TRADING SYSTEMS

Put Your Trading System On High

Improve Your Trading System With Speed

by Gomu Vetrivel

Constantly improving your trading system is the best way to improve the performance of your trading system. But what's speed got to do with it?

Speed has a lot to do with improving the performance of your trading system. As you'll see, it makes all the difference. What is speed? Speed refers to how fast the price is moving. The average speed during the course of a motion is often computed using the following equation: 

Speed = Distance traveled by price / Time taken

Try not to confuse speed with momentum. Momentum is nothing but speed with direction. For example, if on day zero, price is 100, and on day 1, price is 150 and on day 2 price is 100, then momentum on day 1 is 50 and on day 2 is -50, whereas speed on day 1 is 50 and day 2 is also 50.

SO MANY POSSIBILITIES

When price is going up, speed can increase or decrease. Similarly, when price is going down, speed can increase or decrease. Let's look at the following two hypotheses:

Hypothesis 1
A system can take a long signal when price is going up and speed increases. It can take a short signal when price is going down and speed increases.

Hypothesis 2
A system can take a long signal when price is going up and speed decreases. It can take a short signal when price is going down and speed decreases.

TESTING THE HYPOTHESIS

To assess whether speed can improve the performance of the system, I will compare a basic simple moving average system without considering speed to the same system but considering speed. This comparison will be based on the two hypotheses. The goal of this analysis is not to develop a full-fledged trading system, but to determine the impact of speed on the performance of the trading system.
 
 

 ...Continued in the November issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the November 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.


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