Mastering MetaStock
®
Version 10
Printed in the USA All Rights Reserved Copyright © 1985-2007 Equis International 90 South 400 West Suite 620 Salt Lake City, UT 84101 http://www.equis.com
Except as permitted by law, no part of this document may be reproduced or transmitted by any process or means without the prior written consent of Equis. Equis, by publishing this document, does not guarantee that any information contained herein is and will remain accurate or that use of the information will ensure correct and faultless operation of the relevant product or service. Equis provides its products and services as tools to be used by investors who are aware of the risk inherent in securities trading, not as recommendations to buy or sell. Equis, its agents, affiliates, and employees shall not be held liable to or through any user for any loss or damage whatsoever resulting from reliance on the information contained within this document or through the use of Equis products or services.
8.3.2007
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Contents Introduction
Introduction
1
Welcome............................................................................................................................. 1 Who Should Read this Manual? ......................................................................................... 1 How to Use this Manual ..................................................................................................... 2 Getting Help ....................................................................................................................... 2
Chapter 1 - What is Technical Analysis?
3
Introduction ........................................................................................................................ 3 Why use Technical Analysis?......................................................................................3 Technical Analysis Basics .................................................................................................. 4 Charts...........................................................................................................................4 Support and Resistance................................................................................................5 Trends ..........................................................................................................................6 Indicators .....................................................................................................................6
Chapter 2 - Introducing MetaStock and MetaStock Performance Systems 9 Introduction ........................................................................................................................ 9 MetaStock Power Tools...................................................................................................... 9 The Explorer ................................................................................................................9 Enhanced System Tester............................................................................................10 Indicator Builder........................................................................................................10 Expert Advisor...........................................................................................................10 MetaStock Performance Systems ..................................................................................... 10 How the MetaStock Performance Systems were selected .........................................10 Which System Should I Use? ........................................................................................... 11 Comparing System Tests .................................................................................................. 11 One System Tested on Several Stocks.......................................................................11 Several Systems Tested on a Single Stock.................................................................17
Chapter 3 - Using the MetaStock Power Tools
23
Introduction ...................................................................................................................... 23 Finding the MetaStock Performance System tools ....................................................23 Choosing a Time Period ............................................................................................23 Opening a Chart................................................................................................................ 24 Custom Indicators............................................................................................................. 26 Plotting a Custom Indicator .......................................................................................26
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Contents • i
The Enhanced System Tester ........................................................................................... 28 Results from the Systems Tests .................................................................................31 Cleaning Up the Chart ...............................................................................................32 The Explorer ..............................................................................................................33 Selecting the Stocks ...................................................................................................33 Setting Exploration Options.......................................................................................33 Running an Exploration .............................................................................................34 Performance Exploration Results...............................................................................36 Trade Efficiency ........................................................................................................37 Signal Explorations Results .......................................................................................37 Adding an Additional Filter .......................................................................................38 The Expert Advisor .......................................................................................................... 41 Attaching an Expert ...................................................................................................41 Editing an Expert .......................................................................................................42 Viewing the Commentary ..........................................................................................44 Trading Basics.................................................................................................................. 45 Disclaimer ........................................................................................................................ 46
Chapter 4 - New Features in MetaStock 10
47
Introduction ...................................................................................................................... 47 New Data CD ................................................................................................................... 47 Major Changes ................................................................................................................. 48 To Line Studies..........................................................................................................48 To The Explorer.........................................................................................................48 To Indicators ..............................................................................................................48 To Functionality.........................................................................................................48 Minor Changes ................................................................................................................. 48
Chapter 5 - Forex Systems
49
FX Multiple Time Frame System..................................................................................... 49 Explanation of Symbols and Alerts.................................................................................. 51 FX Keltner Systems.......................................................................................................... 52 FX Keltner System 1..................................................................................................52 FX Keltner System 2..................................................................................................52 FX Pattern System............................................................................................................ 52
Chapter 6 - Rahul Mohindar Oscillator System
53
RMO Trade Model ........................................................................................................... 53 RMO Indicator...........................................................................................................53 Swing Trade Indicators ..............................................................................................54 Using the RMO ................................................................................................................ 55 Interpretation of the RMO Model..................................................................................... 56 The RMO ...................................................................................................................56 The SwingTrader indicator ........................................................................................56 Sentiment Detector ....................................................................................................56 Exit Swing Indicator ..................................................................................................57 ii â?– Contents
Mastering MetaStock
Chapter 7 - Descriptions of the MetaStock Performance Systems
58
Introduction ...................................................................................................................... 58 Description.................................................................................................................58 Signals .......................................................................................................................58 Trade Characteristics .................................................................................................58 Further Reading .........................................................................................................58 The Systems...................................................................................................................... 59 Adaptive Moving Average ............................................................................................... 60 Description.................................................................................................................60 Signals .......................................................................................................................60 Trade Characteristics .................................................................................................60 Further Reading .........................................................................................................60 Bull Power Bear Power 1 ................................................................................................. 60 Description.................................................................................................................60 Signals .......................................................................................................................60 Trade Characteristics .................................................................................................61 Further Reading .........................................................................................................61 Bull Power Bear Power 2 ................................................................................................. 61 Description.................................................................................................................61 Signals .......................................................................................................................61 Trade Characteristics .................................................................................................61 Further Reading .........................................................................................................61 Bull Power Bear Power 3 ................................................................................................. 62 Description.................................................................................................................62 Signals .......................................................................................................................62 Trade Characteristics .................................................................................................62 Further Reading .........................................................................................................62 CCI (Commodity Channel Index) .................................................................................... 62 Description.................................................................................................................62 Signals .......................................................................................................................63 Trade Characteristics .................................................................................................63 Further Reading .........................................................................................................63 Chande Forecast Oscillator............................................................................................... 63 Description.................................................................................................................63 Signals .......................................................................................................................63 Trade Characteristics .................................................................................................63 Further Reading .........................................................................................................63 CMO Reversal .................................................................................................................. 64 Description.................................................................................................................64 Signals .......................................................................................................................64 Trade Characteristics .................................................................................................64 Further Reading .........................................................................................................64 Consolidation Breakout .................................................................................................... 65 Description.................................................................................................................65 Signals .......................................................................................................................65 Trade Characteristics .................................................................................................65 Further Reading .........................................................................................................65 Mastering MetaStock
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Cooper 1234 Pattern......................................................................................................... 65 Description.................................................................................................................65 Signals........................................................................................................................66 Trade Characteristics .................................................................................................66 Further Reading .........................................................................................................66 Cycle Progression............................................................................................................. 66 Description.................................................................................................................66 Signals........................................................................................................................66 Trade Characteristics .................................................................................................66 Dynamic Momentum Index 1........................................................................................... 67 Description.................................................................................................................67 Signals........................................................................................................................67 Trade Characteristics .................................................................................................67 Further Reading .........................................................................................................67 Exponential Moving Average........................................................................................... 67 Description.................................................................................................................67 Signals........................................................................................................................68 Trade Characteristics .................................................................................................68 Fractal Trading Systems 1 and 2 ...................................................................................... 68 Description.................................................................................................................68 Signals........................................................................................................................68 Trade Characteristics .................................................................................................68 Further Reading .........................................................................................................68 Long Sell Short Sale – 5 Day ........................................................................................... 69 Description.................................................................................................................69 Signals........................................................................................................................69 Trade Characteristics .................................................................................................69 Further Reading .........................................................................................................69 MACD Histograms 1 and 2.............................................................................................. 70 Description.................................................................................................................70 Signals........................................................................................................................70 Trade Characteristics .................................................................................................70 Further Reading .........................................................................................................70 Meisels Overbought/Oversold.......................................................................................... 71 Description.................................................................................................................71 Signals........................................................................................................................71 Trade Characteristics .................................................................................................71 MESA Sine Wave ............................................................................................................ 72 Description.................................................................................................................72 Signals........................................................................................................................72 Trade Characteristics .................................................................................................72 Further Reading .........................................................................................................72 Pattern Trading System 1 ................................................................................................. 72 Description.................................................................................................................72 Signals........................................................................................................................72 Trade Characteristics .................................................................................................72
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Percentage Crossover 3% ................................................................................................. 73 Description.................................................................................................................73 Signals .......................................................................................................................73 Trade Characteristics .................................................................................................73 Projection Oscillator 1 ...................................................................................................... 73 Description.................................................................................................................73 Signals .......................................................................................................................73 Trade Characteristics .................................................................................................73 Further Reading .........................................................................................................73 StochRSI........................................................................................................................... 74 Description.................................................................................................................74 Signals .......................................................................................................................74 Trade Characteristics .................................................................................................74 Further Reading .........................................................................................................74 Swing Index...................................................................................................................... 75 Description.................................................................................................................75 Signals .......................................................................................................................75 Trade Characteristics .................................................................................................75 Further Reading .........................................................................................................75 Vertical Horizontal Filter.................................................................................................. 75 Description.................................................................................................................75 Signals .......................................................................................................................75 Trade Characteristics .................................................................................................75 Further Reading .........................................................................................................75 Volatility Breakout (Chaikin) ........................................................................................... 76 Description.................................................................................................................76 Signals .......................................................................................................................76 Trade Characteristics .................................................................................................76
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Contents • v
Introduction Introduction
Welcome Do your emotions interfere with your trading? Would you like to add discipline to your trading style? Would you like to automate your investment activities, using a built-in set of pre-tested trading strategies? And would you like a manual that explains all this in easy-to-understand terms? That’s what MetaStock®, the MetaStock Performance Systems™, and this manual were designed to do. We will show you how to quickly and easily use the most powerful features of MetaStock, the Power Tools. We will also introduce you to 26 of the 80 MetaStock Performance Systems (a collection of the best trading systems ever developed for MetaStock). The core of this manual is the step-by-step instruction on how to use the MetaStock Performance Systems to find better investments. The manual shows you, step-by-step, how each MetaStock Power Tool is used to help in choosing systems and trades. You’ll be up and running a trading system in no time. We won’t waste your time with anything but the essential instructions to getting you trading. This manual isn’t a complete MetaStock manual (that’s available from the MetaStock Help menu). It’s not a guide to the basics of MetaStock (see the QuickStart Tutorials in the MetaStock Help menu). It’s not a trading course. Nor is it an in-depth review of technical analysis. This guide is a quick and easy way to feel the power of MetaStock. Where appropriate, you’ll be guided to other reference material for more information.
Who Should Read this Manual? If you're comfortable performing basic tasks in MetaStock, this manual is for you. Basic tasks include opening charts, creating security files, downloading data, plotting indicators and running system tests and explorations. If you're not familiar with any of those tasks, we highly recommend you read MetaStock's Getting Started manual before reading this one.
Mastering MetaStock
Introduction • 1
How to Use this Manual Here is a quick breakdown of what can be found in each chapter of this manual. Chapter One introduces you to Technical Analysis and explains the basic techniques used in MetaStock to help you make better investment decisions. Later in the manual, we’ll be introducing you to more advanced techniques, and having a basic understanding of Technical Analysis will help immensely. Chapter Two explains what’s unique about MetaStock and MetaStock Performance Systems, and what they can do to improve your trading. This chapter also outlines two approaches to using the MetaStock Performance Systems so you can choose the system that’s best for you. Chapter Three is a step-by-step tutorial on using each of MetaStock’s Power Tools with the MetaStock Performance Systems. This is where you learn to master the real power of MetaStock. Chapter Four contains a description of the new features in MetaStock 10. Chapter Five contains a description of the MetaStock Forex Systems. Chapter Six contains a description of each MetaStock Performance System so you can find one that fits your trading personality.
Marginal Notes MetaStock Help – keyword
Throughout this manual, references to the MetaStock help file are included in the left margin. The keyword to search is bolded (as in the example to the left). To look up the keyword, select Help from the MetaStock Help menu, and choose the Index tab. Then type your keyword in the input box at the top of the dialog.
A new term will be defined in the margin
The first time new terminology is introduced, a definition will be found in the margin.
