding, whether the market is in a consolidating wave 4
triangle, or whether a wave 3 breakout thrust is underway. They can
then adjust their trading strategy for the type of market.
2) Slippage Some systems suffer from trading too
frequently. Commissions and slippage costs become a high percentage
of the expected gain. For example, if two systems both generate a profit
of $4000, would you prefer system A that did so with 10 trades or system B
that did so with 100 trades? The average trade in system A is
$400 while the average trade in system B is $40. For example, if
the fills in real life are one tick worse in the E-mini markets, $25 has
evaporated from the average trade results, and the penalty on 100 trades is more
severe than on 10 trades. Thus, a big factor to consider in
evaluating a system's success record is the number of trades. Too
few trades may not be statistically sound, and too many trades may suffer from
commissions and slippage losses, not to mention the constant wear it is on one's
emotions.
3) Emotion Emotion is one of the hardest areas to design
for. The whole reason traders seek a Holy Grail is because they have
had a few bad experiences in the markets, and no longer trust themselves to
trade well.. They assume that the computer
can analyze the facts more logically and pull the trigger more mechanically,
which are areas they feel they need help with. The results look good on paper, up
$60,000 for the year with the system, and the maximum draw down looks tolerable
compared to the benefit. So, courage is mustered and commitment to
faithfully follow the system's signals is expressed to one's
friends. But what happens over the next couple weeks.
Our emotions want instant success. We are unwilling to tolerate a series
of losing trades. All systems eventually have a string of losing
trades and a draw down in equity. Such is part of the statistical results
buried somewhere in those beautiful graphs of wealth accumulation.
However, a graph of past performance is emotionless. The real thing, with
my money on the line, is 100% emotion. When I am ahead I am elated at how
easy it is. When I am behind, I start to second guess every signal and
think I am smarter than the system, and I can improve on the trading system by
applying my experience. Surely I am aware of intangibles the system failed
to consider. For example, does the trading system know what is the correct
thing to do when the news is showing horrifying pictures of planes flying into
tall buildings, or war has broken out in the Middle East, or the dock workers
have decided to go on strike, or Greenspan is speaking before Congress?
Suddenly we convince ourselves we know more than the Holy Grail system, and we
abandon it as we seek a place of greater personal comfort. It is easier to
design a mechanical system than it is to actually trade it! I
know... I have been there and done that.
4) Now you see it, now you don't One problem when doing analysis
on a daily data set is the urge to jump the gun and execute a new signal during
the day. For example, you may see study lines cross during the
day, which would constitute a signal, and you want to execute the trade now
before the market runs away from you. However, signals based on a daily
data set only know the four prices of Open, High, Low and Close.
During the day the Open is known. However, the High and Low are moving
targets. And the Close in not known until the market closes. To
execute any trade based on a signal during the day is to jump the gun. Though
you see the signal intra-day, the signal conditions will often undo
themselves. For example, a simple signal might be when the Close is above
the Open. When the market is putting in new highs, the signal
condition is True. However, the market can turn around and put in new lows
wherein the signal condition has reversed to being False. Signals
which incorporate the Close price either directly or indirectly through studies
should analyze through the last completed bar on the chart, and avoid giving a
signal during the time period the current bar is under construction.
Otherwise they will suffer from the "'now you see it, now you don't"
challenge.
5) Moving target One of the unique studies in Ensign Windows
is the Pesavento Patterns tool. The program uses its set of proprietary
rules to identify swings and label them with their percentage of retracement
when compared to other swing. The problem with using a study like this for
a signal is that the target can move, as illustrated by this sequence of 3
charts. 
Here
the price has dipped to a swing low of 992.50, and the swing ratios are favored
1.128 and .841. One might think there is a Buy signal in effect because of
the ratios and the pattern. If the markets were to rally, buying the
apparent signal would look like a stroke of genius. Now consider what
happened. 
The
market dribbled higher in sideways chop between 12:30 and 14:00, then fell to a
new low at 991.50. The Pesavento Pattern tool adjusted to used the new
swing low. At 991.50 we have another favored ratio of 1.0 for a double
bottom. Do we have a buy signal at this double bottom? Well consider
what happened next. 
