V.16:7 (329-335): On System Development; Part 2 by Mark Vakkur, M.D.

V.16:7 (329-335): On System Development; Part 2 by Mark Vakkur, M.D.
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On System Development Part 2 by Mark Vakkur, M.D.

Last month, this author introduced the initial steps that someone, novice or veteran, should take when developing a stock market system. This time, he explains the final steps.

Last time, I posited that successful trading consists of systematically putting the odds in your favor. Since our only guide to the future is the past, I showed how the trader must find historical relationships and apply them to the markets going forward. I outlined four steps. First, historical data must be gathered; I used monthly closing data of the Standard & Poor's 500 to illustrate. Second, the data must be explored to discover relationships between variables. The third step is to explore those relationships further by setting up a spreadsheet (or other comparable software). The system developed in the article for illustrative purposes began with seasonality since the stock market, as measured by the S&P 500, makes most of its gains during certain months, especially the November–January period, the March–April period, and July. The worst month by average return from 1950 to 1995 is September, which is also the only month with a negative average return. Ignoring dividends, I illustrated this effect with the following simple systems:

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