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System Trading Articles

  • How long should you backtest a system?
    I am frequently asked how long one should backtest a trading system. Though there's no easy answer, I will provide you with some guidelines. There are a few factors that you need to consider when determining the period for backtesting your trading system:

  • ADX for V Tops and V Bottoms
    We have found that when the ADX begins to rise it is telling us that a strong trend is developing. A rising ADX has proven to be a particularly reliable indicator after a market has been going sideways for a while and then begins to trend. For best results, the ADX should begin its rise from a low level (less than 15 or 20) because the low level of the ADX indicates that a sideways basing pattern has been formed.
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  • The Parabolic Trigger for V Tops and Bottoms - REVIEW OF SETUPS and TRIGGERS: For those of you who are new to our work, we strongly recommend a two step process for entries. The first step is to identify some "setup" conditions that tell us that an entry is near. The second step is the "trigger" that tells us we must enter the trade NOW.
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  • ADX Has it's Limitations
    I think it is a mistake to try and over work or become too dependent on any one indicator. If you were going to build a house you would need more than one tool and you wouldn't try to do it with just a hammer. The same is true of building systems. The ADX can be a very valuable tool if used correctly but it has some major shortcomings that everyone should be aware of.
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  • Doubly Adaptive Profit Objectives - Having well-planned profit objectives is the best way to maximize closed-out profits. The tendency is to either take profits too soon or too late and most traders tend to err on the side of taking profits too soon. Taking a quick profit always feels good and helps to maintain our winning percentage because these "nailed-down" profits will never turn into losses. However, taking profits too soon can be one of the most costly of all possible mistakes.
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  • Why Use Multiple Exits? - We believe that good exits require a great deal of planning and foresight and that simple exits will not be nearly as efficient as a series of well planned exits that allow for a multitude of possibilities. Our exit strategies need to accomplish a series of critical tasks. We want to protect our capital against any catastrophic losses so we need a dependable money management exit that limits the size of our loss without getting whipsawed
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  • Importance of Exits -
    The outcome of every trade is dependent on the exit. If we enter in a timely fashion and then exit poorly, the trade is likely to be a loss. If our entry happens to be poor but our exit is good we might still salvage a profit. The exits, not the entries, determine the outcome of our trades. This lesson about exits is easily demonstrated

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  • The Money Management Exit - To trade futures and other leveraged investments without a money management stop is certain ruin. Well-known trader and author Victor Niederhoffer lost tens of millions of dollars of his client's money when he traded his fund down to zero and some twenty-million beyond. No surprise there.
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  • Combining RSI and ADX
    Both the ADX and RSI are valuable trading tools and a combination of the two would seem to offer some interesting possibilities. I like to use the RSI primarily as an indicator for buying on dips in an uptrend. The ADX is my primary indicator of trend strength.
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  • Contradictions in using ADX
    I can see how there may appear to be some confusion on how the ADX should be applied. But there really isn't any contradiction if you understand that what we are trying to do with the ADX is very different in the two examples.
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  • Trading Messages From Mars I have learned to look only briefly at the entries of winning traders and to examine their exit System Trading very carefully. I am very fortunate that more than thirty years ago I learned from the Coke bottle trader that success in trading depends on our exits and not our entries.
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  • Switch Time Frames For Better Exits - While listening to Dr. Elder explain his multiple time frame strategy for entries, my thoughts wandered to the application of his ideas to my favorite subject - exits. One of my goals in trading is to find exit strategies that do a good job of protecting open profits.
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  • Moving Average Crossovers May Not Be The Best Entry Signals - Let's stop for a minute and think about what exactly is occurring at the point of a crossover. When the 10-day MA and the 30-day MA are at the same price, the trend is not nearly as clear as it should be. What we are really observing at the crossover point is that the average of the last 30 prices is exactly the same as the average of the last 10 prices.
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  • Trailing Stops - The Chandelier Exit - The Chandelier Exit hangs a trailing stop from either the highest high of the trade or the highest close of the trade. The distance from the high point to the trailing stop is probably best measured in units of Average True Range. However the distance from the high point could also be measured in dollars or in contract based points.
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  • Trailing Stops - Now that we have taken the necessary precautions to avoid catastrophic losses by using disciplined money management stops, it is appropriate to concentrate on strategies that are designed to accumulate and retain profits in the market. When properly implemented these strategies are intended to accomplish two important goals in trade management: they should allow profits to run, while at the same time they should protect open trade profits.
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  • Taking Control -
    When conceptualizing a new trading system and when going through the design and testing routine, be alert to issues of control. Look for what you can
    control and make sure that you are controlling it to your benefit. Look at what you can not control and as a minimum have some plan that will minimize any possible damage

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  • Moving Average Crossovers May Not Be The Best Entry Signals -
    There are many ways of using moving averages to trade but by far the most common method is to trade when a short-term moving average crosses over a longer term moving average.
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