The
market traded lower into the close and the Pesavento Patterns tool adjusted
again to this new swing low. None of the bounces off of the prior swing
low points were of sufficient amplitude to qualify as a new up trend because our
minimum swing size parameter was set for 5 points. Fluctuations under 5
points in size are being ignored by the Pesavento Patterns tool. The
tool illustrates a general problem where it is easier to see things with the
benefit hindsight. This can be said about most divergence
patterns. It is easy to see the last divergence where the market finally
turned. It is easy to overlook other divergence patterns that existed at
the time, but were not the ones to be traded once additional bars were added to
the chart and they became obscured by a subsequent pattern. Often the
patterns we seek to identify, the divergences, the study lines crossing, are a
moving target. In hindsight it is easy to say, "Of course, there it
is, I see it" yet in real-time we are frustrated by seeing similar
patterns and signals prematurely in the moving target. If we wait for the
signal to be confirmed we are often late in our execution. For example, it
will be 5 points after the fact before we know for sure the current Pesavento
Pattern is not going to adjust again to a new lower low.
6) Interior sequence  Another
challenge in back testing a signal idea is the loss of detail in looking at
historical bars versus knowing a real time tick sequence. Consider a
signal where we want to buy when the market rises 1 full point. In this
bar example we do not know whether the High was put in before or after the Low.
So
in back testing, is the buy signal at 994.50, which would be the case if the
market opened, and then went to the low of 993.50 and then rallied back to
994.50? Or is the signal at the high of 995.50, which would be the case if
it rallied from the 994.50 open to put in the high first? We cannot
tell. We simply lack the detail of knowing the interior sequence of how
the bar came to be. The only thing known about the bar are the four fixed
prices of its Open, High, Low and Close. Another illustration of the interior
sequence challenge is this. Let's assume the Buy signal was one tick
higher than the high of the bar on the left. The buy trigger would be a
known price of 995.50, and since the bar traded at that price, we can assume the
position was filled. Now suppose our protective stop is an automatic 2
points below our fill price. Are we in or out of this trade on this bar? The answer all depends on the sequence. If the Low
was put in prior to the High, then we have not been stopped out. If the
Low was put in after the order was executed, then the position is stopped out
for a loss. What happened is uncertain because the detail of how the bar
was constructed is unknown in the historical data set.
7) Execution price
I often find fault with the price chosen for execution. A trading
system I recently looked at used for its Sell price the High of the bar
following the signal. What a phony deal! Using the High of any bar
is biasing the sell statistics to be executed as a most favorable and unlikely
price. Likewise, using the Low of any bar as the execution price is
biasing the buy statistics with a favorable and unlikely price. My opinion is
that the execution price should be the Open of the bar following the
signal. A second choice could be the Close of the bar that generated the
signal. While this is a fixed price in your historical data set, it is a
moving target in real-time and leads you to anticipate the price or the signal
just prior to the close of the bar. We have already talked about this
challenge in our "Now you see it, now you don't" discussion. Another
consideration is whether the execution price is a study value, such as a
Parabolic Stop value, or a bar price such as its Close. When a bar
touches the Parabolic Stop,
did you have a buy or sell stop in place to execute your trade? That is
fine if your system was designed for the trigger to be the Low or High of the
bar touching the stop, as opposed to the bar closing across the stop. If
your signal is based on where the bar closes, then the execution price should be
the bar's Close price and not the study value. Also, the study value might be unrealistic if the bar gapped across
the line, in which case the Open price of the gap bar should be used as the
execution
price.
8) Time of day Many day traders want a system that incorporates the
time of day in its consideration. Some systems are designed to avoid
the choppiness of the market open. Others may want to consider avoiding
new trades near the close of the day. Some systems will want to exit all
positions ahead of the market close. I find fault with scalping systems that
establish trades just prior to market close, are blind to all Globex activity,
and then exit at an excessive profit objective at the following day's favorable
gap open. My opinion is that scalping systems are day trading
systems and their statistical results should not include holding positions
overnight, nor be blind to the Globex trading if a position is held past the day
session close.
9) Optimization The computer lends itself to endless number
crunching. System designers adjust parameters endlessly in an effort to
tweak more performance out of their idea. They will adjust study
parameters such as the number of bars in a moving average, adjust trigger
thresholds such as CCI crossing 100, adjust entry and exit rules, and adjust
slack parameters such as a stop offset from a bar high or low. The number
of possibilities is mind boggling. The billions of calculations,
permutations and combinations are unfathomable. When it is
all said and done, the author announces the greatness of his work, expounds on
the difficulty of the project and the cleverness of his creativity. A
price tag is picked, advertising hype assembled, and marketing efforts directed
at would be buyers. The problem is that the system performance is often over
optimized in an effort to tweak great performance out of the historical data set
used to design the system. When I started Ensign Software 22 years ago,
one of my first products was the CAT program (Computer Analyzed Trading).