Getting Help If you have a problem or a question, the first place to check is the MetaStock help system. It contains everything in the printed manual. Most questions can be answered in the help. Context Sensitive Help icon
MetaStock Help – Technical Support
2 ❖ Introduction
There is a help button on each dialog that guides you to the help for that dialog. Or you can click on the Context Sensitive Help icon, and then click on any item in MetaStock, to get help on that item. If you've checked the help system and still cannot find the answer to your problem or question, please contact the vendor from which you purchased MetaStock for assistance. If you purchased MetaStock directly from Equis, you may contact Equis Technical Support for assistance with MetaStock. Look up Technical Support in the MetaStock help for information on contacting Equis Technical Support.
Mastering MetaStock
Chapter 1 - What is Technical Analysis?
Introduction To some people, technical analysis is some sort of mystical art, akin to reading tea leaves. To others, it’s a valuable tool that increases their investing success while decreasing their risk. The term security refers to stocks, bonds, mutual funds, commodities, currencies, futures, indices, options, etc.
Simply stated, technical analysis is the study of past security prices and volume, in an attempt to predict the future. Technical analysis only deals with the price elements (open, high, low, and close) and the volume associated with a security, and ignores other factors such as earnings, revenue growth, etc. Technical analysis can be applied to just about any investment vehicle, including stocks, futures, options, or mutual funds. This chapter will describe what technical analysis is and why you should use it, and introduce you to a few of the basic concepts of technical analysis.
Why use Technical Analysis? Used properly, technical analysis can increase your investment return, while reducing your risk. Would you buy a used car without knowing anything about its past performance? Likewise, you shouldn’t buy a stock without learning about what the prices have done in the past. Technical analysis protects you from the biggest enemy to your investment success – you. Using a mechanical trading system takes the emotion out of trading. It makes you a more disciplined trader. It removes the chance that you will panic at the worst possible moment.
Mastering MetaStock
What is Technical Analysis? • 3
Technical Analysis Basics This is a very basic introduction to technical analysis. For an excellent book on Technical Analysis, consider Technical Analysis from A to Z, by the creator of MetaStock, Steve Achelis.
Charts The most basic concept in technical analysis is the chart. This is where technical analysis takes place. A chart shows, in graphical form, the trading history of a security. The most common technical analysis chart is a “bar chart.� The bar shows the open, high, low, and closing prices for the period. See the following illustration for an example. The volume is usually shown below the price bars. The open is the first trade price of the period.
Open High
Close
Low
Volume Dates Prices
The high is the highest trade price that occurred during the period. The low is the lowest trade price that occurred during the period. The close is the last trade price of the period. The volume is the number of shares traded during the period. The period is whatever time frame constitutes one bar (e.g., minute, hour, day, week, or month). The x-axis is the date scale along the bottom of the chart. The y-axis is the price scale along the side of the chart.
The bottom of the chart (also called the x-axis) shows the dates. The right of the chart (also called the y-axis) shows the prices. The bar chart is the most common type of chart, but other forms of charts are also available in MetaStock. For example, you could plot the close as a line. This is also a good chart if you just want to take a quick look at the overall price over the long-term.
4 â?– What is Technical Analysis?
Mastering MetaStock
Support and Resistance Security prices represent a balance between buyers and sellers. When the price falls to a point where there are many more buyers than sellers, prices stop falling, and you get a support level. When prices move up to a point where it brings out many sellers, prices stop rising; this is a resistance level. The following illustration shows MedImmune and a support level at $44.
An overbought security has risen to an unreasonable level, and is due for a correction. An oversold security is the opposite. A trading range is a sideways chart pattern, often a resting period before prices resume their former trend.
Mastering MetaStock
As stocks move between support and resistance, their action is termed “cyclic.” Indicators designed for such activity can be called cyclic indicators, or overbought/oversold indicators, or reversal indicators. Cyclic indicators perform best when stocks are in a trading range. The most famous cyclic indicator is probably the Stochastic Oscillator. See page 6 for more information about indicators. When trading support and resistance levels, it’s advisable to wait for confirmation of the level rather than trying to anticipate the price turn. That is, wait for prices to fall to support and bounce off (the confirmation) before placing a long trade, or vice-versa for short trades.
What is Technical Analysis? • 5
Trends An up-trend is increasingly higher low prices. A down-trend is decreasingly lower high prices.
The opposite of a stock caught between support and resistance is a stock in a trend. An up-trend is defined as increasingly higher low prices. A downtrend is defined as decreasingly lower high prices. The old saying is absolutely true – “The trend is your friend.” The following illustration shows Washington Mutual in a great up-trend as prices break out of resistance.
Trend-following indicators can also be called “lagging” indicators because their signals lag behind price changes. They work best when securities move in long trends. The most common trend-following indicator is the moving average.
Indicators A price pattern is a recognizable formation in prices due to trend and trend reversal.
An indicator is simply a mathematical calculation applied to some or all of the price fields and/or volume. Indicators can be plotted in the chart to show a graphical representation of these calculations. Many of the MetaStock Performance Systems use indicators in their calculations (the systems which don’t use indicators use price patterns).
Moving Average A moving average is the average price at which a security has traded over a given time period.
One of the most common indicators is the moving average. A moving average shows the average price a security has traded over the specified time period. For example, a 5-day moving average would sum up the closing prices for the last five days, and divide by five, to get the average. This type of moving average is called a “simple” moving average because it gives equal weight to each time period. MetaStock includes six other moving average methods that apportion the weight in different ways.
6 ❖ What is Technical Analysis?
Mastering MetaStock
MetaStock Help – Moving Average
A moving average represents the average price investors have been willing to pay for a stock over the specified time period. It gives you the consensus of the crowd. The following illustration shows Microsoft and a 25-day moving average. Notice that buying or selling when the price crossed the moving average resulted in late, but profitable, entry points.
Moving averages are lagging indicators. Signals generated will occur after the price has changed direction. On the other hand, moving averages always eventually get you on the right side of the trend. Moving averages are best for securities that show strong trends.
Stochastic Oscillator The Stochastic Oscillator calculates the price relative to the recent highlow range. MetaStock Help – Stochastic Oscillator
Mastering MetaStock
Another popular indicator is the Stochastic Oscillator. “Stochastics,” as it is sometimes called, shows where the price is trading relative to the recent high-low range. For example, a ten-period Stochastic would look at the highest and lowest price over the last ten days, and see where the current price falls within that range. A value of 100 would indicate the Stochastic was at the top (or 100%) of the 10-day High-Low range, and a value of 0 would indicate it’s at the bottom of the range.
What is Technical Analysis? • 7
The following illustration shows Intel and the Stochastic Oscillator.
The Stochastic Oscillator is an overbought/oversold indicator. That is, it tries to anticipate reversals in price. A common interpretation is to go long when the Stochastic turns up out of oversold territory (i.e., it crosses above 20) and go short when the Stochastic falls below overbought territory (i.e., it falls below 80). The Stochastic Oscillator works best on securities that show cyclic, or nontrending, behavior. Many other indicators are based upon stochastic principles.
Other Indicators MetaStock includes over 120 other technical indicators, from Accumulation/Distribution to Zig Zag. MetaStock also includes over 100 more mathematical, statistical, date, and other functions that can be built into your own technical indicators. You are encouraged to experiment with as many of them as you have time for. Most investors find a couple of indicators that work for them, and stick to those. Hopefully the MetaStock Performance Systems will guide you to a couple of indicators that work for you.
8 â?– What is Technical Analysis?
Mastering MetaStock
Chapter 2 - Introducing MetaStock and MetaStock Performance Systems
Introduction Technical analysis is a powerful tool, but to get the full benefit from it, let the computer do most of the work. MetaStock and the MetaStock Performance Systems do all of the dirty work for you, allowing you to spend your time more productively. This section gives an overview of MetaStock and each Power Tool. This section also introduces you to the MetaStock Performance Systems, and guides you through selecting a system that is right for you.
MetaStock Power Tools MetaStock contains all of the tools necessary to design, test, and implement an advanced technical analysis trading system. MetaStock’s Power Tools include The Explorer™ for finding securities that meet certain conditions, the Enhanced System Tester™ for testing trading systems to see how profitable your ideas have been in the past, the Indicator Builder for creating your own indicators, and the Expert Advisor™ for displaying customized commentary, highlighted bars, symbols, and alerts.
The Explorer MetaStock Help –What is The Explorer?
Mastering MetaStock
The Explorer is a powerful, multi-purpose analysis tool that can perform indepth “explorations” (also called “scans”) on thousands of securities at one time. It can compare, rank, sort, and filter securities; list multiple indicator values for multiple securities; show securities with current buy and sell signals; and search for any technical criteria set by a trader. Results can be saved to lists for easy future reference.
Introducing MetaStock and MetaStock Performance Systems • 9
Enhanced System Tester MetaStock Help – What is a System Test?
The Enhanced System Tester lets users create and back-test trading systems. The user sets entry and exit conditions, commission amounts, and other important details. Then the Enhanced System Tester tests the criteria on real securities to see how much money would have been made or lost using that system during a set period of time. The Enhanced System Tester can also optimize each system to find the parameters that work best for an individual security and compare multiple systems to show which is most profitable. These tools allow traders to optimize their chances of making profits in the markets—without risking a cent of real money.
Indicator Builder MetaStock Help – What is the Indicator Builder?
Built into MetaStock is a powerful indicator builder that allows users to conveniently create their own custom indicators using MetaStock’s 200+ prebuilt mathematical, statistical, and technical functions. MetaStock’s indicators also support variables, multiple plots, and user inputs.
Expert Advisor MetaStock Help – What is the Expert Advisor?.
MetaStock’s Expert Advisor works as both a basic teaching tool and a powerful means of automating a trading system, no matter how advanced. Experts include buy and sell signals, alerts, and written commentary. Users can also create their own experts to automate systems of signals, alerts, and more.
MetaStock Performance Systems The MetaStock Performance Systems are a set of 80 of the best-performing systems ever devised for MetaStock. Twenty-six of these systems come free with MetaStock, and the remaining 54 are available with the MetaStock Performance Systems Plus plug-in. Each MetaStock Performance System has an associated system test, signal exploration, performance exploration, and expert advisor. Some of the performance explorations associated with the 26 free systems are only available by purchasing the plug-in. A description of each of the 26 free systems is found in chapter four of this manual, including whether the performance exploration is included with MetaStock or must be purchased with the MetaStock Performance Systems Plus plug-in.
How the MetaStock Performance Systems were selected A Stop is an order to sell a long position, or cover a short position, at a predetermined amount, usually to limit losses.
The MetaStock Performance Systems, developed by Trading Systems Analysis Group, were chosen by testing many variations of hundreds of different systems on daily data, adding up to about 10,000 different combinations. The tests were done on daily stock data, using no trade delay, with entry and exit on the close. No commission was figured in during the testing. Stops weren’t used, as the systems have their own exit signals that close out a trade fairly quickly. Low-priced and low volume stocks weren’t included in the testing. A system was deemed desirable if its trade efficiency (described on page 37) was positive for more than 50% of all stocks analyzed.
10 ❖ Introducing MetaStock and MetaStock Performance Systems
Mastering MetaStock
Which System Should I Use? There are two ways to approach the MetaStock Performance Systems tools. You can choose the stocks you want to trade, and then find the system that works best with that stock. Or, you can choose the systems you would like to use, and then find the best stocks to trade. You can use the Enhanced System Tester to compare the system’s performance on all the stocks in your chosen database, or even online stocks. The stocks can be ranked by, profit, percent of gain and other criteria, and then you can choose what to trade. The following sections will explain both approaches. You decide which works best for you.
Comparing System Tests Choose the stock or stocks that you want to trade, using whatever criteria you find appropriate. You might choose a stock you have a lot of knowledge about. If you are only going to be taking long positions, you should probably choose a stock that you think has good long-term prospects. We are going to compare different systems' performance with different stocks using the Enhanced System Tester. For more information on using the Enhanced System Tester, see the step-by-step guide to using the Enhanced System Tester on page 28.
One System Tested on Several Stocks Suppose you’ve chosen the system you want to use, and you simply want to find a stock whose personality fits this system. Maybe after reading through the descriptions in chapter four, you’ve decided that the system that best fits your trading style is the Pattern Trading System 1. It’s built on a bullish premise, and it trades every one to two weeks, so you think you’d like to give it a try. In the following example, we’ll show you how to choose a stock to trade using the Pattern Trading System 1 system.
Mastering MetaStock
Introducing MetaStock and MetaStock Performance Systems • 11
To Test One System on Several Stocks 1.
