V.11:4 (166-168): Monitoring Equity For Market Analysis by Joe Luisi

V.11:4 (166-168): Monitoring Equity For Market Analysis by Joe Luisi
Item# \V11\C04\MONITOR.PDF
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Monitoring Equity For Market Analysis by Joe Luisi

STOCKS & COMMODITIES contributor Joe Luisi presents a strategy for using a graph of your profits and losses to pick either trend-following or a trading range trading system.

It is well known or it should be that every trader should plot equity to see graphically how their trading results are faring. But what may not be as well known is that traders can actually use equity as an analytical tool. Equity analysis can indicate whether the markets are trending or trading sideways and what approach a trader should use.

The basic approach to using equity as an analytical tool is to apply two trading systems: a trend-following system and an oscillator-based one. When the markets begin to trend, the trend-following system will perform well and the system's equity will rise and eventually move above its 25-day moving average as the trend increases. Conversely, the oscillator system will perform poorly, getting whipsawed and encountering a series of losing trades, which in turn causes the equity to decrease and eventually fall below its 25-day moving average.

By tracking the equity, a trader can invest more capital into the system whose equity is above the moving average and ignore signals from the system whose equity is below the moving average. Monitoring equity will ensure that a trader will utilize the system with favorable performance and avoid the trading system that is underperforming. When both equities are below their moving averages, a trader can then take no signals at all and instead wait for the equity to rise above the moving average.

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