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A Simple Trading System

Support and Resistance

 

Resources

System Test

Reader Feedback

 

 

Overview

 

 

Support and Resistance systems are among the easiest to compute.  You can get your signals by inspecting a chart.  Such systems perform about as well as much more complicated systems, indicating, perhaps, sticking to a simple system is much more profitable than trying to second guess a more complex one.

 

This exercise introduces several new concepts (not present in the Simple Exponential Lag System).  I recommend you complete the Exponential tutorial before tackling this project.

 

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Hard Stops

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Stop-Specific Position Sizing

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Long and Short Positioning

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Trading within the Trend

 

Readers who would like to duplicate these results can follow the tutorial at the bottom of this section.

 

 

Instruments

 

The system trades only one instrument: an Comex Gold continuous contract (Panama Style, last true).  For information on continuous contracts, see the main TSP index, above.

 

 

Posture

 

The system trades from both the long side and the short side.

 

 

Trading Signals

 

Signals issue right after the close. The system enters orders before the next open, to trade on stop, the following day.

 

The system uses a slow metric to determine the overall long-term trend and then a fast metric to trade in and out within the direction of the long-term trend.

 

 

Support and Resistance

 

N-day support is the lowest low for the past N days.  For example, the 50-day support is the lowest low in the past 50 days.  The 50-day resistance is the highest high in the past 50 days. 

 

When the price trades above the resistance, it defines the trend as up.  The trend stays up until the price trades below the support.  This defines the trend as down. 

 

If you graph support and resistance on a price chart, it appears as a corridor around the price.  Penetration of corridor on the upside defines the trend as up while downward penetration of the corridor defines the trend as down.

 

This system uses two sets of S-R lines:  (1) long-term support and resistance to define the long-term trend and (2) short-term support and resistance to define the short-term trend. 

 

When the long-term trend is positive, the system then enters the market with a stop just above the short term resistance and then places a protective stop below the short-term support. 

 

When the long-term trend is negative, the system enters the market on a stop just below the short-term support with protection just above the short-term resistance.

 

 

Chart Showing Metrics for SR System

 

red square = short sale ... blue diamond = cover short

blue square = buy long ... red diamond = exit long

 

 

Executions

 

The system awards trades with 50% skid. That is, it executes buy orders at a price half-way between best price and the high of the day.  The best price is the highest of the open, the stop price or the low of the day.  It executes sell orders at a price half-way between the best price and the low of the day. The best price is the minimum of the open, the stop price and the high of the day.

 

The system exits the final trade at the average of the final closing price and the worst price of the day.

 

The system does not charge commission for entering positions or for rolling forward. 

 

 

Position Sizing

 

This system uses stop-specific position sizing. It figures the entry stop and the corresponding protective stop prior to entering any orders.  It figures risk-per-lot as the difference between these two levels; that is, it does not figure in an allowance for execution cost.  The system then divides the equity budget by the risk-per-lot to determine the quantity.

 

The system computes equity at the close and then figures orders, after the close, for entry the following morning.

 

 

Output

 

The system sketches the equity value, records the results in an equity log, the essential computations in a metrics log and the trades in a trade log. It also provides a computation dump to trace the workings of the programming for debugging purposes.

 

 

 

Tutorial

 

Note: before attempting this tutorial, study the tutorial at the Exponential Lag system to get the idea about how to trace through the metrics.

 

1. Download the Gold Continuous data at resources.

 

2. Program your testing software to duplicate the results for the system test, above.

 

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.  Please identify the software you use (Excel, TradeStation, Proprietary, etc.)

 

5. Use your system to find the set of parameter values that optimizes Bliss (frequency) for this system.  Send your solution to FAQ. See below.

 

To see how other readers are approaching this tutorial and contributing to the project, see Reader Feedback, above.

 

Coming up: Acknowledging Limits: equity and margin requirements.

 

 

Optimization Table

for Simple Support / Resistance System

 

Key:

Yellow (across) Trading Metric (5 to 105, step 5)

Green (down) Trend Definition Metric (20 to 420, step 20)

 

 

 

 

  Notes:

 

Trend definition lines shorter than 100 days don't work well

Trading lines shorter than 15 days don't work well.

 

Trend lines around 140 days work best.

Trading lines around 30 and 40 work best.

 

The optimal solution is 120/30.

The solution at 140/20 appears for comparison.

 

Solutions where the trading line metric > trend definition metric,

show as 0, as in 20/25.