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Exponential Average Crossover

Resources

Tutorial

 1. Download the S&P Panama Chart File: SP----C.CSV.   2. Program your testing software to duplicate the system test below. For hints on how to do this, study the section, How the System Works, below.   3. If you do not have testing software, you can put the data in a spreadsheet and create the system in Excel.   4. When you succeed in duplicating this run, to the penny, send an email to FAQ.   5. Use your system to find the set of parameter values that optimizes Bliss (frequency) for this system.  Send your solution to FAQ.   Note: As of September 11, 2005, readers confirm the test results of the 150/15 system to the penny.

How the System Works

 Open Run 150/15 (Slow Lag of 150 and Fast Lag of 15) and examine the performance chart and logs.   In the trade log, locate the first trade entry   Inst        Units   Entry                     Exit                      P&L SP----C   6500   82-09-01 119.525   83-12-20 159.600   260487.50   The system buys 6500 Units on 9/1/82 at a price of 119.535 and sells them on 12/20/83 at a price of 159.60 for a profit of 260487.50.   To see how this works, scan down the metrics log to late August, 1982.   82-08-27-F  slow=113.110 fast=112.055 - 82-08-30-M  slow=113.177 fast=112.817 - 82-08-31-T  slow=113.254 fast=113.590 + 82-09-01-W  slow=113.306 fast=114.035 + The fast average crosses above the slow average on 8/31/82 (See the + sign). Therefore, the system buys on the next open.   Again, look in the metrics log for the prices. 82-08-30-M OHLC:[ 115.90 118.20 115.05 118.15 ] 82-08-31-T OHLC:[ 117.95 119.95 117.40 119.00 ] 82-09-01-W OHLC:[ 119.30 119.75 116.90 117.15 ]   On 9/1 the open is 119.3 and the high is 119.75.  The system awards an execution 50 percent of the way from the open to the high, or 119.525.    Again, from the metrics log:   82-08-27-F Atr=3.176 - 82-08-30-M Atr=3.174 - 82-08-31-T Atr=3.115 + 82-09-01-W Atr=3.089 +   On 8/31 the ATR is 3.115.  The ATR Multiplier is 5 so the Risk_Per_Lot is 5 * 3.115 = 15.575.   On 8/31 the Equity is 1,000,000 and the Heat (for the entire run) is 10% so the Risk_Budget is 10% of 1,000,000 or \$100,000.   The Position_Size, then, is 100,000 / 15.575 = 6420.545+ and rounding to the nearest 250, we get 6500 units.   To see another run, with different test parameters, visit 325/85 .  Notice the 325/85 winds up with about 13.6 times the original stake whereas the 150/15 winds up with about 3.3 times the original stake.  Optimization is the process of finding the best set of parameters   The hunt-and-peck approach to optimization is to tinker around with your parameter values to see how they effect the test results. You might notice that the skid factor makes a big difference for systems that trade frequently.  You might also notice that you make the most money with a slow system with a high heat and low ATR multiplier, although this configuration also delivers very large drawdowns.   In the case of very-high-heat / high-drawdown systems, the testing software also needs to recognize other limits, such as margin calls, and stomach calls.   The steamroller approach to optimization is to try every combination of parameters.  This is generally impractical. A ten-parameter system, with 20 values of each parameter would require 2010 runs.  One run for a complex system on a multiple instrument portfolio might take several minutes.   A synthesis of hunt-and-peck, steamroller and thinking about the results is likely the best approach.       Steamroller Spread Sheet Showing Bliss Function Versus Slow Lag and Fast Lag   Lighter Color Indicates Higher Bliss   X-Axis: Slow Lag (Left:30; Right:530) Y-Axis: Fast Lag (Top:15; Bottom:285)   The Upper Left Corner is the home of dysfunctional short-term systems   The Lower Left Region shows systems where the short-term lag is longer than the long-term lag.   Pretty Good Values: Slow=330; Fast=90   Coming up: More on how to automate optimizations, how to include longs and shorts, and how to handle multiple instruments.