TRADING SYSTEM (enhanced fully editable version)
Originally published: 23/02/2021 17:22
Last version published: 27/05/2021 14:04
Publication number: ELQ-53114-5
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TRADING SYSTEM (enhanced fully editable version)

Providing trading signals using mix of technical indicators and historical price trends. FULLY TESTED OVER 15YR HISTORY.

Description
Designed to support medium term investors who hold onto positions for days, weeks or even months. Best suited for investors who do not wish to be tied-up to a computer screen for hours but limit their involvement to a few minutes each day.

Looking back since 2008, the model has shown remarkable performances in terms of annualised profit for some particular stocks listed in different markets (to name a few: Siemens AG 33%; Intesa Sanpaolo 30%; JP Morgan 25%; DTE Energy 25%; Coca Cola 20%; Conoco Phillips 20%; Marubeni 18%; Toyota 16%).

The model uses a well-balanced mix of 6 among the most popular technical indicators, equally divided among 3 categories: Volatility, Trend and Momentum. They are:

• ATR
• Bollinger Bands
• Simple Moving Average
• Pivot Points
• RSI
• MACD

A synthetic explanation of each indicator can be found in the Glossary.

Each indicator generates specific trading signals when prices reach pre-determined levels. A final BUY or SELL signal is created when at least 2 or 3 indicators from different categories get activated, depending on whether the selected stock is cyclical or non-cyclical, to take into account different price dynamics.

Stock cyclicality is assumed by default based on average historical price volatility, but it can be changed if desired.

The model uses historical daily prices imported by the user (going back 15 years max; should not be less than 10 years) plus user-specified technical indicators levels, to produce a simulation of historical trading returns (backtesting) based on the assumption that BUY and SELL occur on the first such signal. Stop losses are factored-in based on the original buying/selling price assumed by the model. If short selling (shorting) is indicated as an option, positions are opened both ends, short and long. Otherwise only long.

Such historical trading results are compared to stock appreciation over the same term, to evaluate profitability of trading strategy vs. buy and hold strategy.
(if stock performance exceeds trading performance on most years, BUY & HOLD may be a better strategy than trading, for that particular stock).

The trading strategy built into the model is simple, designed to produce best results over the medium term, with limited time involvement: SELL when the price breaks above defined range and BUY when it breaks below. To decrease probability of false signals leading to untimely sales or purchases, range levels can be modulated through “buffers” (different for BUY and SELL) modifying the ability to produce signals.

Returns are shown in both, trailing and calendar year fashion. Other information provided include: average holding time of position, idle time between positions, realized and unrealized gains, winning trades %, win/loss ratio, profit/loss ratio, average profit per trade etc.

Once all technical indicators have been tuned-up to generate the best possible historical result for the desired lookback period, the idea is to keep updating prices daily, executing trades according to the model’s instructions. Besides target price, the model indicates if we are opening or closing a position and if closing is due to stop-loss kick-in.

Even though price updates can be done (and signals obtained) at any time during the day entering current price as closing price, to maintain the model’s integrity (trading signals are based on historical closing prices and volumes) and fully exploit its potential, it is best to trade closing price, choosing either one of the following options:

1. 15min before end of session, enter current price as closing price in ‘Data Import’ sheet and operate based on signal (normally, at this point the price should not be far from the actual closing price determined during closing auction)
OR:
2. Wait for session closing, enter closing price and trade, as instructed, during the after-hours session or at the opening of next day session.

Obviously, the closer your actual trading price will be to the closing (target) price, the more reliable the information obtained through the model. For best results over time you should always act according to instructions, trying to avoid second-guessing the model in the attempt to maximize profits or reduce losses. When you first start using the model, if the first signal you get is a BUY or SELL signal for closing a position opened earlier, you should not operate and wait for a new cycle to start with an open position signal.

OPERATING STEPS RECAP
1. Input trade amount, trading style and time horizon
2. Upload historical prices (as described in step-by-step procedure)
3. Select program and technical indicator parameters
4. Analyze historical returns
5. Fine tune parameters (as described in separate instruction document)
6. Update price daily and operate based on trading signal

TO KEEP IN MIND
No investment strategy generates profits all the time under all market conditions. Some years you earn and some years you may lose. Since this model is designed to produce best results in the medium term, what really matters is the global result over your entire investment horizon (should be at least 3-5 years).
Risk cannot be eliminated, but only mitigated through a solid and consistently applied trading strategy over an adequate time horizon. Therefore, second guessing the model's signals trying to maximize profits (or avoid realizing losses) is not advised, since it might not produce the best results in the end.
While technical indicators look at price history on the assumption that similar price dynamics will repeat themselves in the future, there is no guarantee that past performances may be repeated.

This Best Practice includes
1 EXCEL WORKBOOK

Domenico Cristarella offers you this Best Practice for free!

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Further information

This model is designed to support medium term traders who hold onto positions for days, weeks or even months. It is not intended for day traders or scalp traders.
Best for investors who do not wish to be tied-up to a computer screen for hours but limit their involvement to a few minutes each day. It uses a combination of 6 among the most popular technical indicators to generate daily trading signals.

Medium term traders/investors

Day traders / Scalp traders

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