Open the Enhanced System Tester.
2.
Click the New Simulation button. The Select Systems screen appears.
3.
Scroll down and select PS Pattern Trading System 1.
12 â?– Introducing MetaStock and MetaStock Performance Systems
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Mastering MetaStock
4.
Click Next. The Select Securities screen appears.
5.
Click Add Securities. The Add Securities dialog appears.
6.
Double-click the folder titled Stocks - Common, then double-click the folder titled S & P 100.
7.
Click the Tools button, and then click Select All.
8.
Make sure the periodicity is set to Daily (in the lower left corner) and click Open.
Introducing MetaStock and MetaStock Performance Systems • 13
9.
Once you return to the Select Securities screen, click Dates. The Simulation Dates dialog opens.
10. Select Use price data from and enter 6/30/2000 in the “from” date and 7/1/2002 in the “to” date. 11. Click OK. 12. Click Next. The System Testing Options screen appears.
13. Make sure the options in your System Testing Options dialog match those pictured above. 14. Click More to open the System Testing Options dialog and select the Trade Execution tab. Make sure the Realistic Market Prices box is checked.
14 ❖ Introducing MetaStock and MetaStock Performance Systems
Mastering MetaStock
15. Click Next. The Begin Trading Simulation screen appears.
16. Type PTS1 in the top field (where it says The System Tester will now perform the simulation). 17. Click Start. A status window appears in the lower right corner of the screen.
18. When the simulation is complete, click the View Results link.
Click Here
Mastering MetaStock
Introducing MetaStock and MetaStock Performance Systems • 15
19. The Test View opens. Click the Net Profit column heading twice to arrange the results with the best performers at the top of the list.
The top two performers (according to net profit) are General Dynamics and Schlumburger. But net profit is just part of the picture. Let's look more closely at how well these securities worked with the Pattern Trading System 1. 20. In the results list (the bottom half of the screen), double-click General Dynamics. The Summary Report appears.
21. Look at the Performance section (second section down on the left), and notice the Buy & Hold Profit. It was only $5,236.25. But the Pattern Trading System returned a $5636.25 profit, $400 more. That's a good sign.
16 â?– Introducing MetaStock and MetaStock Performance Systems
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22. Now click the Equity tab to view the Equity Report.
23. The equity line rises steadily without any extreme jumps. This suggests that the system is relatively stable and dependable. 24. Now click Back and repeat steps 18 - 20 for Schlumberger. You’ll find that in this test, Schlumberger’s net profit beat its buy and hold profit, but its equity line is less steady than General Dynamics’. So of the two securities that returned the highest net profit with the Pattern Trading System 1, General Dynamics is probably the best candidate going forward. If you decide to use this security with this test, you should attach the Pattern Trading System expert to General Dynamics’ chart and check it each day for buy and sell signals.
Several Systems Tested on a Single Stock You can also run several systems against a single instrument.
To Test Several Systems on One Stock
Mastering MetaStock
1.
Launch the Enhanced System Tester so we can perform a back-test (see page 10 for more information about the Enhanced System Tester).
2.
We want to try all 26 of the MetaStock Performance Systems on our stock to see which ones do the best. To select all the systems, click on the first PS system in the Systems list, then hold down the shift key and click on the last PS system in the list.
3.
Click the New Simulation button to start the Perform Trading Simulation wizard.
4.
In the wizard, click Next.
5.
Click Add Securities. The Add Securities dialog opens.
6.
Make sure the Online Vendor button is selected and double-click the Stocks - Common folder to open it (if you’re not already in it).
7.
Click the Options button and select View by Name. Introducing MetaStock and MetaStock Performance Systems • 17
8.
Type Amgen in the Symbol field.
9.
Make sure the periodicity is set to Daily (in the lower left corner) and click Open. You are returned to the wizard.
10. Click the Dates button. 11. Select Use price data from ___ to ____ and enter 6/27/2001 for the first date, and 6/28/2002 for the last date. 12. Click OK. 13. Click Next. In the wizard, the System Testing Options dialog appears. 14. Check the Points Only Test checkbox. Make sure the rest of the System Testing Options dialog matches the picture below.
15. Click More to open the System Testing Options dialog, and click the Trade Execution tab. 16. Uncheck the Realistic Market Prices box. 17. Set the Buy Price and the Sell Price to Close. 18. Click OK. 19. Click Next. The Begin Trading Simulation dialog appears. In the field at the top (The System Tester will now perform ...) type My Simulation. (Don’t include the quotes.) 20. Click Start. 21. When the simulation is complete, click View Results. 22. The Test View appears, listing all the systems and showing how well they did according to profit and other criteria.
18 â?– Introducing MetaStock and MetaStock Performance Systems
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23. Click the Net Profit column once to sort the systems in ascending order, and twice to sort them in descending order (puts the best results at the top).
In this example, net profit represents points since we are doing a pointsonly test. This report shows that the PS Cycle Progression system performed best, returning 39.93 points (the column titled Net Profit) over the one-year period. PS Bull Power Bear Power is a close second, with a net profit of 31.79 points. Looking at the total number of trades (the column titled Trades); the PS Bull Power Bear Power system only had 15 trades. The PS Cycle Progression had 48 trades, three times as many as the PS Cycle Regression. All else being equal, we’d prefer the system with fewer trades. Fewer trades mean fewer commissions paid out to a broker.
Mastering MetaStock
Introducing MetaStock and MetaStock Performance Systems • 19
24. Double-click PS Bull Power Bear Power to open the Result Details View.
25. Click the Plot on Chart button so we can see the equity line plotted in a chart (the equity line represents our system’s profits). 26. Close the Enhanced System Tester to see the equity line plotted in the accompanying chart.
The equity line shows a relatively steady up trend for the entire year. That’s what we like to see. It would appear that the PS Bull Power Bear Power is in tune with Amgen for these dates. Now all we need to do is attach the PS Bull Power Bear Power expert advisor and check the chart each day for signals. The expert alerts will notify us if there have been any signals since the last time we opened our chart, and the expert commentary will give us details on each signal generated.
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Now we’ve done everything we can to reduce our risks. We’ve found a system that back-tests well on a stock that we understand well. The system fits our trading personality, and we understand the theory behind the indicator. We’re only going to put a small part of the money we can afford to lose into any one trade. We’ve removed the emotion factor as much as is possible. We’re ready to trade. This concludes our discussion of choosing a system and stock to trade. Remember these points: • • • •
Mastering MetaStock
Load enough data for a valid test. Look for systems that beat buy-and-hold. Look for steady, up-trending equity lines. Limit your risks.
Introducing MetaStock and MetaStock Performance Systems • 21
Chapter 3 - Using the MetaStock Power Tools
Introduction Now that you know how MetaStock and MetaStock Performance Systems can improve your trading, we’ll show you, step-by-step, how to use each of MetaStock’s advanced features, the Power Tools. These tools contain the real power of MetaStock. Using MetaStock just to chart your prices and draw a trendline is like buying a luxury car and only sitting in it in the driveway. If you want powerful technical analysis to back up your trades, use the Power Tools! For our examples, we will use the Long Sell Short Sale-5 day (LSS) system.
Finding the MetaStock Performance System tools The MetaStock Performance Systems tools begin with “PS”.
The MetaStock Performance Systems tools are built into MetaStock. All of the MetaStock Performance Systems tools begin with “PS.” For example, the exploration to find stocks that show an Adaptive Moving Average System buy or sell signal is named “PS Adaptive Moving Average (Signal).” Not all of the MetaStock Performance Systems provide custom indicators. Many systems use only the indicators that are already built into MetaStock for their calculations. Some of the performance explorations associated with the MetaStock Performance Systems are available separately by purchasing the MetaStock Performance Systems Plus plug-in. Check the descriptions in chapter four to find out what’s included with each system.
Choosing a Time Period How many time periods should you load? This is a more important issue than it may appear. You want to load enough data to get a good look at the long-term trend. Two to three years is usually a fair choice. If you’re looking at long-term investments, you may want to look even further into the past. Whatever time periods you choose, you should be consistent across each of the tools. If you load 500 periods in your chart, load 500 periods in your explorations, also. If the time period is different in your explorations, the results may not agree with your system test.
Mastering MetaStock
Using the MetaStock Power Tools • 23
Opening a Chart Before we can apply any of the tools, let's open a chart. If you know which security you want to trade, go ahead and open that chart. We’re going to use Exxon Mobil in our example. 1.
Click on the File Open icon, or choose Open from the File menu.
2.
Choose Load Options from the Options menu in the Open dialog.
3.
Enter the number of periods you would like to be displayed in your charts. Or (if you prefer), select Prompt for dates when chart is opened if you’d like to choose different time periods or dates for each chart. We’ll choose this option for our example. Whatever option you choose will be the default for all charts.
4.
Click OK.
5.
Select the folder containing the security you want to open. If you’re using online data with DataOnDemand™, choose the data vendor shortcut from the shortcut bar. If you’re using local data, choose the Local Data shortcut from the shortcut bar, then navigate to the appropriate folder. We’ll choose the data vendor shortcut. Select the folder containing the security you want to open.
6.
Type the symbol of the security you want to look at in the Symbol field, and press the Enter key to open the chart. We know the name of our security, so we choose View by Name in the Options menu, and then enter Exxon Mobil in the Security Name field. Or if you see your security in the list, you can double-click on it to open the chart.
MetaStock Help – Open Dialog File Open icon
MetaStock Help – DataOnDemand Online data is accessed through the internet or other online resource. Local data is stored on your hard drive.
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7.
If you chose the Prompt for dates when chart is opened option in the Load Options dialog, the following dialog appears.
8.
Enter the number of periods to load, or a specific date in the past. We’ll enter a date 20 years in the past so we can look at the long-term trend.
9.
Click OK.
10. The following chart appears:
Now that’s what they mean by “the trend is your friend”! Exxon has been grinding higher for nearly 20 years. That’s a trend you want to be on the right side of. We’ve determined that the long-term trend is positive, but we don’t want to use the tools on 20 years of data. The more data you have loaded, the longer each calculation takes. Close this chart, and reopen with only 1000 periods (about four years) of data. Now we’re ready to use MetaStock’s advanced features, the Power Tools.
Mastering MetaStock
Using the MetaStock Power Tools • 25
Custom Indicators MetaStock Help – Plotting a Custom Indicator
The Indicator Builder allows you to build custom indicators of your own design, or enter indicators that you may find in a magazine or web site. Many of the MetaStock Performance Systems use custom indicators in their calculations. These indicators are included in MetaStock so you can see how the associated indicators look on a chart. They are for reference only, and are not necessary for your analysis.
Plotting a Custom Indicator The MetaStock Performance System's custom indicators are plotted using the Indicator QuickList on the Standard toolbar. 1.
Click the Indicator QuickList on the toolbar and scroll the list until the indicator PS Long Sell Short Sale-5 day appears. (This indicator appears in a second alphabetical listing at the bottom of the QuickList.)
2.
Position your mouse pointer over the small icon to the left of the indicator. Notice that the mouse pointer changes to a hand.
Cursor
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3.
Click and hold the left mouse button and drag the indicator until you have it positioned on any title bar within the chart. Notice that the mouse cursor changes its appearance when it is over the title bar.
Cursor
4.
Mastering MetaStock
Drop the indicator by releasing the mouse button. The following illustration shows the indicator in the chart.
Using the MetaStock Power Tools • 27
The Enhanced System Tester All 26 MetaStock Performance Systems include a system test free with MetaStock. The Enhanced System Tester allows you to back-test a trading system to determine its past profitability. Past performance does not guarantee future results, but as you learned in chapter one, stocks tend to follow trends or patterns that can help predict the future. The Enhanced System Tester can show you how profitable a system was in the past, so you can decide how risky future trades may be. If a system did not perform well in the past, you would not want to risk your money on future trades.
Notes: • The Enhanced System Tester should not be used to generate current trading signals. To find out if any signals have been generated by the current data, attach the expert for your system (see page 41). • If you use a delay the results will not match the other tools.
To Use the Enhanced System Tester 1.
Choose Enhanced System Tester from the Tools menu, or click the Enhanced System Tester icon.
2.
In the Systems list (the left panel), scroll down and select the PS Long Sell Short Sale-5 day (LSS) system.
3.
