50/200 cross in SP Futures

If someone were to buy and sell ES futures over the last 25 years based on the 50-day simple moving average crossing over the 200-day moving average, what kind of results would they get?

Below is a table that represents the statistics of this simple trade:

WoodShedderCross50200persummary

Now if we were to optimize the parameter set and run permutations, would the results improve with different parameter sets?

I ran 112 permutations with the fast average ranging from 30 to 100 in steps of 10 and the slow moving average ranging from 120 to 250 in steps of 10.

Next I plotted the slow average against the fast average and then used Net Profit as the third axis. This yielded an optimization space that is depicted below:

WoodShedderCrossNetProfit

Below is the optimization space based on the Pessimistic Return on Margin objective function. Notice that the 50/200 cross stands atop a lonely hill that represents a local maxima, but not the global maxima.

WoodShedderCrossPROM

FAS and FAZ price decay

Here is a daily chart plotting FAS and FAZ. I’ve highlighted the price points at which they’ve met recently. I’ve drawn a regression-like line depicting their mutual decline.

FAS and FAZ

The bottom study is a correlation study with a 30-bar lookback. As you can tell, I need to upgrade my image publishing skills. If you can’t read the values of the correlation, they start at -0.75 on the top and go down to -0.95 on the bottom. The current correlation value is -0.81. Not perfectly negatively correlated, but pretty close.

The prices at which they’ve met in chronological order is about $9.52, $9.17, $8.35 and $8.22. They started these shenanigans around April 13, 2009.

Trade System Alpha

The Trade System Alpha is my first formalized trading system. And yes, it’s not for sale.

Trade System Alpha

I hold the belief that a trade system should be unique to the trader. Ideally, nobody should know about how it works in a meaningful way except for the trader.

My Trade System Alpha is designed for day trading setups. It uses the 5-minute to enter and exit trades. Here are the list of technical indicators used:

1. Heikin Ashi candlesticks. Used in conjunction with a moving average to trigger entries and exits. See also candlestick list

2. Moving Average. Type and length confidential, but as stated above, it triggers entries and exits.

3. Donchian Price Channel. Length and displacement confidential. It’s main purpose is situational awareness.

4. RSI. Length confidential. Situational awareness as to the oversold/overbought condition.

5. Trendicator. Proprietary and confidential indicator. Confirms entries by indicating the current trend, and its strength. It may be difficult to gather from the picture above, but the Trendicator has four states: Green and above, Red and below, Yellow and above, and Yellow and below.

This system should be considered mostly discretionary since it isn’t in the market all the time, only when I choose to put a trade on. And though the entries are pretty clear cut, I take discretion in taking a trade.

The stop loss is set at a market-defined location where the chances of my trade working out start decreasing. I will also exit a trade before it hits my stop loss if it’s not setting up as expected. Again, kinda discretionary.

Trade System Alpha is my attempt to reduce random trading. It’s not a rules-based system in the true sense, but it is a framework that has a positive expectancy.

Once you set up your own trading system, you’ll find that losses are simply the cost of doing business and have nothing to do with you being right or wrong. In a twisted way, you can look forward to losses because you know your odds increase on the next trade being a winner. We can get into the statistical validity of that being the case if you’re not always trading, but let’s leave that for another time.

Good luck setting up your own trade system. And don’t get caught up in the phrase ‘trade system’ like I often do with certain phrases. You get the idea. Call it a system or criteria or whatever. As long as it’s not random dart throwing.

You can see some trading systems here:

System Trading is Quicksand without the Quick(Opens in a new browser tab)