It basically was a High/Low stop concept with an optimized slack value for each
futures symbol. CAT had an optimized slack value for Japanese Yen, a
different slack value for Gold, and a different slack value for Live
Cattle. The idea was to put the good trends in the bank, and hold its own
in choppy markets. A really good trend came along in each market a couple
times each year, and the impressive wealth accumulation was to catch those
trends and put them in the bank. The other 9 or 10 months of the year, the
small winners would balance out the small losers. The downfall of the system
was over optimization. Trading the program signals in real-time did not
amass the same results as the back tested results. Why? It
took a long time for me to admit to what the problem was because of my
ego. The system was being optimized to find a slack value for each market
such that the stops would be far enough away to optimally avoid whip lash.
This meant we back tested tighter stops (enter and exit the trade sooner for more
profit per trade) and wider stops (try to avoid whip-lash).
Somewhere between these conflicting objectives would be some slack values that
would show positive returns in the back testing results. The finely tuned
slack values that generated 80+% winning trades, were valid for the historical
data set the analysis was done on, but were not necessarily the best values to
use for the immediate future. The hope was, and it was definitely just a
hope, that the past would repeat itself in the future and so the optimized
parameters should continue to work. Sometimes they did, often they did
not. When you see advertisements showing stellar results, please realize that
the graphs and reports show Optimized settings, optimized for the past.
And wisely the small print says, "Past performance is no guarantee of
future performance." Trust me... future performance will be
worse than the past performance because the past was optimized. 10) Just
one more rule The dilemma with every system designer is that their work is
never done. They are plagued with the perpetual need to add just one
more rule to handle just one more situation that just came up in today's market
that was not handled as profitably as it should. If only we had one
more rule too keep us out of that losing trade today, then the system would be
perfect. So one more rule, one more exception is incorporated into the
system. But the process is repeated over and over again as the original
pure idea evolves into a different beast. One more rule is just another form
of on-going optimization. Often this type of optimization is based on what
happened today, and not on thorough back testing. I have seen systems that
worked in general and were statistically proven through back testing, become
specialized and cease to work at all because of the addition of rules
to handle special situations. Rules get added to avoid opening gaps that
exceed a certain threshold, or to avoid trading during certain windows of time
during the day, or to increase the trade size if a particular formation is seen,
etc. Too often the rules use specific hard coded values instead of being
generalized so they auto adapt to different instruments or auto adapt to calmer
or more volatile markets. I guess the lure to harvest more money from the
field of opportunity will keep the Holy Grail seekers forever employed.
Not all will agree on the ideas on which different mechanical system are
founded. One trader shooting for the moon might be confident even
when a big position is against him 20 thousand dollars, while other traders
would be financially and emotionally wiped out. We each have a different
'risk avoidance' threshold and comfort zone. May each of you find a
methodology that fits your personality and pocket book, and helps you be successful in
your trading.
Research:Back Testing
by Howard Arrington
Ensign Windows has a powerful programming language called ESPL. This Delphi (Pascal)
like language can be used to implement proprietary studies, draw tools, alerts, reports,
and program control. This article will demonstrate using ESPL to develop
a trading system and back test its performance. Consult the Ensign web
site for information about ESPL and for the ESPL programming manual, http://www.ensignsoftware.com/espl/espl.htm
Our trading system must be kept simple for the sake of being a teaching
example. Yet, it will demonstrate many of the design principles that would
be used in designing any trading system and back testing its performance.
Let's begin by outlining the characteristics of the example trading system.
- It must trade in the direction of the trend. Trade 'short' in
a downtrend and 'long' in an uptrend.
- It must have specific, mathematical rules that define the 'signals' for
buying, selling, and exiting a position.
- Parameters should be flexible so that different settings can be tried and
tested.
- The profitability of the trading system needs to be measured and reported.
The structure of the ESPL program will be like this. Each section
will be developed, and then the program will be shown in its entirety.