Click the New Simulation button (at the bottom of the Enhanced System Tester). The simulation wizard appears.
4.
The first dialog in the wizard is the Select Systems dialog. Make sure PS Long Sell Short Sale 5 Day is highlighted.
Enhanced System Tester icon
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5.
Click Next. The Select Securities dialog appears.
6.
Click the Add Securities button. The Add Securities dialog appears; here you can select any number of local or online securities.
7.
Type XOM in the Symbol field. (XOM is the symbol for Exxon Mobil.) and click Open.
8.
Back in the Select Securities dialog, click the Dates button. The Simulation Dates dialog appears.
9.
Select Use price data from the last ___ available periods and enter 500 in the blank. Click OK.
10. Click Next. The System Testing Options dialog appears.
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Using the MetaStock Power Tools • 29
11. When you run a system test, you can factor in your specific trading conditions such as initial equity, commissions, and margins. To get an accurate calculation of past profit, the System Testing Options should be set to match, as closely as possible, the way that you would have traded the system. To get a general idea of how well a system works with a stock, you can run a basic test with no options. Then, if the system was profitable, you can set your specific options to get a more accurate calculation. 12. In the Trading section at the top of the dialog, select Points only test. 13. In the Portfolio section in the center of the dialog, select Long. 14. Click Next. The Begin Trading Simulation dialog appears.
15. Type LSS in the field under the words: The System Tester will now perform the simulation. 16. Click Start. The Perform System Test wizard closes, and a small window appears, showing you details about the simulation's progress. A blue bar next to a dollar sign in the lower right corner of the MetaStock workspace also indicates the test’s progress. 17. When the test is complete, click View Results.
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Results from the Systems Tests After you've run the test, click the View Results button. Notice that the View Results button disappears after thirty seconds or so if you don't click it. If it disappears, return to the Enhanced System Tester and click the All Systems folder at the top of the Systems List (the left section), then double-click LSS in the Trading Simulations List (the lower right section). This opens the Summary Report in the Result Details View screen.
Note: Your results may differ from these, but the basic concepts still apply. The Summary Report shows (among other things) the profit, the percent gain, the total number of trades, and the number of winning and losing trades. In our example, the Profit was 30.1437 points, with 58 trades. Scroll down a little and you'll see that 43 of the trades were profitable, and 15 were unprofitable. Our total net profit of 30.1437 compares very favorably with the buy-and-hold profit of 4.2850. Scrolling down in the Summary Report dialog, we see the average winning trade was 1.1183 points, or $111.83 if you are trading 100 shares. There were 43 winning trades, lasting an average of six days each. The losing trades were slightly bigger, an average of 1.1961 points, or $119.61 for 100 shares, but there were only 15 losing trades. They lasted, on average, fifteen days. There are 4 other tabs in the System Report dialog: • • • •
Mastering MetaStock
The Orders tab details every order that the system observed. The Positions tab details every position opened during the test. The Equity tab shows the day-by-day change in equity. The System tab shows the rules for the system, along with the stops and the testing options.
Using the MetaStock Power Tools • 31
Arrows and Equity Line While viewing the Summary Report, click the Plot on Chart button, and close the Enhanced System Tester. The security's chart appears with an equity line and buy and sell arrows are plotted on the chart. The most desirable equity line is one that shows a good, steady upward trend. Less desirable would be an upward but volatile line, and obviously worse would be a declining line. In our example, we’ve got a great equity line (in the upper window). There were so many trades that the “Buy” arrows are hard to see.
Cleaning Up the Chart Before you continue, you should remove all unwanted buy and sell signals from your chart. 1.
Choose Delete All from the Edit menu.
2.
Check Symbols in the Delete All dialog. All other options should remain unchecked.
3.
Click OK.
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The Explorer MetaStock Help – The Explorer Dialog Explorer icon MetaStock Help – Online Cache Local Securities
All 26 MetaStock Performance Systems include a signal exploration free with MetaStock. Ten of the systems include a performance exploration free with MetaStock. The performance explorations for the remaining 16 systems are available in the MetaStock Performance Systems Plus plug-in. A signal exploration looks for stocks that have generated buy or sell signals. A performance exploration is similar to a system test. It displays the performance of the given system versus a buy-and-hold strategy. The Explorer works with online and local data, but runs faster on local data.
Selecting the Stocks Which stocks should you include in your exploration? It depends on your system. A short-term system that catches very small moves would work best on the largest, most liquid stocks. The S&P 100 stocks are good examples of this type of stock, so we will use the S&P 100 for our example. A longer-term system designed to catch larger moves could be applied to a broader database of stocks such as the S&P 500, or even the entire database of U.S. stocks, available on the MetaStock Data CD. Try the performance exploration on different stocks, and see which stock shows the best results. You can filter out stocks that don’t meet price, volume, or other criteria (see page 38).
Setting Exploration Options MetaStock Help – Exploration Options
Explorer icon
Mastering MetaStock
When running an exploration, you should load at least 500 records to generate reliable results. More records require more time to calculate, however, so don’t be surprised if a 20-year scan takes several hours. Remember to be consistent with the number of time periods you load on your charts or your results will not match the Enhanced System Tester. 1.
Choose The Explorer from the Tools menu, or click The Explorer icon.
2.
Click the Options button in The Explorer dialog.
3.
Enter the number of records to load. We’ll enter 1000 records (about 4 years) for our example.
4.
Click OK.
Using the MetaStock Power Tools • 33
Running an Exploration We’ll run our performance exploration first. A performance exploration tells us how the system has performed versus buy-and-hold on a group of stocks. We can get an idea of how well our LSS system has done on other stocks, besides Exxon Mobile. 1.
Select the PS Long Sell Short Sale-5 Day (Perf) exploration.
2.
Click the Explore button. The Select Securities dialog appears.
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3.
Click Add Securities.... The Add Securities dialog appears.
4.
Double-click the folder titled Stocks - Co..., and then double-click the folder titled S & P 100.
5.
Click the Tools button and then click Select All.
6.
Click Open.
7.
Click OK to start the exploration.
8.
After the exploration is complete, click the Reports button in the Exploration Completed dialog to get a complete report of the results.
Using the MetaStock Power Tools • 35
Performance Exploration Results MetaStock Help – Results Report
The Exploration Report dialog has three tabs across the top – Results, Rejects, and Exploration. The Rejects tab displays any securities that were rejected by the exploration filter, and why. The Exploration tab shows the options that were used in the exploration. The Results page displays the following columns. L Point – the number of points gained per share on long trades over the time period specified. S Point – the number of points gained per share on short trades over the time period specified. LS Point – the total number of points gained per share on both long and short trades over the time period specified.
The trade efficiency measures the performance of a system versus buy-andhold.
L Perf – the performance, as measured by the trade efficiency, of the long trades. S Perf – the performance, as measured by the trade efficiency, of the short trades. LS Perf – the performance, as measured by the trade efficiency, of all trades. Note: Points are not the same as percents. If a system gained, say, 5 points, that would be a $5 gain for a stock, which might be a move from $10 to $15, or a move from $100 to $105. If you’re trading 100 shares, 5 points is a gain of $500. The results are sorted by security name by default. We want to see the best performers at the top of our list. We want to sort by L Perf, since we are only taking long positions, and we want to know how well the system did versus buy-and-hold. To sort the list by the L Perf column, we click on the column heading. Clicking once sorts in ascending order, so we click again to sort in descending order.
To get an idea of how the system did on all of the stocks, scroll down the list (with the scrollbar on the right) until the L Perf column shows a negative value. In this example, it occurs about 3/4ths of the way down the list, which tells us 36 ❖ Using the MetaStock Power Tools
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that the system was better than buy-and-hold on about 3/4ths of the securities in the S&P 100. That’s an excellent result. You can get more information on the exploration with the buttons on the right: • • • • •
The Inspect button allows you to view the day-by-day results. The Open Chart button will open the selected chart or charts. The Sort button allows you to sort by up to three different columns. The Print button will print out the results. The Save List button will save the securities into a list. This list could then be used as the source for a later exploration.
Trade Efficiency The crux of the testing process is the trade efficiency. If a system’s profit per day in a trade exceeds the buy-and-hold profit per day, that system will have a positive trade efficiency. For example, if a system was in a position for 250 of 1,000 possible days, and it gained 250 points, it gained a dollar per share per day. If buy-and-hold gained 250 points in those same 1,000 days, it only earned 25 cents per share per day, so the trade efficiency would be .75 (1.00 minus .25), even though both systems gained the same absolute amount. The key is that the system managed the same profit in 25% of the time as buy-and-hold, so your money was freed up 75% of the time for other trades. A positive trade efficiency does not mean that a system was profitable; it means a system outperformed buying and holding that security.
Signal Explorations Results To run the signal exploration, follow the instructions in the Running an Exploration section above, but choose the PS Long Sell Short Sale-5 Day (Signal) exploration instead. The Signal exploration will display a list of all securities that generated a buy or sell signal on the current bar. The following columns are displayed in a signal exploration report: Longs – will show a 1 if the Enter Long condition is met, otherwise 0. Shorts - will show a 1 if the Enter Short condition is met, otherwise 0. If you get too many results from a Signal exploration, add additional filters (see the next section).
Mastering MetaStock
Using the MetaStock Power Tools • 37
Running the LSS signal exploration gives us the following results:
There were 12 possible buys, and two possibilities for selling short. Let’s add another filter so we don’t have so many stocks to look at.
Adding an Additional Filter MetaStock Help – Filter Syntax
For systems that return a large number of results, additional filters can be used such as a price or volume limit. For our example, we only want to trade the biggest, most liquid stocks. So we’ll add a filter that requires the average volume over a 50-day period to be at least five million shares per day, and the price to be greater than $5 per share. 1.
The PS Long Sell Short Sale-5 day (Signal) exploration should still be selected. If not, select it, and then click the Edit button.
2.
Select the Filter tab. The current filter is ColA or ColB, which screens out stocks that don’t show a 1 in either column A or column B.
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3.
Add the volume requirement. In English-like terms, we would say “ColA or ColB and High Volume.” The problem is that MetaStock doesn’t know if you want the “or” evaluated first, or the “and.” To clarify the rules, we will start by putting parenthesis around “ColA or ColB.” The formula should now look like this: (colA OR colB)
4.
Now add the following to the filter: AND mov(volume,50,simple) > 50000.
5.
This breaks down as: and = this condition must also be true mov(
=
calculate a moving average
volume
=
of the volume
50
=
for the last 50 days
simple)
=
make it a simple moving average
50000
=
the volume must be greater than 5 million shares (volume is reported in 100’s by Reuters DataLink, our data provider)
The formula should now look like this: (colA OR colB) AND Mov(VOLUME,50,SIMPLE) > 50000
6.
Mastering MetaStock
Add the filter that excludes any stocks that are less than $5. This filter would simply be and Close > 5.
Using the MetaStock Power Tools • 39
7.
The formula should now look like this: (colA OR colB) AND Mov(VOLUME,50,SIMPLE) > 50000 AND CLOSE > 5
8.
Click OK to save your changes.
9.
Click Explore to re-run the exploration with the new filters.
10. This time, the results only show two buy signals – General Electric and Bristol Meyers Squibb. Let’s look at these two charts. 11. Click on General Electric, then control-click on Bristol Meyers to select them both. 12. Then click Open Chart to open both charts. 13. Launch the Enhanced System Tester and run the LSS system test on both charts. Now we can compare equity lines and system test results and make a decision on what to trade.
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The Expert Advisor MetaStock Help – Expert Advisor Dialog Expert Advisor icon
All 26 MetaStock Performance Systems include an expert free with MetaStock. The Expert Advisor automates your trading system by applying your system’s rules to the latest data every time you open the chart. If a signal is generated, an alert will appear, and an arrow will point out the signal on the chart. For more detail on a signal, read the expert commentary. Experts must be attached to your chart, and only one expert can be attached to a chart at a time. When you first attach an expert, the system will be applied to all the data in the chart. In the future, when you open the chart with the expert attached, alerts will only be generated for the latest data. Signals will still appear for all the data. Features of the MetaStock Performance Systems experts include: • Symbols – buy and sell signals are pointed out on the chart with arrows. • Highlights – the price bars are colored green while in long positions, and red while in short positions. • Alerts – a dialog will pop up notifying you of any buy and sell signals. • Commentary – a description of the buy and sell signals.
