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2010issue C1218-23

Evaluating mechanical index timing under drawdown limits

An end-of-day long-only timer allows a buy only when four concurrent filters pass and closes on the first of a relative-strength exit, a 15 percent target, or a 5 percent stop. Editorial: lock that stop and the two-name, 50 percent allotment cap first, then ask whether the same script still forms one jointly testable procedure off the index trio.

  • Lock the 5 percent stop and the two-name, 50 percent allotment cap before judging the remaining entry and abstention filters.
  • A buy is allowed only when four concurrent filters pass, and the open position is closed by the first of a relative-strength exit, a 15 percent gain target, or the 5 percent stop.
  • Robustness testing here means reapplying the same rule set from three major US index funds to two large-capitalization stock groups, not rewriting the script.
  • The archive still calls for further tests across a range of conditions, used no sample older than five years, and notes that stop fills can miss the intended price, more severely in single names.
Entries in this reading3 entries
Current trackDrawdown limit68 readingsRobustness testing80 readingsMechanical trading system322 readings

Lock the caps before scoring the timer

An end-of-day long-only mechanical trading system can be written so that a buy is allowed only when four concurrent filters pass. The open position is closed by the first of a relative-strength exit, a 15 percent gain target, or a 5 percent stop.

Every trade carries a 5 percent stop, and index-fund use is capped at 50 percent allotments so that at most two of the three tested funds can be held at once. Those two constraints are the drawdown limit in this design: a hard loss cap on each trade and a two-name exposure cap on the book.

Specify one long-only procedure

A filled entry is a market order on the next session. Coded exits fire when the 9-day relative-strength reading of the 9-day Hull average reaches 90 or more, when the 15 percent target is hit, or when the 5 percent stop is hit.

The lag-reduced average doubles a half-length weighted mean, subtracts the full-length weighted mean, then applies a weighted mean whose length is the integer square root of the lookback. The lookback is therefore chosen as a perfect square such as 4, 9, 16, 25, 49, or 81.

Four concurrent buy filters

The four buy filters require the close above a 50-day simple average, a 4-day Hull average turning higher, a 9-day relative-strength reading of the 9-day Hull average at or below 50, and the close above the close 59 days earlier.

If any one of those four filters fails, the procedure abstains. Entry, exit, and abstention are therefore the same script, not a stack of optional overlays.

The same script off the index trio

The same rule set was examined on the three major US index funds and then reapplied to two large-capitalization stock groups over a five-year window. The author reports that more volatile names fit the pullback-and-reversion logic more closely.

The author describes the procedure as made robust but states that further tests across a range of conditions are still required and that no sample older than five years was used.

Gaps the archive already flags

Stops may not fill near the intended price in a sudden decline. That gap is described as more severe for single names than for indexes, which is why the stock-level figures were based on a 10-name set rather than one-at-a-time trading.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
15 of 22 in the Drawdown limit track
201366-68 pp.Next on Drawdown limitPredefined small losses outrank market analysisStrong market or economic analysis can still coincide with losing money, so analysis is treated as insufficient on its own.
All readings on this track · 22 readings
  1. 1992Probability stops from winning-trade drawdowns
  2. 1994Monthly drawdown limits when cash competes with equity
  3. 1994Keep constant leverage left of the equity peak
  4. 1995Evaluate mechanical systems as a three-way fit test
  5. 1997Limits as a single trading decision procedure
  6. 1998Drawdown limits before a trend system is allowed to trade
  7. 1998Evaluating trailing stops as two-parameter loss filters
  8. 1998Walk-forward evaluation of a noise-filtered bond-futures breakout
  9. 2002The pattern-day-trader equity floor as a leverage governor
  10. 2003Evaluating a one-rank mutual-fund switch
  11. 2004Keep entry, exit and abstention balanced as one procedure
  12. 2006A stated daily multiplier is a risk contract, not a return promise
  13. 2007Walk-forward probation for intraday systems
  14. 2008A mechanical futures procedure is unfinished without a drawdown limit
  15. 2010Evaluating mechanical index timing under drawdown limits
  16. 2013Predefined small losses outrank market analysis
  17. 2013Equity-curve filters as drawdown brakes
  18. 2014Critique of chasing recovery after a large drawdown
  19. 2015Loss thresholds and equilibrium as trade filters
  20. 2015Constructing mechanical systems under a drawdown cap
  21. 2018Evaluating system rules for robustness and livable drawdowns
  22. 2020Regime-aware equity halts and volatility entry filters
By fieldSystem design203 readingsBy year2010169 readings
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