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applied, the number oftrades is cut in half, but the profit factor improves from 2.01 to 2.91, while the Total Net Profit is reduced byjust2Po.


Total Net Profit Gross Profit

$884,875.50 S1.757 161.50

Open position P/L Grass Loss

$0.00 ($872,286.00)

Totals of trades Number winning trades

291 163

Percent profitable Number losing trades

56.01% 128

Largest winning trade Average winning trade Ratio avg win/avg loss

$93,797.00 $10,780.13 1.58

Largest losing trade Average losing trade Avg trade (win & loss)

($62.286.00) ($6.814.73) $3.040.81

Max consec. Winners Avg # bars in winners

Max consec- losers Avg # bars in losers

Max intraday drawdown Profit Factor

($90,726.00) 2 01

Max # contracts held

Table 7.3. TradeStaiion

Performance Acme N Strategy COMPX-Daily with Filter

Total Net Profit Gross Profit

$699,612.63 $1,065,632.63

Open position P/L Grass Loss

$0.00 ($366,020.00)

Total* of trades Number winning trades

140 91

Percent profitable Number losmg trades

65.00% 49

Largest winning trade Average winning trade Ratio avg win/avg loss

$93,797.00 $11,710.25 1.57

Largest losing trade Average losing trade Avg trade (wT & loss)

($62.296.00) ($7.469.80) $4,997.23

Max consec Winners Avg # bars in winners

Max consec. losers Avg # bars in losers

Max intraday drawdown Pfofil Factor

(S62 29600) 2 91

P conlrHclB tield

These performance reports have problems, however, because they are based on indices that cannot directty be traded. The stock that closaly tracks the Nasdaq Composite Inde.x is the Nasdaq-100 Inde.x Tracking Stock (QQQ:Amex). Although the QQQ did not start trading until 1999, its profit factor matches the performance ofthe indices, as shown in Table 7.4.

Table 7.4. TradeStation Performance - Acme N Strategy QQQ-Daib (3/10/1999-3/1/2002)

Total Net Prufit


Open position P/L


Gross Profit


Gross Loss


Total # oftrades

Percent profitable

Number ijinning trades

Number losing trades

Largest iJinning trade


Largest losing trade


Average winning trade


Average losing trade


Ratio aug ijin/aug loss


Avg trade (Min £ loss)

$490 73

r-lax consec. Winners

t-lax consec. losers

Avg # bars in thinners

Avg # bars in losers

t-lax intraday draijdoijn


Profit Factor

t-lax # contracts held


7.4.2 Securities Broker/Dealer Index

The chart m Figure 7.8 didajs some Acme N long signals for the Securities Broker/Dealer Index (XBD). As with other sector indices, the XBD does not have a direct yioxy. One possibility is the Exchange TradedFimd, or ETF. The ETF isjust a stock that is composed of agroup ofstocks in a specific sector. The problem with the ETFs is that most are not yet liquid enough for short-term trading, and the spreads are wide enough such that the Acme N sjstem does not perform weh on some ofthese stocks (see Chapter 8).

Another altemative is a basket of stocks. Select three or four representative stocks, and buy or seh them when the Acme N signal fires on the sector index. The ad-antage ofthis approach is that the trader can select a few volatile stocks that are muchmore liquidthan the ETF. The disad-antage is that one ortwo of the stocks may not trade in line with the index. The best approach is to select stocks that most closely track the sector those with the highest weightings in the index.

tXBDLASTJlally 10/26/2001

1 200

" 1 . »



4DD.O0 3SO.O0

»eRanfleRalio(1.7..7,1.3) 0.84 0.70 1.30

1.M 00

Fure 7.8. Securities Broker/Dealer Index

The performance report in Table 7.5 shows the unfiltered performance for the Securities Broker/Dealer index for the past four years.

Table7.5.TnideStationPerformanceAcmeNStrat-XBD:-Daily(3/24/l 998-3/1/2002)

Total Net Profit


Open position P/L


Gross Profit


Grass Loss


Total* of trades

Percent profflatie


Number winning trades

Number losing trades

Largest winning trade


Largest losing trade


Average winnVig trade

$4,021 72

Average losing trade


Ratio avg win/avg loss


Avg trade (win & loss)


Max consec. Winners

Max consec- losers

Avg # bars in winners

Avg # bars In losers

Max intraday drawdown

($9.976 00)

Profit Factor


Ma> # cortrat-ls held

Aiuiiml 1 nniiiiitil


KnIlUIl oil lU.....Ml

f.7) ,.

