Shared sigma for trend entries, retests and stops

One written sequence

A mechanical trading system is a written take-or-skip procedure that names the next order, stays testable as one sequence, and does not wait on discretionary reinterpretation after the signal appears. A finished procedure is automatic, states a risk bound, names the next action, and leaves a record that can be scored after the trade.

Editorial: this article teaches that procedure as one shared volatility unit. The same sigma that decides whether a high or low is new also sets the entry band and the first loss bound, so take, skip, confirm and abort can be marked on a single scale before anyone argues about returns.

Take, skip, true and false

Signals are classed as take or skip and as true or false. A positive-signal is a rule-based instruction to enter or reverse, later scored true if the trade was warranted and false if it was not. A negative-signal is market action that produces no order; it is a true skip when standing aside was correct and a false skip when a trade should have been taken.

True-take outcomes must cover losses from false takes and from skipped trades that should have been taken.

One sigma for extremes, retests and the first stop

The worked trend design treats each minor-trend turn as a candidate secondary reversal and changes side with a reversing-stop after direction turns, rather than buying the retest with a limit. A reversing-stop flips the position only after price closes through the prior day's high or low.

A new high or low is counted only when the close clears the prior extreme by sigma. Sigma is a volatility unit equal to the 20-day average true range plus two standard deviations of that true range, used to define breakouts, retests, entry limits and the first protective stop. A close inside one sigma is treated as a retest.

Where the entry is placed

A 5-day stochastic locates the close in the recent range. After the smoothed reading leaves the 75 or 25 extreme, the entry is a trailing stop at the prior day's low or high, not the move into the extreme.

Confirmation and the second exit

Each new position carries a protective stop one sigma from entry. That stop-loss is a pre-placed exit that caps an unconfirmed entry at one volatility unit, with a separate trailing exit at the last reactionary swing when the market turns without a signal.

The confirmation-rule holds after a new position is opened: ignore opposite oscillator signals until a higher low or lower high confirms the trend, or until the protective stop is hit.

Size after the loss is bounded

Position size may stay fixed, profits may be withdrawn at a stated equity band, or contract count may rise with equity. Per-trade exposure is first bounded by the one-sigma stop and by a risk amount small enough that a full loss is acceptable.

How the paper record is judged

Historical paper checks come before live paper checks because a multi-year live sample is impractical. The chosen window must include non-trending conditions rather than only strong trends. Logged paper trades are judged from win and loss counts, consecutive runs, the equity path, calendar returns and drawdowns, and peak-to-valley moves, including whether a stated drawdown would halt use of the rules.

A 1991 to 1994 Treasury-bond walk-through was rejected as a valid check because the window was an unusually strong rally. A 1978 to 1992 soybean paper series with stated month-end rollovers was used instead. A longest losing run of only three trades was treated as a reason to retest on another market or with a mechanical tester.