Let’s take a closer look at the bad trades that are destroying our profits in the Microsoft back-test. Clearly, our simple systematic trading strategy works, and Zorro Trader enters and exits trades profitably when a sustained trend exists. The bad trades occur almost always when the price wiggles a lot around the moving average, which usually happens when the market is in a trading range. During those periods, the moving average is almost horizontal (no trend) and the price fluctuations seem to be random noise. But they do trigger a lot of small losing trades, because there is no trend to follow – and it costs us a lot of money.
by Algo Mike
Experienced algorithmic and quantitative trading professional.