V13:06: (233-237): A Weekly S&P Trading System by Adam White
Here's a trading system based on a price pattern and which uses the Standard & Poor's 500 index as a test case.
Should a stock market investor buy and hold, or should he or she attempt to trade the major market trends? The answer depends on many factors, but even the most convincing arguments for buy and hold will not prevent curious technicians from designing trading systems. Let me introduce a system to trade the market trends.
The system's performance goal is to add value to stock market investing over and beyond what is subtracted by the costs of running the system. At first, this might mean achieving a higher annual return than buy and hold, but this is not necessarily the case. If the system can lessen risk effectively, then it adds value even if the total return is less than buy and hold. This is because investors don't invest with a trading system; they invest with their portfolios.
If the trading system lowers risk, we can restructure our portfolio and commit more capital to the market than we
would have with a buy and hold strategy. This builds more capital in the long run, even with a lower return. Of
course, an improved annual return is still something to shoot for, but the smoothness of the equity line should get equal attention.
THE SYSTEM'S CHARACTER
The character of the system will be plain vanilla trend-following: Cut losses and let profits run. More specifically, the system will aim to be in the market during authoritative rising trends and out of the market and in cash during unsure sideways or downward action. (Short positions are never taken.) Critical to this strategy will be that the system employ different devices for the entry and exit. The entry will be selective, attempting to catch only the most powerful trends, while the exit will be adaptive, allowing strong trends ample opportunity to run while terminating positions in uncertain and risky conditions. Finally, the system will take a long-term stance, trading weekly bars of
the Standard & Poor's 500 index. Given these design parameters, it won't trade very frequently, and it will often spend significant periods out of the market.