2010issue C0156-61
Mechanical trend-following system design, stops, and validation
The interview prefers trend-following because tops and bottoms need not be picked, then places entries near a stop-loss so a pullback can be judged quickly. Editorial reading: lock direction and support-and-resistance first, bind every entry to that stop, and accept the procedure only after backtesting and forward-testing.
- Trend-following is treated as preferable to anti-trend methods because it avoids the impractical task of picking tops or bottoms.
- A pullback that does not penetrate a pre-set stop-loss is treated as a retracement, so an entry near that stop can be judged right or wrong quickly.
- A mechanical-trading-system is built in three steps: choose a universal principle, concentrate on direction plus support-and-resistance, then add backtesting.
- Backtesting is the first check of a signal algorithm; forward-testing then examines the same parameters on a later, unseen period.
One mechanical procedure
The archive interview presents trend-following as preferable to anti-trend methods because it removes the need to pick tops or bottoms, which the interviewee regards as impractical. A trend-following rule trades with established market direction rather than trying to catch turning points.
Editorial note: TradersWeek reads these pieces as one mechanical-trading-system. Entry, exit, and abstention are not separate habits. They are one testable procedure.
Three design steps
Building a trading system is described as three steps. First, choose a universal principle. Second, concentrate on market direction plus key support-and-resistance. Third, add backtesting.
The second step is framed as less means more. Only market direction and key support-and-resistance are treated as the essential information.
Stops that decide a pullback quickly
A recurring reason traders lose money is described as failing to cut losses short, or taking too long to decide whether a position remains valid.
A stop-loss is a pre-set price bound used both to define invalidation and to judge whether a pullback is still a retracement. A pullback that does not penetrate that stop is treated as a retracement, and an entry may then be taken near the stop so the trade can be judged right or wrong quickly.
Validate before trusting the picture
Backtesting is presented as the first and easiest way to validate a signal algorithm before trusting colored bars, lights, or other visual indications. It checks the rules against historical data before those visual or live cues are trusted.
Forward-testing is defined as historical out-of-sample checking. Parameters are set on earlier data and then examined on a later period, illustrated with a 2003 setup tested in 2004.
The same simulation idea across markets
The same scientific-simulation approach used for molecular spectra was later applied to market waves, first on a major stock index and then on gold, wheat, and Treasury bonds. The interviewee reported positive results across those markets.
All readings on this track · 38 readings
- 1986A Marshall Wave book is assembled one confirmed stance at a time
- 1987Operator gut check when two systems conflict
- 1988Visual trend rules need one testable procedure
- 1988Audit trend and breakout rules sold without tests
- 1992Weekly 4 percent close reversal case study
- 1992Write down the plan, then wait for the cross
- 1994Constructing a three-rule moving-average system
- 1995Weekly long-only trend rules with a gated retracement exit
- 1997Constructing rainbow charts with repeated smoothing
- 1997Three-line break as a one-parameter mechanical filter
- 2000Nested horizon trend alignment with a momentum stack
- 2001When certainty turns off the stop
- 2001Price must confirm every setup
- 2001Constructing a color stack from every lookback
- 2002Evaluating mechanical trend signals from ten-session average excursions
- 2004Trend pullbacks with a fifty-day average and relative strength index
- 2005Stochastic overbought as a trend-regime state
- 2005Trend-following as one testable signal procedure
- 2007One checklist for entry, exit and abstention after a market switch
- 2008Parallel listings and divergent trend behavior
- 2008Recovery headlines versus trend-regime rules
- 2008Constructing an intraday trend procedure with confirming close, retest, and planned exits
- 2010Mechanical trend-following system design, stops, and validation
- 2010A trading-plan that sets entry, stop, trail, and pause together
- 2010Multi-horizon cycle signals, trend filters, and stops
- 2012Weekly bear-market and shock signals as a mechanical procedure
- 2013A 2013 rates week as a structure-first exit drill
- 2013Trend following as one testable procedure
- 2013A forex veto checklist: trend, pair economy, and crowd bias
- 2015Relative-strength-index rules under a 20-percent trend filter
- 2015Trend-gated oscillator entry and exit rules
- 2016Trend process versus end-goal trading
- 2017Gold as a classroom for one midterm-trend procedure
- 2017Falling-knife FX longs wait for a four-hour trend turn
- 2018A closed procedure for quarterly sector rank slots
- 2018A recursive median as shared state for trend rules
- 2020Moving-average construction as an objective trend filter
- 2020Constructing first and second cross trend entries