A Simple Trading System
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
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.