From the August 01, 2011 issue of Futures Magazine • Subscribe!

Shocking moving average systems

Complete approach

This approach now combines several simple trading tools: 1) a simple moving average; 2) displaced by roughly its own period; 3) with entry based on a filter, in this case consecutive months; 4) a profit target and 5) an opposite trade using the shock methodology; but 6) only after a filter has been overcome. All six of these are computed easily and a trading determination can be made. There can be no question about any trade entry or exit with the sole exception of what happens if price exactly equals a filter level, which is so unlikely that it’s trivial for the purposes of this test.

The results are considerably better, as demonstrated in "Final system results" (below). The win/loss ratio over the same 10 trades has doubled to 80%, which is phenomenal. The total profit is $4.0814 (vs. the 16.7¢ loss for the control system), or a total gross profit of $102,035, and all trades are closed. The average trade gained $10,203.50 before slippage and commissions for each contract traded. Trading time ranged from 59 to 943 days and the average trade lasted 268 days; 70% of the trades lasted roughly one year or less.

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Another important result is the reduction of realized loss. The control method suffered four relatively minor losses, but also took an enormous hit of 172.10 points. The improved method had only two small losses.

Nevertheless, it is important to remember the methods both can suffer significant drawdowns before closing trades, even if the result of such trades is profitable. For example, the October 2007 short trade entry triggered by the shock methodology at 347.30 produces a nice profit of 96.43 gross points, but a trader would have had to hold through a drawdown of 79.70 points in May 2008 prior to realizing the eventual gain five months later.

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