Attaching an Expert 1.
Choose Expert Advisor from the Tools menu, or click the Expert Advisor icon on the toolbar to attach an expert to an open chart. If your chart is not open, see page 24 for more information on opening charts.
2.
Select the PS Long Sell Short Sale-5 Day expert.
3.
Click the Attach button.
Expert Advisor icon
Mastering MetaStock
Using the MetaStock Power Tools • 41
4.
Click the Close button. The expert is now attached to the chart.
Editing an Expert MetaStock Help – Creating an Expert
What if you only want to take long positions, and don’t want any signals displayed for short positions? Editing the expert to display only long signals is simple. 1.
Choose Expert Advisor from the Tools menu, or click the Expert Advisor icon on the toolbar.
2.
Select the PS Long Sell Short Sale-5 Day expert.
Expert Advisor icon
3.
Click the Edit button. The Expert Advisor dialog shows six tabs across the top – Name, Trends, Commentary, Highlights, Symbols, and Alerts. We will edit the Highlights, Symbols, and Alerts tabs.
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4.
Mastering MetaStock
Select the Highlights tab. Deselect the box next to Shorts.
5.
Select the Symbols tab. Deselect Enter Short and Exit Short.
6.
Select the Alerts tab. De-select Enter Short and Exit Short.
7.
Click OK to accept your changes.
8.
Click Close to dismiss the Expert Advisor dialog. The following illustration shows the changes to the chart. Now that we have removed the short positions, instead of a down-arrow terminating the long trades (and initiating a short trade), we have an exit sign.
Using the MetaStock Power Tools • 43
Viewing the Commentary 1.
Select Expert Commentary from the View menu.
2.
The commentary will appear as shown below. Any signals for today will be explained, along with a brief description of the system.
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Trading Basics Trading is a risky business, but there are some steps you can take to increase your odds of being successful. This is not a thorough discussion of trading, but just a few tips to point you in the right direction. • If you’ve never traded before, paper-trade for a while. Go through all the motions of trading, but instead of placing the actual order, just write your trades on a piece of paper. Or use one of the virtual trading web sites available on the internet. Be honest with your entry and exit points! You may be surprised at how hard it is to keep up with a trading system. • Find a trading system that matches your trading style, your risk tolerance, and the markets you want to trade. If you can’t spend too much time following the market, and are risk averse, take only long positions in a system with a low number of trades. Use a tight stop, and maybe check the fundamentals of a stock before you buy it. If you want to trade daily and are a risk-taker, find a system that generates frequent signals. Your positions may have more volatile swings, but you may get a better return. • Determine your stop levels (the most you are willing to lose) before placing a trade. The worst feeling in the world is watching a stock move far past a stop point you ignored in the heat of battle. • During the testing of the systems, it was found that only taking long positions in stocks, and not taking short positions, generally increased performance. This could be due to the natural inclination of stock prices to rise. There are also other difficulties that go along with shorting stocks – it can be tough to borrow shares, you can’t short a falling stock, you can be forced to cover even if you don’t want to, you have unlimited risk, and limited gain, etc. These factors should be considered when deciding on whether or not to take short positions. • Trade only money you can afford to lose. Trading is stressful enough without the added stress of trading the rent money. • Only place a small percentage of your trading account into any one trade. Don’t let a bad trade zero out your account. • Take a logical, disciplined approach to trading (that’s what the MetaStock Performance Systems are for). Don’t buy Nike stock just because you spend so much money on your kids’ tennis shoes. • Learn as much as you can about trading.
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Using the MetaStock Power Tools • 45
Disclaimer Securities trading is an imperfect science. The following factors should be considered.
The future may not resemble the past There’s no guarantee that a security’s future price action will resemble its past price action.
Trading involves risk You can lose some or all of your money. There’s no guarantee that future results will match the Enhanced System Tester results.
Commissions and slippage The performance explorations only calculate points gained by a system, and make no allowance for commissions, slippage, taxes, or other factors. A promising system should be confirmed by running a system test with the testing options set to your individual situation.
Positive trade efficiency A positive trade efficiency does not mean that a system was profitable; it just means that it beat buy-and-hold.
No Endorsement by Authors Most of these systems are based on indicators developed by well-known technical analysis gurus, but they did NOT develop these systems. Many systems are variations of systems advocated by these gurus. These systems are in no way endorsed or accepted by such authors. If no author is mentioned, the system is an original system by the Trading Systems Analysis Group.
Not an Offer Nothing in this manual constitutes an offer or a solicitation to buy or sell any securities mentioned, but rather it is a guideline to interpreting the specified analysis methods. This information should only be used by investors who are aware of the risk inherent in securities trading. Equis International and Trading Systems Analysis Group accept no liability whatsoever for any loss arising from any use of this product or its contents.
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Chapter 4 - New Features in MetaStock 10
Introduction Several useful new features have been added to MetaStock 10. This chapter explains some of them briefly. These features are explained in detail in the chapter titled “New Features and Changes in MetaStock 10” in the MetaStock User Guide, and in the online help.
New Data CD MetaStock 10 includes an updated Data CD, containing up to five years of data for Stocks Grouped by Sector, North American Stocks, S&P 500, NASDAQ 100, Futures, Indices, and Indicators. Installation of the Data CD is optional but strongly encouraged. This new Data CD, combined with MetaStock’s one-click “Update MetaStock Data” feature, makes the Enhanced System Tester and The Explorer more powerful and easy to use than ever. You can install this data on your local hard drive and use it for explorations and system tests. (System Tests and Explorations run much faster using local data instead of online data.) To install the data, insert the data CD into your CDROM drive. It should begin the installation automatically. If autoplay is disabled on your computer, navigate to the CD-ROM drive, explore it, and select setup.exe. Then just follow the on-screen instructions. You can also quickly update your local data by using the “Update MetaStock Data” feature. To use the Update MetaStock Data feature: 1.
In Windows, click Start.
2.
Click All Programs (or Program Files).
3.
Click Equis International.
4.
Click Update MetaStock Data. The DownLoader opens and automatically updates all the data files in your MetaStock Data folder. The new features include:
Mastering MetaStock
New Features in MetaStock 10 • 47
Major Changes To Line Studies • Added Extended Intraday Compression.· Fibonacci Projections Line Study • Added New Dynamic Trend Line Study
To The Explorer • Added additional Exploration Editor Tabs, allowing for more complex formulas • Improved report sorting
To Indicators • Added Rahul Mohindar Oscillator (RMO) System
To Functionality • Extended Intraday compression to 1439 minutes • Added FX Layouts to MetaStock Pro for QuoteCenter
Minor Changes • • • • • •
Enhanced the System Tester Improved usability for setting custom intervals Added periodicity selection from the X-Axis Properties dialog Added “Extend Right” option to Fibonacci Retracement line study Added marker for the base security’s “Last Trade Value” Dialog & Window Object Enhancements Many windows can now be resized (and these size changes saved), allowing you to see more data at a time. • The DownLoader now allows you to “Remove All Subfolders” This feature makes it easier and faster to deselect all the securities in a folder, including those in subfolders.
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Chapter 5 - Forex Systems
A set of Forex Experts and Templates specifically developed for the Forex market by Forex traders have been added to MetaStock.
FX Multiple Time Frame System This system is composed of one Template and two Experts.
Template: FX Multiple Time Frame.mwt – This template —when applied to a chart using the template’s periodicity— will display five charts with the following periodicities: Daily, 60-minute, 30-minute, 15-minute and 5-minute.
The Daily, 60-minute, 30-minute and 15-minute charts (1–4 above) display bar charts with an 8-period Relative Strength Index (RSI) overlaid on the price plot. They also have the *FX Multiple Time Frame Trend Expert attached. The 5-minute chart (b, at the bottom of the image above) displays a bar chart with an 8-period RSI and 50-, 12-, and 3-period Exponential Moving Averages overlaid on the price plot. It also has the *FX Multiple Time Frame Trend Expert attached.
To apply this template to an open chart 1.
Mastering MetaStock
Right-click on the current chart and choose Apply Template. Forex Systems • 49
2.
In the Apply Template dialog select the file named FX Multiple Time Frame.mwt.
3.
Check Use template’s periodicity.
4.
Click Open.
How to use this System This System uses multiple time frame charts to determine trends with a currency pair. This is an intraday system whose signals are generated on a 5-minute chart. It uses the Relative Strength Index (RSI) for the initial buy or sell signal and the MACD and Moving Averages to confirm the signal. After applying the template to a currency pair (EUR/USD for example), look first at the upper leftmost chart (^). This is the Daily chart and it has the *FX Multiple Time Frame Trend expert attached to it. The current trend is presented in the lower right corner of the chart and displays a green up arrow for an upward trend, or a red down arrow for a downward trend. If there is no distinguishable trend, no arrows will display. If the trend is up (a green “up” arrow) then only long trades should be considered. If the trend is down (a red “down” arrow) then only short trades should be considered. The charts marked _, `, and c have (respectively) 60-minute, 30-minute and 15-minute periodicity values. All of them have the same expert (*FX Multiple Time Frame Trend) attached and will also display a green up arrow or a red down arrow to indicate the trend for each time interval. The Daily chart (^) represents the overall trend of the currency pair with the other three charts giving confirming or non-confirming signals. If the three other charts display the same trend as the Daily chart then the trend is considered very strong. If the Daily chart trend displays in only one (or no) charts then the trend is considered weak. The 5-minute chart (_) is the “trade signal” chart. This chart has an additional expert (the *FX Multiple Time Frame Signals expert) attached to it. This expert will add buy and sell symbols to the chart and generate Alerts.
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Explanation of Symbols and Alerts The Symbols and Alerts available in the Forex system include:
Symbols: Buy – This symbol (O) is displayed on the chart if the RSI is below 30 and then trends upwards for three time periods. Once the buy symbol is plotted long trades should be considered. Sell – This symbol (P) is displayed on the chart if the RSI is above 70 and then trends downwards for three time periods. Once the Sell symbol is plotted short trades should be considered.
Alerts: MACD Buy Confirmation – This alert displays when the MACD has confirmed the buy signal. MACD Failed Buy Confirmation – This alert displays when the MACD has failed to confirm the buy signal. MACD Sell Confirmation – This alert displays when the MACD has confirmed the sell signal. MACD Failed Sell Confirmation – This alert displays when the MACD has failed to confirm the sell signal. RSI Flat Top – This alert displays when the RSI has flattened after an uptrend. This usually confirms the upward trend RSI Flat Bottom – This alert displays when the RSI has flattened after a downtrend. This usually confirms the downward trend 12 – 50 Cross Up – This alert displays when the 12-period Exponential Moving Average crosses above the 50-period Moving Average. This is considered a bullish signal. 12 – 50 Cross Down – This alert displays when the 12-period Exponential Moving Average crosses below the 50-period Moving Average. This is considered a bearish signal.
To use the Forex System When using the system, the trader should follow these steps: 1. Look for the Daily current trend. If the trend is up then only long trades should be considered; if the trend is down then only short trades should be considered. 2.
Look for Buy or Sell signals on the 5-minute chart.
3.
If one displays and follows the trend direction of the Daily chart then: a) Look at the trends of the other three charts to confirm the signal. b) Wait for Alerts to confirm the trend (MACD Confirmation, RSI Flats and 12-50 Cross).
IMPORTANT: Equis International is not a Registered Investment Advisory service. The experts included with MetaStock are for educational purposes and are to be used at your own risk. Equis International (or its partners) is not liable for the investment decisions you make based on information obtained from the Expert Advisor.
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FX Keltner Systems There are two FX Keltner Systems; *FX Keltner System 1 and *FX Keltner System 2. Both of these systems are composed of one Template and one Expert. The two Keltner Systems use “Keltner Channels” as their primary method of triggering signals. Keltner Channels are included in MetaStock as a new custom formula. Keltner Channels are explained in the book The New Commodity Trading System and Methods by Perry Kaufman and were first introduced in the book How To Make Money in Commodities, by Chester W. Keltner.
