June 2003Research:
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, file:///C:/EnsignSoftware/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. | 
