This indicator looks at the excursion from the first price in the window to the highest and lowest price in the future. It compares the ratio of price excursion. If positive excursion in the future is bigger than negative excursion, that’s bullish and the ratio will be greater than 1.00. If the ratio is less than 1.00, then that’s bearish. Using our excursion indicator and looking five bars into the future, we about double profits over our standard system (see “Time bandits,” below).
Unfortunately, making such predictions in real life is easier to synthesize than actually to do. In the case of the moving average crossover, predicting five bars into the future for a 38-60 crossover is effectively eliminating lag; although not easy by any means, it’s a viable target. The target we are using for this Keltner channel system, however, is far less stable and much harder to predict. Based on this initial research, the moving-average crossover is the better prospect for improvement. The five-day lag elimination increases profits by 2.5 times, while the excursion prediction for the Keltner channel is much harder to accomplish and only doubles profits.
The next step is to develop a hybrid system neural network model based on this analysis and examine some additional case studies that round out our understanding of this approach.
Murray A. Ruggiero Jr. is the author of “Cybernetic Trading Strategies” (Wiley). E-mail him at firstname.lastname@example.org.