Wednesday, June 6, 2007

Trading System Idea 1 and Interest Rates

"I would rather have a mind opened by wonder than one closed by belief"

Gerry Spence

This is a chart of the S&P 500 Index year to date. The top pane shows the red moving average for the advance/decline ratio. The dashed green lines mark the levels based on the opening rage system discussed earlier; to review click Here. The bottom section of the chart shows an indicator called the Directional Movement Indicator. This indicator is comprised of 5 factors, but for the time being charts here will deal with just three.

The red and blue criss/crossing lines are -DI and +DI respectively. When the +DI crosses above the -DI it is considered bullish. If just using this indicator to establish long and short positions, this cross would result in a buy. The last cross occurred on 4/13/07 and a long position would have been established at the close, 1452.85. The +DI is still above the -DI so this indicator would still be in that long trade.

Indicators by themselves can be triggers for getting into and out of trades. They can also be combined with other indicators depending on if the market is trending or range bound to assist in developing a system that can help take the emotion out of trading/investing. Combining indicators with pattern recognition formulas and then adding risk management parameters can result is some really useful trading systems. The end result is a complex system, but each piece can be simple by itself. Over the next weeks, a system will be built using Directional Movement Indicator as a base. Many more indicators and pattern formulas will be add one at a time. This will NOT create a holy grail trading system, but a functional one that can be used as a basis for bigger and better things. The money management formulas will be the last part, because money management is the most important aspect of trading. A really poor system can work with exceptional disciplined money management parameters.

Below are two reports from running +DI crossing over -DI on the S&P 500 and the Nasdaq 100 Indexes. These are not complete systems, these are just for informational purposes as to the potential this indicator might have as a foundation to build upon. Theses reports were run from June 1999 until June 5, 2007.

These results are just for the long(buy) side of the system, there were no short trades. There isn't much that sticks out as fabulous about these results except that the winners are larger than the losing trades, and that one result had more losing trades than winners, yet was still positive(NDX 16 winners, 20 losers).

Paradysz Matera

A look at interest rates....

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