7.4.3 Analog Devices

Here is an example ofthree Acme N entries, as shown in Figure 7.9. Examine the price patterns preceding the occurrence ofthe narrow range bar. For the first entn, the stock consohdated for at least three days before the signal The second entrywas an extended pullback, and the third entr\was a three-bar retracement. Look for rectangles and tables preceding the narrow range bar because this type ofentr\has a better riskreward ratio

The longer the Range Ratio is below the threshold, the more explosive the move. Study the contour ofthe RR curve when the Range Ratio dips below the threshold. Either the ratio spikes, or it forms along, shallow bottom. Wldle the Range Ratio is below the threshold, the stock is storing potential energ> for a protracted move.

The three entries in Figure 7.9 iUusteate why profit targets are essential in todays trading environment. AU three stocks hit their optimum profit after only two days. By waiting for the extreme ofthe previous bar to be exceeded, the trader may be giving up as much as one-third to one-half of the profit while having to hold the position another day. When deciding whether or not to use profit targets, the profit factor is not the only deciding factor. The profit factor should be di\dded by die average holding period to calculate the optimum time to exit the trade.

LAST-Oaily 12/28/2001 Mov Avg 1 llnefChise.SO.O) 43.020

» .-7. . Aii:(lo l><-vi..-

7.4.4 Taro Phamiaceutical

Figure 7.10 is an e.xample of three Acme N long entnes o-er a period of one month. This sjstem worics best on strongly trending stocks with the fohowing characteristics, some ofthem taken from Investors Business Daily (IBD):

- IBD Relative Price Strength Rating (RS) := 90

- IBD Eamings Per Share Rating (EPS) := 90

- New 52-Week High

At the time, Taro Pharmaceutical (TARO:Nasdaq) had RS and EPS rankings of greater than 99. We are certain that a trader couM make a decent h\ing by tradingjust this strategj.

rAROLAST-Oaily 07/2*2001 MovAvfll 1 ( 1 .50.0) 37.M9

62-OCO 50.000



4S.O00 44.000

.4. Iff bifU


42.01 40.000 38.000


AcmeLEN --""

32.000 30.000 28.000 2S,000

11 18 25 e

Figure 7.10. Taro Pharmaceutical

The number of retracement bars -aries for each trade shown in Figure 710. The first trade puhed back two bars; the second trade two bars, including one inside day, and the third trade two bars with one inside day. A parameter to the Acme N Sjstem is Reti-aceBars-it is the minimum number ofretracement bars required to trier an N entrj. Ifthe trader chooses not to wait for a retracement andjust wants to enter on a narrow range bar. then the RetraceBars parameter can be set to zero. When not using retracement bars, examine the range ofthe few bars preceding the NR bar. Iffhe stock has appreciated dramatically in this period, then the trade is a psss. The advantage of using no retracement is that the N system picks up consolidafions that would normally be filtered out.

7>4.5 Multimedia Games

The chart in Figure 7.11 shows a losing trade. Yourjob is to count the number of problems with this trade entrj before proceeding with this e.xample. We find at least four problems with this trade entrj:

a The siock has gapped up.

a The stock has aheadj risen 10° o-er two dajs.

a The stock is m the midst ofa retracement.

a The stocks trend is not deafly defined.

This example fllustrates why no automated trading sjstem is foolproof. Yes, ah ofthe problems could have been filtered out with the software, but automafion is a tradeoffbetween eliminating good trading candidates and keeping bad ones. The use ofretracement is a perfect example of how both good and bad trades can be eliminated. Setting the number of retracement bars to zero includes narrow range bars in consofidation pattems (good) but does not exclude stocks with strong mo-es in the past few dajs (bad). In contrast, setting the number ofretracement bars to two excludes narrow range bars in consofidation pattems (bad) but also excludes stocks such as the one shown in this e.xample (good).

MGAMLASTJJaily 07/27/2001 MovAvfll line(Close,50.ll 18.882

-24.000 23.000 22.000 21.000 ZOJWO -10.000 18.000 17.000 18.000 15.000

•KurL-y-ll. M<i]rimcdi.i (::iiiu-M

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