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: