TRADING SYSTEMS

Trading When Less Is More

Restrictive Trading Systems

by Anthony Trongone, PhD, CFP, CTA

Looking for a trading system that offers more success and less risk? Try this one.

When it comes to profitable trading systems, not much has been written on those with restrictive trading conditions. Although a system that generates less trading activity may demonstrate a strong and consistent record of success, it does not have the same allure as a system without restrictions. It can, however, offer more success with less exposure to risk.

When trading price patterns with restrictive conditions, patience is a precious resource. You should not be discouraged if you are not playing your system on a regular basis, especially if you can uncover a handful of highly dependable plays to supplement your trading activity.

This article focuses on a single strategy that was applicable in 29 of 334 trading days (8.68%) from January 1, 2002, to April 30, 2003. Although the system is restrictive (one playing day for every 11.52 trading days), the results are worth the wait.
 
SYSTEM ADVANTAGES

There are several benefits to this trading strategy. First, it involves simple trading conditions. You do not have to place your trades during the regular trading day, when the market fluctuations can be distracting and sway you from implementing your strategy. Your trades can be executed between 16:00 and 20:00 ET. Although you can also place your trade during the premarket trading session, this should be done before the market begins to move from the previous day's closing price.

This trading system requires the undemanding calculation of the percentage change between the closing prices and the percentage change between closing volume. For example, if the previous price was $10 and the closing price is $12, then the percentage change in price is a 20% gain ((12-10)/(10))(100). The percentage change in volume is a comparison between an eight-day simple moving average of volume and the volume for the trading day you are investigating.

I tracked the price patterns of two instruments continually gaining in popularity: SPDRs (SPY) and the cubes or triple Qs (QQQ). There are compelling incentives for trading these instruments. First, they allow investors to participate in the collective performance of a portfolio of companies. Since they each represent the intraday movements of a price index (cubes include 100 stocks; SPDRs include 500 stocks), they trade as a single security. With such diversification, a large percentage decline in any particular company has a less dramatic impact on either the cubes or the SPDRs. Other advantages when trading either the SPDRs or the cubes include small spreads and a longer trading session. In addition, the restricting downtick rule does not apply when shorting either instrument.

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

Excerpted from an article originally published in the February 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.


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