Last weeks post “In Search of Nirvana” brought some interest. Allow me to interject, there is no method and/or system that this series is leading up to. None, zero, zilch. I am merely following a thought process and this process may or may not turn up a viable methodology. If it does not turn up a worthwhile method, it will at least give you, along the way, what does not work and that can be even more valuable saving not only monies but research time as well.
Our search for a system of investing or a trading method (choose your term) begins, at least with me, with casual observations about market or sector activity. Lets begin by bringing up the chart used last week IJR (Ishares S&P Small Caps) with one of the indicators from last week, buying power. Chart below is highlighted when buying power is positve.
If we were to trade utilizing Welles Wilder’s Parabolic SAR when Buying Power (Blue Line) overtakes selling pressure. Quick calculations gives us 5 trades on the long side with a gross profit of 6 points in a period of roughly 6 months. If I switch to Chuck LeBeau’s Chandelier instead of the SAR:
We now have 2+ trades, one still being open with a gross profit of seven points. Is that better? It’s certainly less active which is probably better over the long haul and certainly may be better, depending upon the trader.
Well how about the dollar weighted cumulative advancing minus declining volume? How does that play out in the above scenario. For this I utilized a 34 moving average and a positive direction for said moving average. There is no reason here for the 34 except casual observations.
Will any of the above stand up to rigorous back testing across a spectrum of sectors? Way too early to tell but do stay with us as I explore other options.
Perhaps the next step for next week is some cursory back test work. See you then.