{define global variables}
{define procedures and functions}
{main program}
begin
Initialize;
Calculate;
Report;
end;
Initialize The Initialize procedure will be where variables are
initialized prior to calculating the trades and accumulating the results for the
report. ESPL has the ability to trade our trades and generate a
report. The ResetTrades statement is used to define
specific Trading System values. The statement is used in conjunction with
the Trade, and TradeReport commands. ResetTrades
is used to initialize a Trading System. The statement prepares a file to
receive the Buy and Sell trades specified by the Trade
command. The Commission per contract or per share is
specified. The style of the Arrows (marking the trades on a chart) is also
specified.
procedure Initialize;
var
Commission: real;
BuyArrow: integer;
SellArrow: integer;
OutArrow: integer;
ShowBoxes: boolean;
begin
Commission:=10; {deduct $10 round trip for each trade}
BuyArrow:=8; {show Up arrow and the word 'Long'}
SellArrow:=13; {show Down arrow and the word 'Short'}
OutArrow:=7; {show Right arrow and the word 'Out'}
ShowBoxes:=true; {mark trade with a square box on the bar}
ResetTrades(Commission,BuyArrow,SellArrow,OutArrow,ShowBoxes);
Position:=0; {0 = out, -1 = short, 1 = long}
ScalpSize:=100; {scalp objective, IQFeed users enter 1.00}
StopSize:=250; {protective stop, IQFeed users enter 2.50}
BuySignal:=false; {flag to indicate Buy setup}
SellSignal:=false; {flag to indicate Sell setup}
end;
Calculate The Calculate procedure will find the chart, clear it of
all studies and markers, put on the Parabolic stop, and loop through all bars in
the chart file and make trades based on the rules for the Buy and Sell signals.
procedure Calculate;
var
w: integer;
study: integer;
stop: integer;
begin
FindWindow(eChart);
{locate the window with the chart}
Remove(eAll);
{clear off studies and markers}
study:=AddStudy(ePar); {put on Parabolic stop for trend}
for w:=1 to BarEnd do begin {calculate across all chart bars}
stop:=GetStudy(study,3,w); {read the Parabolic position flag}
if stop>0 then begin
{determine trend}
TrendUp:=(stop=1);
TrendDn:=(stop=2);
HH:=High(w);
{start new swing high search}
LL:=Low(w);
{start new swing low search}
end;
TestExit(w);
{did this bar trigger an exit}
TestTrade(w);
{did this bar trigger a trade}
end;
end;
Report
The Report procedure will close out the current position, and print a report
in the Output window on the ESPL editor form.
procedure Report;
begin
Trade(eOut); {close-out the last open trade}
TradeReport(True); {print the results in the output window}
end;
Exit Rules For this simple trade system, a position will be exited
when it has hit the protective stop or when it has achieved the scalp objective.
procedure TestExit(w: integer);
var
bExit: boolean;
begin
bExit:=false;
if Position=1 then begin
{currently long}
if Low(w)<=ExitStop then begin
{test for stopped out}
if Open(w)<ExitStop then ExitPrice:=Open(w)
{check for gap across stop}
else ExitPrice:=ExitStop;
bExit:=true;
{set exit flag}
end
else if High(w)>ExitPrice then begin
{test for scalp objective}
if Open(w)>ExitPrice then ExitPrice:=Open(w);
{check for gap across goal}
bExit:=true; {set exit flag}
end;
end
else if Position=-1 then begin
{currently short}
if High(w)>=ExitStop then begin
{test for stopped out}
if Open(w)>ExitStop then ExitPrice:=Open(w)
{check for gap across stop}
else ExitPrice:=ExitStop;
bExit:=true;
{set exit flag}
end
else if Low(w)<ExitPrice then begin
{test for scalp objective}
if Open(w)<ExitPrice then ExitPrice:=Open(w);
{check for gap across goal}
bExit:=true;
{set exit flag}
end;
end;
if bExit then begin
Trade(eOut,w,ExitPrice,1);
{exit the position}
Position:=0;
{position goes to neutral}
BuySignal:=false;
{clear any pending signals}
SellSignal:=false;
HH:=High(w);
{start new swing high search}
LL:=Low(w);
{start new swing low search}
end;
end;
Signal Logic This trading system will watch for higher highs and
lower lows to determine swing points. The Parabolic stop will be used
to determine the trend. When in an up trend, the signal will be
a bar whose High is lower than the swing high. When in a downtrend, the
signal will be a bar whose Low is above the swing low. Execution
will use the Open of the bar following the signal bar. The Exit
Price objective will be the entry price plus a scalp size. The
protective stop price will be the entry price minus the stop size.
