Letters To S&C by Technical Analysis, Inc.
COLOR-BASED SYSTEM FOR SHORT-TERM TRADING
The color-based system presented by Edgar Kraut in his July 2011 article (“A Color-Based System For Short-Term Trading”) looked promising and simple. However, using the Excel spreadsheet example given in your Traders’ Tips section in that same issue, I recoded it into Mechanica Professional, but I did not get anything close to the performance shown in the article. I’m fairly sure I coded it correctly because I get the same color bars as those shown in Figure 6 in the article and the same number (98) of bars (45 green bars and 53 blue bars) in the first trading period (4/17/2002 to 4/17/2003) shown in the article’s Figure 8. So it seems that there must be something wrong with my trailing 1% exit.
Since closing prices are used to color the bars and enter the trade, I assume that the author means to enter on the open the next day and use a 1% trailing stop, but he doesn’t say whether that stop is based on the close of the previous day or his open fill price. For there to be 98 trades, that means every trade had to have been entered and exited on the same day, and I don’t see how that could happen with a 1% trailing stop 98 out of 98 times, especially using intraday data.
I would appreciate it if the author clarified his exit and how he managed to get 98 one-day trades with a 1% trailing stop.
See also the next letter and reply. —Editor