TradersEdgeSystems.com

Consulting | Custom Trading Systems
Built-In Indicators | Custom Indicators

September 2007 Stocks and Commodities Traders Tips


Trading Trendline Breaks (Part 2)

Original article by Sylvain Vervoort
AIQ Code by Richard Denning

AIQ recently introduced a chart pattern service that has the ability to recognize classic chart patterns and alert the user to emerging formations as well as completed formations. The patterns are stored historically back to about February 2006 and the history bank will grow as time marches forward. In addition the completed patterns can be accessed via the EDS code thereby allowing a back test to be performed for the patterns. Since all of the completed pattern signals involve a breakout from a trendline, I decided to put most of the pattern signals together into one rule and then trade all the signals for the NASDAQ 100 list of stocks. I traded only in the direction of the breakout: long for upward breaks of a trendline and short for downward breaks of a trendline. Positions were entered the next day at the open after the trendline break and were exited after being held for 3 days without any other stops. Three positions maximum were held with 1/3 of capital allocated to each. The signals were chosen based on relative strength, strongest for long positions, weakest for short positions. I deducted three cents per share for commission and slippage for a round trip trade. The types of breakouts included are: channel, flag, pennant, triangles, wedges, double bottoms and tops, and rectangles.

In addition, I devised some simple market timing filters using the NDX index. In figure 1 and figure 2, I show a comparison of trading with and without market timing filters. Because of the limited history currently available, I ran the test from February 10, 2006 to July 12, 2007. The best results come from the long signals with the market timing filter which showed a 19% annualized return with an 8% maximum drawdown. The short side also showed improved results with the market timing filter but overall both short side tests were net losers for test period.

FIGURE 1 (click here to view): Equity curve comparison for trading trendline breaks long related to classic chart patterns with and without a market timing filter.

FIGURE 2 (click here to view): Equity curve comparison for trading trendline breaks short related to classic chart patterns with and without a market timing filter.

The AIQ code for completed chart pattern breakouts including the code for individual chart pattern signals is given below.

EDS Code for Trading Trading Trendline Breaks
Trendline_Brkout.EDS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer | Privacy Policy | Contact Us | Spam Blocker | ©2009 Traders Edge Systems