Thursday, August 12, 2010

Excerpts from Tushar Chande’s 1998 Telerate workshop

I found the audio of Tushar Chande’s 1998 workshop, How to Build Both a Trading System and a System for Trading, some time ago on the web, I no longer remember where. I’m sure that anyone who tries hard enough can retrace my footsteps. Seminar participants also received a fairly lengthy handout, which I have as well. For those who don’t feel like searching, here are a few bullet points from the handout. There’s nothing revolutionary among them, but they may tickle some trader’s little grey cells.

First, a simple 3-bar consolidation pattern. Use the high and low of two days ago as reference (the H-L reference window). Yesterday’s and today’s close must be inside the reference window. Buy or sell on a breakout above or below the reference window.

Chande also suggests a similarly constructed 5-bar consolidation pattern. Here the long-only system is: if the last four closes are within the shadow of the previous bar, then buy one contract at the most recent three-day high on a stop. Place a stop at yesterday’s low.

Exits can be based on an anticipated or desired price behavior, length of trade, smoothness of equity curve, or initial money management risk. Use an exit strategy that is consistent with your style. Common types of exits are time-based, trailing stop, profit target, volatility, and combination. To evaluate exits generate 50 or more signals and look at the smoothness of the equity curve. Check percent profitable and profit factor across more than ten markets and over a “long” time.

Finally, benchmark your system to measure its added value. Of course, there are many ways to benchmark. One can benchmark by style—trend following, anti-trend, breakout, short-term, pattern based. One can benchmark apples to apples by using an identical test set (markets, time period, leverage, starting capita). One can benchmark to an index, such as the S&P 500 or compare to a buy-and-hold strategy. And then you have to define why your system is better. Does it have higher profits, lower drawdowns, a higher Sharpe ratio?

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