The scalp size and the stop size were variables set in the Initialize procedure
and can be adjusted to test the profitability of different settings.
procedure TestTrade(w: integer);
begin
if Position=0 then begin
{do not trade if already in a position}
if TrendUp then begin
{consider 'long' trade}
if BuySignal then begin
{did prior bar give buy signal}
EntryPrice:=Open(w);
{trade at open price}
Trade(eBuy,w,EntryPrice,1);
ExitPrice:=EntryPrice+ScalpSize;
{set scalp objective}
ExitStop:=EntryPrice-StopSize;
{set protective stop}
Position:=1;
{new position long}
end;
if High(w)>HH then HH:=High(w);
{find swing high}
BuySignal:=(High(w)<HH);
{signal is 1st bar below swing high}
end;
if TrendDn then begin
{consider 'short' trade}
if SellSignal then begin
{did prior bar give sell signal}
EntryPrice:=Open(w);
{trade at open price}
Trade(eSell,w,EntryPrice,1);
ExitPrice:=EntryPrice-ScalpSize;
{set scalp objective}
ExitStop:=EntryPrice+StopSize;
{set protective stop}
Position:=-1;
{new position short}
end;
if Low(w)<LL then LL:=Low(w);
{find swing low}
SellSignal:=(Low(w)>LL);
{signal is 1st bar above swing low}
end;
end;
end;
Full Program Cut and the text from this newsletter and paste it into
the ESPL editor form in Ensign Windows, or use the Internet Services form to
download the script file from the Ensign web site. Open a chart, such as 3-min
ES #F, and apply the Parabolic Stop study. For my tests, I have
reduced the Acceleration rate and Maximum limit on the Parabolic parameters so the study
indicates the bigger trends and has less whip lash. The Parabolic Stop
will be used as the indicator for the trend. The trading system only
takes Long trades when the Parabolic stop is rising, and Short trades when the
Parabolic Stop is falling. After changing the Parabolic Stop properties,
check the Use as Default check box so these parameters are used as the default
settings.
{define global variables}
var
Position: integer;
EntryPrice: real;
ExitPrice: real;
ExitStop: real;
ScalpSize: real;
StopSize: real;
HH: real;
LL: real;
BuySignal: boolean;
SellSignal: boolean;
TrendUp: boolean;
TrendDn: boolean;
{define procedures and functions}
procedure Initialize;
var
Commission: real;
BuyArrow: integer;
SellArrow: integer;
OutArrow: integer;
ShowBoxes: boolean;
begin
Commission:=10; {deduct $10 round trip for each trade}
BuyArrow:=8; {show Up arrow and the word 'Long'}
SellArrow:=13; {show Down arrow and the word 'Short'}
OutArrow:=7; {show Right arrow and the word 'Out'}
ShowBoxes:=true; {mark trade with a square box on the bar}
ResetTrades(Commission,BuyArrow,SellArrow,OutArrow,ShowBoxes);
Position:=0; {0 = out, -1 = short, 1 = long}
ScalpSize:=100; {scalp objective, IQFeed users enter 1.00}
StopSize:=250; {protective stop, IQFeed users enter 2.50}
BuySignal:=false; {flag to indicate Buy setup}
SellSignal:=false; {flag to indicate Sell setup}
end;
procedure TestExit(w: integer);
var
bExit: boolean;
begin
bExit:=false;
if Position=1 then begin
{currently long}
if Low(w)<=ExitStop then begin
{test for stopped out}
if Open(w)<ExitStop then ExitPrice:=Open(w)
{check for gap across stop}
else ExitPrice:=ExitStop;
bExit:=true;
{set exit flag}
end
else if High(w)>ExitPrice then begin
{test for scalp objective}
if Open(w)>ExitPrice then ExitPrice:=Open(w);
{check for gap across goal}
bExit:=true; {set exit flag}
end;
end
else if Position=-1 then begin
{currently short}
if High(w)>=ExitStop then begin
{test for stopped out}
if Open(w)>ExitStop then ExitPrice:=Open(w)
{check for gap across stop}
else ExitPrice:=ExitStop;
bExit:=true;
{set exit flag}
end
else if Low(w)<ExitPrice then begin
{test for scalp objective}
if Open(w)<ExitPrice then ExitPrice:=Open(w);
{check for gap across goal}