FX Keltner System 1 This system looks for very specific patterns that occur infrequently. It is not uncommon for this system to generate few signals. However, when signals do occur they are usually followed by sharp moves. FX Keltner 1.mwt – This template displays a Price Oscillator plus ADX and Keltner Channels with the Expert *FX Keltner System 1 attached. *FX Keltner System 1 – This Expert uses Keltner Channels, the Price Oscillator, and the ADX to generate and display buy and sell signals and to generate Alerts.
FX Keltner System 2 This system is similar to the FX Keltner System 1 except in place of the ADX it uses the r-squared indicator. This system gives more frequent signals than FX Keltner System 1. FX Keltner 2.mwt – This template displays the Price Oscillator, the r-squared indicator, and Keltner Channels with the Expert *FX Keltner System 2 attached. *FX Keltner System 2 – This Expert uses Keltner Channels, a Price Oscillator, and the r-squared indicator to generate and display buy and sell signals and to generate Alerts.
FX Pattern System The FX Pattern System is also composed of one Template and one Expert. This system works best on charts with 5-minute periodicity. It uses Bollinger Bands, Standard Error Bands, and the Stochastic Oscillator to generate signals. FX Pattern System.mwt – This template displays Bollinger Bands, Standard Error Bands and the Stochastic Oscillator indicator with the Expert *FX Pattern System attached. *FX Pattern System – This Expert uses Bollinger Bands, Standard Error Bands, and the Stochastic Oscillator indicator to generate display buy and sell signals and to generate alerts.
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Chapter 6 - Rahul Mohindar{xe "Rahul Mohindar Oscillator"} Oscillator System{xe "Rahul Mohindar Oscillator\: See also\\: RMO."}
The Rahul Mohindar Oscillator and its associated tools and indicators were developed by Mr. Rahul Mohindar of VIRATECH (viratechindia.com). In addition to being a trader and trainer, Mr. Mohindar is a panelist on both CNBC and CNN India. These set of tools and indicators and expert can be used across any timeframe for Stocks, Commodities and Forex. It is designed to work with Open/High/Low/Close (OHLC) bar charts only.
{xe "RMO Trade Model"}RMO Trade Model The RMO Trade Model consists of 4 key modules:
The RMO This module detects the primary trend of the instrument’s trading value.
{xe "RMO\: SwingTrader"}SwingTrader (Indicators & Expert) This module detects each swing within a trend and automatically places red (Sell) or blue (Buy) arrows on the price chart at these points.
{xe "RMO\: Sentiment Detector "}Sentiment Detector This module colors the OHLC chart bars red (bearish) or blue (bullish) indicating the prevailing sentiment
{xe "RMO\: Exit Swing Indicator"}Exit Swing Indicator This module is used only when registering a profitable trade as a trailing stop loss and works well as an exit signal.
RMO Indicator The RMO was developed to smoothen out multiple market swings, indicating a longer term major trend. Mastering MetaStock
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If the RMO is positive (above zero) you should look for blue Buy arrows with blue bars. If the RMO is negative (below zero) you should look for red Sell arrows with red bars.
{xe "RMO\: Swing TRD Indicators"}Swing Trade Indicators The three SwingTrd indicators are constantly measuring the strength of market swings. {xe "RMO\: Tracks minor (short-term) trends SwingTrd 1"}SwingTrd 1 {xe "RMO\: Tracks medium-term trends SwingTrd 2"}SwingTrd 2 {xe "RMO\: Tracks long-term trends (and is slower to change) SwingTrd 3"}SwingTrd 3
SwingTrd 2 and SwingTrd 3 are plotted in the same window. When they intersect (cross), it can result in a potential trend change as that is where strength is building or dropping for the stock. This can be easily detected with arrows on the price charts that are automatically plotted by the expert. When the SwingTrd 2 indicator goes above or below 0, it should be treated as the first indication of trend change or breakout; this can be easily viewed with red and blue bars with the RMO expert that has been provided. A more confirmed interpretation is to expect strength when the high of a blue breakout bar is crossed and weakness when the low of a first red down breakout bar is broken.
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The Sell (Red) arrows are actionable because they are confirmed by a red bar where the low is crossed.
None of the Buy (Blue) arrows are actionable because they are not confirmed by a blue bar where the High is crossed.
Notes: • You can trade on any one indicator; for example, you could just be using the RMO or only using Bar Colors. • Whenever taking a Trade, place a STOP at the nearest support or at least a few points below the level marked by the SwingTrd buy arrow. • The RMO Explorers can further help you detect instruments that have fresh opportunities, whether with a new Blue/Red bar or a Swing Trade Buy/Sell signal.
The Exit Swing Signal Once you take a trade and get into profit – or a trend sets in – you will want to use this indicator to mark where your trailing stop loss point should be set so that you exit your trades closer to the peak. Once you have entered into an instrument and are profitably into an established trend, you can exit longs below the low when the EXIT Swing Indicator leaves the over-bought region (where the ESI is below 75).
Using the RMO Below are two possible setups for using the RMO as a trading indicator. Although both of these are designed for indicating buys, they could easily be reversed to indicate sells.
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“Trade with the Trend” Setup Swing Trade:
BUY Arrow (Blue)
Sentiment:
BLUE Bars
Positive (Above 0) RMO: This setup is a strong buy trade as the primary trend is up, an up swing is setting in and also the sentiment is bullish. As we are trading in the direction of Primary Trend (RMO), this setup is even more accurate & reliable.
“Aggressive BUY Breakout” Setup Swing Trade:
BUY Arrow (Blue)
Sentiment:
BLUE Bars
RMO:
Negative (Below 0)
With this setup you are essentially expecting that the market sentiment will turn positive when you see the bars change to a blue color and the swing trade buy arrow shows up. However, as the primary trend (RMO) is still negative, you might want to consider trading in smaller amounts, a covered strategy, or just buy “call” options.
Interpretation of the RMO Model The four aspects of the RMO to be interpreted are discussed below.
The RMO This is an oscillator which clearly identifies whether the major (primary) market trend is positive or negative. If the RMO is positive —i.e. above the 0 Line— this indicates a probable strength and increases the indicator’s “Buy” preference. The converse (RMO below the 0 line) would indicate probable weakness, and so put more weight on “Sell” trades. Note: The shape size or curve of the RMO has no relevance; all that matters is whether it is above or below the 0 line.
The SwingTrader indicator This is a set of indicators for which every intersection/crossover signals a possible trade opportunity. Each signal is marked with an expert arrow, so you do not necessarily need to view the SwingTrd indicators directly. Use: The buy and sell arrows show up frequently, and you probably don't want to trade on every single one of them. To increase the number of valuable trades,
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consider making trades on the buy arrows only when the RMO is positive, and on the sell arrows only when the RMO is negative. For further safety, buy only above the High of the signal/arrow bar, and be sure to set a stop loss point —either at the previous bar’s low or when an identified support level is broken. Likewise, sell only below the low of a sell arrow bar, and set a stop loss above the previous bar’s high or the breaking of an identified resistance level.
Sentiment Detector This built-in expert colors your OHLC bars blue or red by evaluating the medium-term trend for strength and weakness. There are two ways to use these indications: •
•
A slightly aggressive trader might just trade on the bar colors, not integrating them with any other tools or indicators. As an example, such a trader would buy above the high of a blue breakout bar, and sell below the low of a red breakout bar. A position or longer-term trader would exit long either by seeing a combination of red bars and a red arrow, which is a hint that the trend may be turning negative, or by getting stopped out. HINT: You could integrate this with the RMO and SwingTrader Arrows as follows: TRADE when you get all three going the same direction (i.e. if the bars are blue, the RMO is positive, and you get a Buy arrow, you would buy).
Exit Swing Indicator This provides you with a profit-taking exit strategy*. Here is an example: If you are long on a stock and have got into an uptrend, each time the exit swing indicator slips below the red (75) line, look at putting in a trailing stop or exit below the low of the corresponding price bar. Likewise if you are short and are into a downtrend, every time the indicator crosses above the blue (25) level look at putting in a trailing stop or exit above the high of the corresponding price bar. CAUTION: This should not be used immediately after taking a trade. Mr. Mohindar recommends using the Exit Swing Indicator only after you have entered a trade and are profitably trending. He suggests partially exiting when you achieve an intermediate financial goal/target, and then using this indicator to trail your stops and/or exit at better levels.
* The Exit Swing indicator is lesser used and is recommended for fast profit taking and to active traders. Mastering MetaStock
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Chapter 7 - Descriptions of the MetaStock Performance Systems Introduction To help you decide which MetaStock Performance System is best for you, this section describes each of the systems. Each section includes a brief description of the system’s strategy, a description of the signal requirements, trade characteristics to let you know how often the system trades, and a list of material for further reading. Note: Replication and distribution of any MetaStock Performance Systems formulas is a violation of your license agreement. Do not use the Formula Organizer to export and distribute these systems.
Description This section contains a short description of the system. Notice that most systems are a minor or major variation of the original system developed by the author. For example, the PS CCI system uses a “+/- 200” level, rather than the traditional “+/- 100” level developed by the author, Donald Lambert. These variations are a result of back-testing many variations of the standard systems.
Signals This section shows the conditions for entering and exiting short and long positions. Not all systems take short positions. Most of the time, the “enter long” and “exit short” signals are the same, as are the “enter short” and “exit long” signals. In that case, the system would be in a trade 100% of the time if you were trading both long and short positions. Some systems have different exit criteria, and are only in the market part of the time.
Trade Characteristics The MetaStock Performance Systems were tested on a variety of stocks, including volatile and non-volatile, up-trending, down-trending, and sideways moving. The trade frequency is a result of those tests. The frequency shown assumes both long and short positions are taken, and trades are entered at the close with no delay.
Further Reading This section cites any further reading relevant to that system or that author.
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The Systems • Adaptive Moving Average • Bull Power Bear Power 1 • Bull Power Bear Power 2* • Bull Power Bear Power 3 • CCI (Commodity Channel Index) • Chande Forecast Oscillator* • CMO Reversal • Consolidation Breakout • Cooper 1234 Pattern • Cycle Progression • Dynamic Momentum Index 1 • Exponential Moving Average* • Fractal Trading System 1 • Fractal Trading System 2 • Long Sell Short Sale – 5 Day* • MACD Histogram 1 • MACD Histogram 2 • Meisels Overbought/Oversold* • MESA Sine Wave* • Pattern Trading System 1* • Percentage Crossover 3% • Projection Oscillator 1* • StochRSI • Swing Index* • Vertical Horizontal Filter • Volatility Breakout (Chaikin) *
* The performance exploration for this system is included free with MetaStock. Mastering MetaStock
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Adaptive Moving Average Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in. A custom indicator is available for this system
The Adaptive Moving Average (AMA) was developed by Perry Kaufman. The AMA is designed to adjust its sensitivity depending on the market’s trendiness. A sideways market with a lot of noise requires a longer-term moving average than a trending market. The AMA varies the number of time periods in the moving average depending on the trendiness of the market.
Signals • Enter long/close short when the AMA changes direction from falling to rising. • Close long/enter short when the AMA changes direction from rising to falling.
Trade Characteristics The AMA system produces a trade about once every four to six days, making it appropriate for short-term traders. The system is always in a trade if you are taking both long and short positions.
Further Reading Trading Systems and Methods. (Wiley Trading Advantage Series) John Wiley and Sons, Inc. 1998 Smarter Trading: Improving Performance in Changing Markets. McGraw-Hill. 1995
Bull Power Bear Power 1 Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Bull Power Bear Power systems are based on the concept of Bull Power and Bear Power developed and introduced by Alexander Elder. Bull Power is calculated by subtracting a 13-period exponential moving average from the high price. This is typically displayed as a histogram oscillating above and below the zero line. A higher reading above the zero line gives strength to the Bull Power. Bear Power is calculated by subtracting a 13-period exponential moving average from the low price. This is also typically displayed as a histogram oscillating above and below the zero line. A lower reading below the zero line gives strength to the Bear Power.
Signals • As long as the Bull Power is stronger above the zero line than the Bear Power strength is below the zero line (i.e., the Bull Power is greater than the absolute value of the Bear Power), then a long position is maintained. • If Bear Power strength below the zero line is greater than the Bull Power strength above the zero line, then a short position is maintained.
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Trade Characteristics The Bull Power Bear Power 1 system produces a trade about once every week or two. The system is always in a trade if you are taking both long and short positions.
