System Development

In the “Model System” post on Feb 14th, 2011, I revealed a sample system that has outperformed many of the major benchmark like the S&P by wide margins.

Those numbers cannot be possible if one was to only implement a single trend following strategy (TF). For a typical TF system, there are inherent drawdowns that are usually greater than 20% due to range bound market conditions. I consider these range bound market conditions to be the costs of doing business in trading. I have confidence that a string of risk controlled losses will be made up for in a jackpot when a trend comes. This is one of the major hurdles that new trader encounter as they feel that a string of losses is unbearable. They want to be right 100% of the time.
Coming back to analyzing the Model System, I believe I have found an idea that can very well yield those performance numbers. In my previous trading posts, System 1 was what I considered to be a short term TF system but to be honest, it is more of a short term momentum system after really looking at it more this weekend. The idea was always in the back of my head but I just never really gave it a deeper thought. My idea is to combine system 1 with system 2 (i mentioned system 2 in earlier post).
System 2 is a longer term legit TF system that catches major trends. This Saturday when I put both systems on a single chart and analyzed it, I found that the two complemented each other very well. When my system 2 produces false entry signals that result in losses, my system 1 will usually make up for by going against it.
From a visual backtest on Saturday, results are promising but this is means nothing. I will need to code the two strategies in to mechanica and backtest it extensively. This will take some while as I will need to code new indicators into the backtesting engine….wonder how long that will take. Thank god I have a week off school next week!
Before I close up for the day, I want to put down another idea I have been thinking about. Incorporating a reversal system with a semi-neutral TF system…wonder what the results would be..hmmm.
Good hunting

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