Beyond Technical Analysis: How to Develop and Implement a Winning Trading System [PDF]

Summary
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Beyond Technical Analysis: How to Develop and Implement a Winning Trading System – Book

The T-AT system signaled a perfect short trade within a day of the actual contract high. Then, it correctly picked off the bottom of the quick sell off. However, it rolled over to short during the brief congestion and then was short through the volatile countermove in late May.

Trend-antitrend trading requires great faith in the system and rigid risk control, with the added benefit that the risk/reward ratio can be excellent. The June 1995 deutsche mark contract also illustrates the difficulty of using a heavily smoothed ADX indicator in volatile markets. The same smoothing that desensitizes ADX works against it if the market is choppy and thin.

Another quirk of the T-AT system is that it will often be slow in signaling a countermove if the market is drifting slowly, as the December 1993 cotton contract was doing near the summer top. T-AT logic correctly picked the first low (see Figure 4.30), but had to sit through the ensuing double bottom in November before the trend turned up. Once again, we have the hiccup at the start of the trend, with the system quickly reversing into the intermediate trend.