Further Reading Trading for a Living: Psychology, Trading Tactics, Money Management. (Wiley Finance Editions) John Wiley and Sons, Inc. 1993 Study Guide for “Trading for a Living: Psychology, Trading Tactics, Money Management”. (Wiley Finance Editions) John Wiley and Sons, Inc. 1993
Bull Power Bear Power 2 Description The performance exploration for this system is included free with MetaStock
See Bull Power Bear Power 1 (page 60) for an explanation of Bull Power and Bear Power. The Bull Power Bear Power 2 system doesn’t look at Bull Power/Bear Power directly. Instead, it looks at the 5-period linear regression slope of Bull Power and Bear Power to determine which one is gaining strength. Whichever one is showing a gain in strength is the position that it takes.
Signals • Enter long/close short when the 5-period linear regression slope of Bull Power is increasing while the same slope of Bear Power is decreasing. • Enter short/close long when the 5-period linear regression slope of Bull Power is decreasing while the same slope of Bear Power is increasing.
Trade Characteristics The Bull Power Bear Power 2 system produces a trade about once every two to four days, making it appropriate for extremely short-term traders. The system is always in a trade if you are taking both long and short positions.
Further Reading See Bull Power Bear Power 1
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Bull Power Bear Power 3 Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
See Bull Power Bear Power 1 (page 60) for an explanation of Bull Power and Bear Power. The Bull Power Bear Power 3 system looks at whether Bull Power and Bear Power are able to maintain strength, and takes a position when that strength fails.
Signals • When the Bear Power comes down to a trough and then moves up again, this system will wait for the next movement down. If the Bear Power fails to come down to as low as the first trough does, this is viewed as the Bear Power losing strength and a long (Bullish) position is taken. Both troughs need to occur below zero for the entry to be valid. • When the Bull Power comes up to a peak and then moves down again, this system will wait for the next movement up. If the Bull Power fails to come up to as high as the first peak does, this is viewed as the Bull Power losing strength and a short (Bearish) position is taken. Both peaks need to occur above zero for the entry to be valid.
Trade Characteristics The Bull Power Bear Power 3 system produces a trade about once every two to four weeks. The system is always in a trade if you are taking both long and short positions.
Further Reading See Bull Power Bear Power 1
CCI (Commodity Channel Index) Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Commodity Channel Index (CCI) was developed by Donald Lambert. Despite the name, this indicator is suitable for stocks as well as commodities. Mr. Lambert suggests using the CCI as an overbought/oversold indicator with +100 being overbought and -100 being oversold. The system included with MetaStock is based upon a further analysis determining that +/- 200 produces a more significant reversal signal and therefore is more ideal. While it is very good at capturing profits on the majority of trades, no loss protection mechanism has been put into place. Stop-loss orders should be used to prevent the few failing trades from removing all acquired profits.
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Signals • Enter long/close short when the 14-period CCI falls below –200. • Enter short/close long when the 14-period CCI rises above +200.
Trade Characteristics The CCI system produces a trade about once every ten to twenty weeks. The system is always in a trade if you are taking both long and short positions.
Further Reading Futures magazine, October 1980
Chande Forecast Oscillator Description The performance exploration for this system is included free with MetaStock
The Forecast Oscillator (FO) was designed by Tushar Chande and is calculated by subtracting the closing price from the linear regression indicator, and then displaying that as a percentage. Mr. Chande recommends using a crossover of a 3-period moving average of the FO as a signal that a trend in the direction of oscillator movement may be imminent. The forecast oscillator must be positive for a buy, or negative for a sell, to prevent late entry.
Signals • Enter long/close short when a 14-period Forecast Oscillator crosses above its 3-period moving average and it is in positive territory. • Enter short/close long when a 14-period Forecast Oscillator crosses below its 3-period moving average and it is in negative territory.
Trade Characteristics The FO system produces a trade about once every one to three weeks. The system is always in a trade if you are taking both long and short positions.
Further Reading The New Technical Trader: Boost Your Profit by Plugging Into the Latest Indicators (With Stanley Kroll). (Wiley Finance Editions) John Wiley and Sons, Inc. 1994 Beyond Technical Analysis: How to Develop and Implement a Winning Trading System. (Wiley Finance Editions) John Wiley and Sons, Inc. 1997
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CMO Reversal Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Chande Momentum Oscillator (CMO) was developed by Tushar Chande as a stand-alone momentum indicator. The CMO Reversal system looks specifically for the CMO to turn up from down-trending momentum to enter a long position. As soon as the CMO reverses, the long position is exited and a short position is entered. This places the trades in the direction of the momentum of the security (except for the initial day of the reversal of the CMO).
Signals • Enter long/close short when the current 13-period CMO is above the previous CMO, and the previous CMO is below the bar before that (i.e., the CMO has formed a bottom and is reversing up). • Close long/enter short when the current 13-period CMO is below the previous CMO, and the previous CMO is above the bar before that (i.e., the CMO has formed a top and is reversing downwards).
Trade Characteristics The CMO system produces a trade about once every one to three days, making it appropriate for extremely short-term traders. The system is always in a trade if you are taking both long and short positions.
Further Reading See Chande Forecast Oscillator.
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Consolidation Breakout Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Consolidation Breakout system uses John Bollinger’s Bollinger Bands and Welles Wilder’s Average True Range indicator. However, this system has no association with the methods of either author. The system looks for a narrowing Bollinger Band, indicating a decrease in volatility, and then looks for a breakout of the Band to signal a buy or sell.
Signals The Consolidation Breakout has a two-part signal. a) First, the Bollinger Band’s width must compress around the prices until the distance between the upper and lower bands is less than 1.75 times the 1-period Average True Range. Once you have a compressed band: b) Enter long if the price breaks above the upper Bollinger Band. c) Enter short if the price breaks below the lower Bollinger Band. d) Exit long when the price crosses below a 20-period simple moving average. e) Exit short when the price crosses above a 20-period simple moving average.
Trade Characteristics The Consolidation Breakout system produces a trade about once every four to six weeks. Trades generally last about two to four weeks. Since the exit signals differ from the entry signals, the system is in the market about 30%-40% of the time.
Further Reading Technical Analysis of Stocks & Commodities magazine, February 1992
Cooper 1234 Pattern Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Cooper 1234 Pattern system is based on Jeff Cooper’s 1-2-3-4’s trading system. It establishes that a trend exists and then waits for a pullback so that it can take a position for a trend continuation. While the setup is the same as the 1-2-34’s, this system differs in that the entry is immediate (since the trend has already been identified). Also, the trailing stop has been designated (for long positions) by the price crossing below the previous day’s low (assuming that the position moved in favor of the trade). The reverse would be true for short positions. While it can be very good at capturing profits on the majority of trades, no loss protection mechanism has been put into place if the trade immediately moves against you. Stop-loss orders should be used to prevent the few failing trades from removing all acquired profits.
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Signals • For a complete description of the signals, please refer to Mr. Cooper’s books, listed under “Further Reading”.
Trade Characteristics The Cooper 1234 system produces a trade about once every ten to twenty weeks. Most trades last about one or two weeks. The system is in a trade less than 10% of the time, so the most appropriate strategy would be to apply the system to a basket of stocks.
Further Reading Hit and Run Trading: The Short-Term Stock Traders’ Bible. M. Gordon Publishing Group. 1996 Hit and Run Trading II: Capturing Explosive Short-Term Moves in Stocks. M. Gordon Publishing Group. 1998 Hit and Run Lessons: Mastering the Trading Strategies. M. Gordon Publishing Group. 1999 The 5-Day Momentum Method. M. Gordon Publishing Group. 1999
Cycle Progression Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in
The Cycle Progression system is designed to anticipate short term swings in price activity. The system identifies when there are more down days than up days in the last 5 days and then enters a long position. It then exits and enters a short position on the reverse condition.
A custom indicator is available for this system.
This system is designed to capture very short-term cycles and should be used with caution. While it is very good at capturing profits on the majority of trades, no loss protection mechanism has been put into place. Stop-loss orders should be used to prevent the few failing trades from removing all acquired profits.
Signals • Enter long/close short when the number of down days exceeds the number of up days during the last five days. • Enter short/close long when the number of up days exceeds the number of down days during the last five days.
Trade Characteristics The Cycle Progression system produces a trade about once every four to six days, making it appropriate for short-term traders. The system is always in a trade if you are taking both long and short positions.
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Dynamic Momentum Index 1 Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Dynamic Momentum Index (DMI) is basically an RSI that automatically adjusts its own time period length as needed. Tushar Chande and Stanley Kroll developed the DMI.
Signals • Enter long when the DMI crosses below 30. However, rather than a typical exit rising above 70 and crossing below, a different approach is taken. If at any point in the trade the price crosses below the 5-period simple moving average (acting as a trailing stop), then the position is exited. The problem with this is that when the entry signal is given, the price is typically already below the 5-period simple moving average, so a protective measure is needed that exits the position before too many losses can occur but also gives enough time to cross above the moving average setting up a potential exit signal. This is accomplished by doing a price check. If in the third day of the position it is at a loss, then the position is exited. The reverse is true for short positions.
Trade Characteristics The DMI system produces a trade about once every three to five weeks. Trades generally last one to two weeks. The system is in the market 30%–40% of the time.
Further Reading The New Technical Trader: Boost Your Profit by Plugging Into the Latest Indicators. (Wiley Finance Editions) John Wiley and Sons, Inc. 1994 Beyond Technical Analysis: How to Develop and Implement a Winning Trading System. (Wiley Finance Editions) John Wiley and Sons, Inc. 1997 The Business One Irwin Guide to the Futures Markets. Irwin Professional Publishing. 1992 The Professional Commodity Trader. Traders Press. 1995
Exponential Moving Average Description The performance exploration for this system is included free with MetaStock
The Exponential Moving Average (EMA) system is an extremely fast follower of direction. Rather than try and determine a single optimum-length moving average crossover approach, it simply looks to see if a 2-period exponential moving average is moving upward or downward. If the 2-period EMA is greater than yesterday’s 2-period EMA, then it enters long. If the 2-period EMA is less than yesterday’s 2-period EMA, then it enters a short position. A good way to work with this type of fast moving system is to use protective stops. For this particular system, using the previous day’s low as a stop point (or previous day’s high if short) can help to prevent unnecessary losses.
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Signals • Enter long/close short when the current 2-period EMA is greater than the previous 2-period EMA. • Enter short/close long when the current 2-period EMA is less than the previous 2-period EMA.
Trade Characteristics The EMA system produces a trade about once every two to four days, making it appropriate for extremely short-term traders. The system is always in a trade if you are taking both long and short positions.
Fractal Trading Systems 1 and 2 Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
While there are many definitions for a “fractal” in securities trading, the definition used in these systems is a minor version of the type defined by Bill Williams, Ph.D., and his chaos-based trading methods. According to Bill Williams, an “up fractal” is defined as a middle bar with two lower highs on each side of it. A “down fractal” would be the reverse of that, which would be a middle bar with two higher lows on each side of it. These two systems are based on a very small fraction of Bill Williams’ complete trading system.
Signals • The Fractal 1 system enters a long position when the price crosses above the most recent up fractal. The position would be exited and a short position entered when the price crosses below the most recent down fractal. • The Fractal 2 system is identical except that rather than reversing a position upon the price crossing below the most recent down fractal, it exits upon crossing the low of the second most recent fractal back. No short positions are taken in the Fractal 2 system.
Trade Characteristics The Fractal 1 system produces a trade about once every two to four weeks; the Fractal 2 system produces a trade about once every six to ten weeks. The Fractal 1 system is always in a trade if you are taking both long and short positions. Since the Fractal 2 system doesn’t take short positions, it is in a position 50-70% of the time.
Further Reading Trading Chaos: Applying Expert Techniques to Maximize Your Profits. (Wiley Finance Editions) John Wiley and Sons, Inc. 1995 New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities. (Wiley Trading Advantage) John Wiley and Sons, Inc. 1998
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Long Sell Short Sale – 5 Day Description The performance exploration for this system is included free with MetaStock
A custom indicator is available for this system.
