At this stage the system is not quite 100% systematic. There is a slight anomaly that I cannot code (as yet) that doesn’t make the testing completely accurate.
The initial basis of the system started with the Tom DeMark Sequential setup which I have been interested in for a number of years. I then noticed a pattern within that setup that allowed a lot more scope and robustness than the Sequential setup (i.e. easy to understand and see).
In essence the system is looking at the following:
(1) stock long term trending higher
(2) stock pulling back but within n% of 100-day highs
(3) contraction of volatility – this is the important one as it creates low risk entries which in turn allows multi R gains.
(4) we use a fixed fractional position size method rather than fixed dollar or ATR style. Maximum 10 positions unless one is above breakeven.
(5) a trail stop is used to track prices higher in the hopes of capturing a trend from a retracement.
Regarding (3) above. This is something I used to use back in the 90’s with my futures trend system. It basically ensured I was only ever involved in very high return trades (which are established from low risk entries). I basically have a risk hurdle of 3%. What this means is if the difference between the entry and initial stop is >3% the trade is ignored. You can read an article on it HERE. Also there is a lot written about it if you Google ‘Radge + Bang for Buck”
Win rate will be nearer 40% – 45% but the potential gains are huge. So far this month the system is +8% but I’m only using 0.5% risk per trade.
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