From the October 01, 2010 issue of Futures Magazine • Subscribe!

The trend isn’t your only friend

Another variation of this system uses the relative strength index (RSI) instead of the seven-bar high and low.

Sub ConnorsRSI(FilterLen,RSILen,BuyVal,SellVal,BuyExit,SellExit)

Dim RSIValue As BarArray

RSIValue=RSI(Close,RSILen,0)

If RSIValueAverage
(Close,FilterLen,0) Then

Buy(“Buy-7”,1,0,Market,Day)

If MarketPosition=1 And RSIValue>BuyExit Then

ExitLong(“LX”,”Buy-7”,1,0,Market,Day)

If RSIValue>SellVal And Close(Close,FilterLen,0) Then

Sell(“Sell-7”,1,0,Market,Day)

If MarketPosition=-1 And RSIValue

ExitShort(“SX”,”Sell-7”,1,0,Market,Day)

End Sub

The results for this variation, using the inputs ConnorsRSI(100, 2, 10, 85, 50, 50), are shown in “Relative approach” (below). Our test period is once again Oct. 7, 1997, to Aug. 6, 2010.

We can see that the winning percentage across this basket is more than 67%. The average trade is a bit low at $292.23, but with electronic markets slippages are lower and per-trade profits are not as vital. The win/loss ratio is 0.79 and losing trades last longer than winning ones.

In individual market results, performance is missed. The Nasdaq and S&P 500 do OK considering the system is only in a trade between 10% and 20% of the time. We also did well in natural gas, lumber, crude oil, the euro and coffee in light of the low drawdown.

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Intermarket systems

Intermarket divergence is a simple concept that lets you trade based on intermarket relationships. It is a countertrend system in the sense that it takes cues regarding market direction from a related market, and those cues are often counter to the direction in the market you are trading.

For positively correlated markets:

  • If the related market is in uptrend and the traded market in a downtrend, buy.
  • In the reverse scenario, sell.

For negatively correlated markets:

  • If both the related market and traded market are in uptrends, sell.
  • In the reverse scenario, buy.

You can use various concepts to define an upward and downward trend. Price relative to a moving average is a simple and workable method. Basically you are banking on one market (the lead market) signaling a reversal in that particular sector.

Sometimes markets will become uncorrelated, even when the relationships are fundamental and strong. A classic example is between the S&P 500 and the 30-year Treasury bond. This relationship is good when it is working, but when it does not work, it really doesn’t work.

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