A Simple Trading System

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Intermediate
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Markus Heitkoetter

18 Jul, 2005

in Indices and 2 more

In this†article we†present†a simple trading system that we developed based on the concepts outlined in The 10 Power Principles of Successful Trading Systems.

Step 1: Selecting a market and timeframe

One of the most popular markets these days is the e-mini S&P, and thatís not without a reason: It's a 500 company index. One of the largest in the world and that means you have excellent and consistent liquidity, superb volatility, tremendous leverage and no uptick rule. It's a truly bi-directional market that shorts just as easily and safely as going long. Itís a fully electronic market, offering all the advantages of electronic contracts.

We decide to trade the market intraday, i.e. we will enter and exit a trade on the same day, because we do not want to expose our position to the risk of holding it overnight.

Step 2: Define entry rules

In my opinion swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet. Thatís why we decided to use a swing trading approach in this example.

Many traders are familiar with the concept of ďBollinger BandsĒ: Bollinger Bands consist of a centerline and two price channels, one above the centerline and one below. The important thing to know about Bollinger Bands is that they contain up to 95% of the closing prices, depending on the settings.

In the chart above you see the red centerline and the blue price channels. There are only 2 days in the beginning of November when prices close outside the Bollinger Bands.

We are using this knowledge to create a very simple entry rule:

  • Sell when prices move above the Bollinger Bands and
  • Buy when prices move below the Bollinger Bands.

The idea is that prices will move back into the Bollinger Bands by the end of the day.

Step 3: Define exit rules

Letís start with a very simple exit rule:

  • Exit the trade at the close of the same day.

Below is the equity curve of the last 2 years. The first results are encouraging.

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thanks for sipmple system

Nov 22, 2009

Rookie (5 posts)

new_trader
By product diversity, do you mean trading something like an index and forex? Do you consider trading two different indices as diversification? eg/ S&P500 and Nasdaq 100?


You can diversify your trading via running different Systems on different Instruments over different Timeframes.

E.g.

Strategy - Trendfollowing / Volatility Breakout / Pattern Recognition etc
Instrument - Sugar, Oil, USDCHF, Bund, Copper, Vodafone etc
Timeframe - Scalping, Spreading, Intraday, 2 day trade, 14 day trade, 20 EMA vs 50 EMA, 100 EMA vs 250EMA etc

For maximum diversification one would want to trade a basket of non-correlated systems, instruments, timeframes. Regarding your indices question, trading S&P and NASDAQ offers less diversification than trading NASDAQ and Nat Gas.

AM

Mar 27, 2006

Member (97 posts)

twalker
I can say that I would indeed. One thing I would not do is trade this system exclusively. You have to diversify by product and system. I do not believe you could survive this draw if this was all you had. If you see this in back test then it is time to go and see exactly why it occured and assess how likely this is to happen again.


By product diversity, do you mean trading something like an index and forex? Do you consider trading two different indices as diversification? eg/ S&P500 and Nasdaq 100?

Mar 27, 2006

Member (5720 posts)

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