Sunday, March 23, 2008

The Impulse System

This system has been covered in a number of books by Dr Alexander Elder.

From the book “Entries and Exits, Visit To Sixteen Trading Rooms”, it seems that this system is used as a censorship system rather than an automatic trading system.

This system uses the slope of the moving average and MACD histogram to classify the system trends. There are 4 types of markets:

Type

Slope of EMA

Slope of MACD Histogram

Trading Message

1

Up

Up

Long or stand aside, no shorting

2

Down

Down

Short or stand aside, no buying

3

Up

Down

Either long or short

4

Down

Up

Either long or short

When the slope of EMA is up, it shows that inertia favors the bulls. The reverse is true for the bears. When the slope of EMA is down, bears have the upper hand.

The slope of the MACD histogram shows the power of the bulls and bears. When slope of MACD histogram is up, the bulls are gaining strength. When slope of MACD histogram is down, the bears are growing stronger.

Let’s do a case study to see whether the method works.

I have chosen FXI and STI respectively. FXI is iShares FTSE/Xinhua China 25 Index and STI is the Straits Times Index.

The rules are as follows:

Entry

  1. Slope of weekly EMA is up. 26 week EMA is used
  2. Slope of weekly MACD Histogram is up. 12-26-9 weekly MACD Histogram is used.
  3. When both conditions 1 and 2 wait for conditions 4 and 5 to be satisfied
  4. Slope of daily EMA is up. 13 day EMA is used
  5. Slope of daily MACD Histogram is up. 12-26-9 daily MACD Histogram is used.

Exit

  1. Slope of weekly EMA is down. 26 week EMA is used
  2. Slope of weekly MACD Histogram is down. 12-26-9 weekly MACD Histogram is used.

Simulation data is from 2003 to 20 Mar 2008

The trading record for STI is as follows:

Entry Date

Entry Price

Exit Date

Exit Price

Change (%)

Draw Down %

Max Gain %

Bars Held

1/5/2004

1,797.75

5/17/2004

1,745.89

-2.88

-2.8847

6.4069

91

6/28/2004

1,807.15

10/24/2005

2,249.57

24.48

-0.2047

32.792

337

11/7/2005

2,268.76

5/29/2006

2,449.61

7.97

-1.5828

17.5237

139

8/18/2006

2,477.94

8/13/2007

3,375.02

36.2

-2.0537

48.8567

246

8/27/2007

3,426.19

11/19/2007

3,454.70

0.83

-5.1436

14.0089

59

12/3/2007

3,549.47

12/17/2007

3,417.08

-3.73

-3.7298

2.0389

10

The trading record for FXI:

Entry Date

Entry Price

Exit Date

Exit Price

Change (%)

Draw Down %

Max Gain %

Bars Held

6/13/2005

53.767

10/17/2005

58.08

8.02

-0.5933

18.7476

88

11/14/2005

57.819

6/12/2006

69.242

19.76

-0.7939

43.4096

143

7/3/2006

76.714

3/5/2007

89.305

16.41

-5.8268

52.0596

167

3/26/2007

102.393

1/7/2008

167.37

63.46

-3.0881

111.9071

198

This method is able to avoid trading in the market when the trend is in sideways mode. The average gain is higher than the average loss which is typical for trend trading method.

4 comments:

The Average Jay said...

Where do you find the program to trade using this system?

petrenkov said...

It is certainly interesting for me to read the post. Thanks the author for it. I like such themes and anything connected to this matter. I definitely want to read a bit more soon.

Sincerely yours
Steave Markson

Anonymous said...

Nice blog you got here. I'd like to read a bit more about that topic. Thank you for sharing that data.
Joan Stepsen
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Anonymous said...

for the exit did you use conditions 1 AND 2 or conditions 1 OR 2 ?