bExit:=true;
{set exit flag}
end;
end;
if bExit then begin
Trade(eOut,w,ExitPrice,1);
{exit the position}
Position:=0;
{position goes to neutral}
BuySignal:=false;
{clear any pending signals}
SellSignal:=false;
HH:=High(w);
{start new swing high search}
LL:=Low(w);
{start new swing low search}
end;
end;
procedure TestTrade(w: integer);
begin
if Position=0 then begin
{do not trade if already in a position}
if TrendUp then begin
{consider 'long' trade}
if BuySignal then begin
{did prior bar give buy signal}
EntryPrice:=Open(w);
{trade at open price}
Trade(eBuy,w,EntryPrice,1);
ExitPrice:=EntryPrice+ScalpSize;
{set scalp objective}
ExitStop:=EntryPrice-StopSize;
{set protective stop}
Position:=1;
{new position long}
end;
if High(w)>HH then HH:=High(w);
{find swing high}
BuySignal:=(High(w)<HH);
{signal is 1st bar below swing high}
end;
if TrendDn then begin
{consider 'short' trade}
if SellSignal then begin
{did prior bar give sell signal}
EntryPrice:=Open(w);
{trade at open price}
Trade(eSell,w,EntryPrice,1);
ExitPrice:=EntryPrice-ScalpSize;
{set scalp objective}
ExitStop:=EntryPrice+StopSize;
{set protective stop}
Position:=-1;
{new position short}
end;
if Low(w)<LL then LL:=Low(w);
{find swing low}
SellSignal:=(Low(w)>LL);
{signal is 1st bar above swing low}
end;
end;
end;
procedure Calculate;
var
w: integer;
study: integer;
stop: integer;
begin
FindWindow(eChart);
{locate the window with the chart}
Remove(eAll);
{clear off studies and markers}
study:=AddStudy(ePar); {put on Parabolic stop for trend}
for w:=1 to BarEnd do begin {calculate across all chart bars}
stop:=GetStudy(study,3,w); {read the Parabolic position flag}
if stop>0 then begin
{determine trend}
TrendUp:=(stop=1);
TrendDn:=(stop=2);
HH:=High(w);
{start new swing high search}
LL:=Low(w);
{start new swing low search}
end;
TestExit(w);
{did this bar trigger an exit}
TestTrade(w);
{did this bar trigger a trade}
end;
end;
procedure Report;
begin
Trade(eOut); {close-out the last open trade}
TradeReport(True); {print the results in the output window}
end;
{main program}
begin
Initialize;
Calculate;
Report;
end;
Back Test Results
For all tests, a $10 round trip commission will be used. The chart
being tested is the 3 minute ES #F. The data set has been limited to Day
Session Only data for the three dates of June 20th, 23rd, and 24th.
For the first test, let's try a small scalp objective of one full point,
and a generous stop size of 2.50 points. The following are the back
test results, and the chart shows some of the trades.
ES #F Profit Trades Average Ratio
Wins 1435.00 34 42.21
79.07
Loss 1215.00 9 135.00
20.93
Total 220.00 43
5.12 1.18
79% of the trades were profitable scalps, but the Net Profit is only $220 after
paying commissions on 43 trades. Let's try a
bigger scalp objective, knowing in advance a lower percentage of winning trades
will be achieved. The following results are for a scale objective of 2.50
points.
ES #F Profit Trades Average Ratio
Wins 1675.00 15 111.67
62.50
Loss 1215.00 9
135.00 37.50
Total 460.00 24
19.17 1.38
The larger scalp objective generates more profit, on fewer trades, which is good on both
points. Further testing could be done with this
trade system to determine whether one should use a tight or a generous stop, and
whether the scalp objective should be large or small. The parameters for the
Parabolic stop should also be adjusted to see the impact it has on the trade
system. Finally, the system should be tested using more data to simulate a
wider variety of market conditions. Some may wish to modify the
logic for the Buy and Sell signals to test other ideas. The tools are
available in Ensign Windows for designing trade systems and the effort can be
both rewarding and fun.
| 
