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The best thing about designing a trading system is that if you know how to code you can put any idea you have in your head down on to paper and see if it would have worked in the real world. If you can’t code, you can hire someone to do it for you. It’s really creative process and a lot of fun testing out your ideas.
But before we look at some system ideas, it’s important to understand the preparation that I have put into each system.
That’s 10 years of data for 500 stocks which should be plenty to draw some decent conclusions. By fixing the data over these dates, we have left three years of out-of-sample data with which we can validate the findings at a later date. (By the way.
Each test is run on weekly end-of-day data unless otherwise indicated. Although some traders prefer trading daily, I find trading on a weekly basis tends to provide smoother results.
Each test is run on a portfolio of 10 positions. The starting capital is set at $10,000 which is then divided equally by the number of positions to give the position value per trade.
In other words, each position has an initial value of $1000. To get the number of shares simply divide $1000 by the share price.
This position size changes as the capital increases or decreases. For example, if capital drops down to $9000, each position has a value of $900. Trading like this means you can never go completely broke. It also allows the magic of compounding to take effect.
For simplicity, commissions have been set at 0.2% per trade. 0.4% for a round trip (buy and sell).
Delisted securities are those stocks that have been taken off the exchange and should usually be included in back-testing. However, due to the difficulties of obtaining, referencing and including delisted stock data, delisted stocks have been left out of these tests. It is up to you to find a way to incorporate delisted data into your own analysis.
The idea of including these tests is not to provide trading advice but rather to give some guidance as to how to start thinking about trading systems. As presented here, the tests are only rough guides and would usually benefit from extra work.
While every effort has been made to test these trading systems in a fair and accurate way, it is strongly advised not to trade any of these ideas without testing them rigorously in your own time.
Before investing any money make sure you have tested the system on out-of-sample data and used data that includes delisted securities.
This Article is taken from How to Beat Wall Street
Written by Arshad. A
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