The ‘Long’, ’Sell’, ’Short Sale’ (LSS) indicator was developed by George Angell. It was designed as a 3-period indicator for day-trading purposes only, but here it is used as a 5-period indicator suitable for end-of-day (near end-of-day) purposes. Here it is treated as an overbought/oversold indicator. When the LSS indicator moves below .3, it is viewed as oversold. When it moves above .7, it is viewed as overbought. In general, this indicator (dependent upon what mode it is in at any given time) can be a leading/lagging indicator in reference to a same-period stochastic and —if desired— could be used with the same trading techniques. IMPORTANT: This system requires valid Open prices. While it can be very good at capturing profits on a large number of trades, no loss protection mechanism has been put into place if the trade immediately moves against you. Stop-loss orders should be used to prevent the failing trades from removing all acquired profits.
Signals Please refer to Mr. Angell’s books (listed below) for a description of the indicator.
Trade Characteristics The Long Sell Short Sale system produces a trade about once every one to three weeks. The system is always in a trade if you are taking both long and short positions.
Further Reading Sure-Thing Options Trading: A Money-Making Guide to the New Listed Stock and Commodity Options Markets. New American Library Trade. 1984 Winning in the Futures Markets: A Money-Making Guide to Trading, Hedging and Speculating. Probus Publishing Co. 1990 How to Triple Your Money Every Year with Stock Index Futures. Windsor Books. 1984 Real Time Proven Commodity Spreads: The 20 Most Consistently Profitable Low-Risk Trades. 1985
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MACD Histograms 1 and 2 Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in
A custom indicator is available for this system.
The MACD Histogram indicator was popularized by Alexander Elder. This system uses the histogram in the way that has been popularized for use by the regular MACD; it looks for divergences between the indicator and price. The MACD Histogram is calculated by subtracting the 9-period exponential moving average of the MACD from the MACD itself. A divergence in price is then detected against this indicator and a trade is entered in the direction of indicator movement with the belief that the price will shortly follow. Even though it is displayed here as a complete system and is functional as such, it is primarily designed as an entry method. A favorite stop-loss and exit strategy should be considered when using this system.
Signals MACD Histogram 1: • Enter long/close short when the MACD Histogram shows a positive divergence from prices (i.e., the Histogram makes new highs while prices fail to make new highs). • Enter short/close long when the MACD Histogram shows a negative divergence from prices (i.e., the Histogram makes new lows while prices fail to make new lows). MACD Histogram 2: • Enter long/enter short same as signal for MACD Histogram 1. • Close long when the MACD Histogram turns down. • Close short when the MACD Histogram turns up.
Trade Characteristics MACD Histogram 1 and 2 systems both produce trades about once every ten to twenty weeks. The MACD Histogram 1 system is always in a trade if you are trading both long and short positions. The MACD Histogram 2 system is in a trade 20%-30% of the time.
Further Reading Trading for a Living: Psychology, Trading Tactics, Money Management. (Wiley Finance Editions) John Wiley and Sons, Inc. 1993 Study Guide for “Trading for a Living: Psychology, Trading Tactics, Money Management.” (Wiley Finance Editions) John Wiley and Sons, Inc. 1993
70 ❖ Descriptions of the MetaStock Performance Systems
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Meisels Overbought/Oversold Description The performance exploration for this system is included free with MetaStock A custom indicator is available for this system.
Ron Meisels developed the Meisels Indicator as an overbought/oversold indicator that moves between +10 and -10 and is based on whether the market closed higher or lower than the previous trading day over the last 10 days. The original entry concept is maintained here with a long entry occurring when the indicator reaches –6 (oversold), and a short entry occurring when the indicator reaches +6 (overbought). In this case, an exit has been added when the indicator reaches a zero level from either direction. This produces a very good short-term approach to trading. The Meisels Overbought/Oversold system will work best on securities that are cycling, rather than trending. As with all overbought/oversold indicators and systems, even though it can be very good at capturing profits on a large number of trades, no loss protection mechanism has been put into place if the trade immediately moves against you. Stop-loss orders should be used to prevent the few failing trades from removing all acquired profits.
Signals • Enter long when the Meisels Indicator falls down to or crosses below -6 (this value would indicate that six of the last 10 trading periods showed a decrease in price). • Close long when the Meisels Indicator rises to or above 0. • Enter short when the Meisels Indicator reaches up to or crosses above +6. • Close short when the Meisels Indicator falls to or below 0.
Trade Characteristics The Meisels Overbought/Oversold system produces a trade about once every ten to fifteen weeks. The trade usually lasts one to four weeks. The system is in a trade 10%-20% of the time.
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MESA Sine Wave Description The performance exploration for this system is included free with MetaStock
The MESA Sine Wave indicator was developed by John Ehlers. The indicator itself is designed to determine if a security is in a cyclic or trending mode. However, the short time frame used in this system doesn’t really allow it to ever make that distinction. Instead, it tries to identify and take advantage of very short-term cyclic activity. Since the period being used is so short, the MESA Sine Wave is almost turned into a binary indicator with a very fast sensitivity to a change in direction. Trading can easily occur daily with this system.
Signals • Enter long/close short when the 2-period MESA Lead Sine indicator is less than the 2-period MESA Sine Wave indicator. • Enter short/close long when the 2-period MESA Lead Sine indicator is more than the 2-period MESA Sine Wave indicator.
Trade Characteristics The MESA Sine Wave system produces a trade about once every one to three days, making it appropriate for extremely short-term traders. The system is always in a trade if you are taking both long and short positions.
Further Reading Technical Analysis of Stocks & Commodities magazine, November 1996 MESA and Trading Market Cycles. John Wiley and Sons, Inc. 1992
Pattern Trading System 1 Description The performance exploration for this system is included free with MetaStock
A custom indicator is available for this system.
The Pattern Trading System 1 is designed to be used with stocks and stock indexes since it relies upon the inherent upward bias that stocks exhibit. The system follows the philosophy that ANY up movement becomes an entry signal, and any down movement following a valid up movement trend (two days or more of up movement) becomes a valid exit signal. While being a very fast system, it can also be an extremely profitable one. Since the upward bias is already accounted for, the system doesn’t take short positions. While it can be very good at capturing profits on a large number of trades, no loss protection mechanism has been put into place if the trade immediately moves against you. Stop-loss orders should be used to prevent the few failing trades from removing all acquired profits.
Signals • Enter long after two consecutive up bars. • Close long on the first down bar after at least two consecutive up bars.
Trade Characteristics The Pattern Trading System 1 produces a trade about once every one to two weeks. The trades typically last one to two weeks. Since the system takes no short positions, the system is in a trade about 60%-70% of the time. 72 ❖ Descriptions of the MetaStock Performance Systems
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Percentage Crossover 3% Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Percentage Crossover system enters a trade after a security has moved up 3%, and exits a trade after the security has moved down 3%. It is thus a trendfollowing indicator. Using a percentage allows the indicator to be tailored to the price of the individual security. The disadvantage is that if the price begins to cycle consistently the system will have excessive trading whipsaws.
Signals • Enter long/close short when the security moves up 3%. • Enter short/close long when the security moves down 3%.
Trade Characteristics The Percentage Crossover 3% system produces a trade about once every three to six days (more often for volatile stocks, less often for stable stocks). The system is always in a trade if you are taking both long and short positions.
Projection Oscillator 1 Description The performance exploration for this system is included free with MetaStock
The Projection Oscillator is basically a slope-adjusted Stochastic developed by Mel Widner, Ph.D. It’s an indicator that identifies its position relative to the Projection Bands. For this system, rather than trade the oscillator in relation to a 20/80 position like a regular Stochastic Oscillator, a short-term smoothed Projection Oscillator is traded in relation to an even shorter-term moving average of itself.
Signals • Enter long/close short when an 8-period/3-slowing period Projection Oscillator crosses above its own 3-period moving average. • Close long/enter short when an 8-period/3-slowing period Projection Oscillator crosses below its own 3-period moving average.
Trade Characteristics The Projection Oscillator 1 system produces a trade about once every two to four days, making it appropriate for extremely short-term traders. The system is always in a trade if you are taking both long and short positions.
Further Reading Technical Analysis of Stocks and Commodities magazine, July 1995
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StochRSI Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in
A custom indicator is available for this system.
Tushar Chande and Stanley Kroll developed the StochRSI indicator. One of the problems with using the RSI as an overbought/oversold indicator is that, due to the built-in smoothing, it may be a long time before an extreme is ever reached. This forces it to miss out on many significant trading signals. Applying a stochastic process to the RSI makes it so that an extreme will have to be reached within a limited amount of time (preferably when a valid trading signal is present). As with the Stochastic Oscillator, the system trades around the 20 and 80 extremes. As with all overbought/oversold indicators and systems, even though it can be very good at capturing profits on a large number of trades, no loss protection mechanism has been put into place if the trade immediately moves against you. Stop-loss orders should be used to prevent the few failing trades from removing all acquired profits.
Signals • Enter long/close short when the StochRSI crosses below 20. • Enter short/close long when the StochRSI crosses above 80.
Trade Characteristics The StochRSI system produces a trade about once every two to four weeks. The system is always in a trade if you are taking both long and short positions.
Further Reading The New Technical Trader: Boost Your Profit by Plugging Into the Latest Indicators. (Wiley Finance Editions) John Wiley and Sons, Inc. 1994 Beyond Technical Analysis: How to Develop and Implement a Winning Trading System. (Wiley Finance Editions) John Wiley and Sons, Inc. 1997 The Business One Irwin Guide to the Futures Markets. Irwin Professional Publishing. 1992 The Professional Commodity Trader. Traders Press. 1995
74 ❖ Descriptions of the MetaStock Performance Systems
Mastering MetaStock
Swing Index Description The performance exploration for this system is included free with MetaStock
The Swing Index was created by Welles Wilder to identify the true price of a security by evaluating the current bar’s open/high/low/close prices as well as the previous bar’s. It then plots that relationship as a value above or below a zero line. Because it’s looking for a change in direction of price movement (using a bar by bar approach) it trades with a very similar philosophy to Pattern Trading System 1 but much more frequently. It also allows for short positions.
Signals • Enter long/close short when the 3-day Swing Index is above 0. • Close long/enter short when the 3-day Swing Index is below 0.
Trade Characteristics The Swing Index system produces a trade about once every one to three days, making it appropriate for extremely short-term traders. The system is always in a trade if you are taking both long and short positions.
Further Reading New Concepts in Technical Trading Systems. Trend Research. 1978 The Adam Theory of Markets or What Matters Is Profit. Trend Research. 1987
Vertical Horizontal Filter Description The performance exploration for this system is available in the MetaStock Performance Systems Plus plug-in.
The Vertical Horizontal Filter (VHF) was developed by Adam White. It is similar to r-squared and Welles Wilders’ ADX indicator in that it identifies trending/non trending activity except that it is nowhere near as sensitive as r-squared (therefore reducing whipsaws) and much more responsive than the ADX (increasing the chance of getting in at the beginning of a trend). Once a trending status is identified by the VHF, it looks to see which direction the trend is going by looking at a linear regression slope with the same periods as the VHF and then enters a position accordingly. It then exits when the trend breaks down.
Signals • Enter long when the 21-period VHF crosses above 0.3 and the 21-period linear regression slope is positive. • Close long when the VHF crosses below .7 or the slope is negative. • Enter short when the VHF crosses above .3 and the slope is negative. • Close short when the VHF crosses below .7 or the slope is positive.
Trade Characteristics The VHF system produces a trade about once every one to three months. Trades are usually closed out in about two to four weeks. The system is in a trade about 50%-60% of the time.
Further Reading Futures magazine, August 1991
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Volatility Breakout (Chaikin) Description The performance exploration for this system is included free with MetaStock
The Volatility Breakout system uses the Volatility indicator created by Marc Chaikin to determine extremely short periods of volatility expansion. Typically, trades with this system are only held for one or two days. The system looks to see if the volatility of a security is increasing and then takes a trade in the direction of price movement. It exits the position either when prices move in the opposite direction or when volatility decreases (signaling a potential change in direction).
Signals • Enter long when a 10-period/10-period rate of change Chaikin’s Volatility increases and the price moves up. • Close long when the volatility decreases and the price moves down. • Enter short when the volatility increases and the price moves down. • Close short when the volatility decreases and the price moves up.
Trade Characteristics The Volatility Breakout system produces a trade about once every two to four days, making it appropriate for extremely short-term traders. The system is in a trade about half of the time.
76 ❖ Descriptions of the MetaStock Performance Systems
Mastering MetaStock