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Ed Seykota’s First Trading System: Using Moving Averages and Richard Donchian’s Four Week Rule
By Dave McLachlan During Ed Seykota’s interview in the book Market Wizards by Jack Schwagger, Ed describes the influences on the first trading system he ever used to make money in the market. Of course, this was back in the early 1970s – when computers were very new and not even one thousandth of the speed we have today. For example, Ed tested around one hundred variations of four simple trend following systems on a computer that took up an entire air conditioned room, and the tests took him half a year to do. Today we can test thousands of variations of trading systems in around 3 minutes on a computer that fits in the palm of your hand. Ed Seykota was initially influenced by Richard Donchian who was a pioneer of trend following systems. The main difference was that Donchian was doing most of his calculations by hand, Ed was pioneering computer research. Richard Donchian used a five and twenty day moving average cross over system, and Ed used exponential moving averages (where more weight is given to the more recent data to calculate the moving average). We decided to test these two systems and see if they still hold any weight in today’s markets. Richard Donchian’s Four Week Rule: Does It Still Work Today? One of the main reasons for writing this article is that I was researching the “52 week high” rule of William O’Neil and decided to optimize the results (optimizing is the process of testing all the variations of a system between two values). I tested all the variations of buying on new weekly highs and selling on new weekly lows, from one week to 52 weeks, and the results absolutely blew me away. The variation with the best back-tested result out of over 2,700 variations was to buy on a four week high and sell on a four week low, in other words the exact same system that Richard Donchian pioneered over 50 years ago. I couldn’t believe it! Did that mean that his ridiculously simple system still worked? See for yourself: Market: All Ordinaries (XAO) from 1990 to today (21 years). The win percentage was 52.38%, meaning we won around 5 out of 10 trades; the profit to loss ratio was 2.29 to 1.00 (the average profit being 4.57% and average loss 1.99%) and the net profit was 309.00% over 21 years. Just to check, I tested it on the S%P 500 from 1990 to today as well. The results were not as good, with an overall profit of only 37.29% over 21 years. Obviously it pays to choose your market when you are trading or investing, and to test your system to ensure it works – the All Ordinaries results were fantastic, and the S&P 500′ s results were well below par. Here is the Amibroker Formula Language (AFL) for this optimisation test below, so you can use it for yourself or check for any errors: HighestHigh = Optimize (“HighHigh”, 4, 1, 52, 1); LowestLow = Optimize (“Lowlow”, 4, 1, 52, 1); HI = HHV (C, HighestHigh); LW = LLV (C, LowestLow); Buy = C >= HI; Sell = C <= LW;
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http://www.asxmarketwatch.com/2011/11/ed-seykotas-first-trading-system-using-moving-averages-and-richard-donchians-four-week-rule/[8/20/2013 3:35:12 PM]
Not Percentage Return The Everlasting Lure And Terrible Dangers Of Predictions The Top Six Account-Destroyers And How To Fix Them The Seven Forces That Move A Stock Price The Number One Psychological Mistake In Trading And How To Fix It http://www. Just In Case) Related Articles You Will Like: 7 Free Trading Systems and Their Returns From The Last 13 Years Amibroker Trading System: Referring to Previous Signals For MAup Trading System Knowing Your Total Risk And Possible Losing Streak A Final Thought On Trading The Market Getting Your Stats: How To Know If Your Strategy Can Win Conditional Orders and Trading When Working Full Time Position Sizing – Thinking In Terms Of Risk. then we can test an exponential moving average crossover system as well. Larry Hite and others started getting their phenomenal returns.00%. More On Ed Seykota : Ed Seykota: Everybody Gets What They Want. Here is the AFL code I used for this Moving Average back-test: FastMA = EMA( C. Testing a five and twenty day exponential moving average crossover system on the All Ordinaries over 21 years. we can see from the results above that the components of his system would still work today – especially so on the All Ordinaries in Australia.57% over 21 years. the profit to loss ratio was 2. 20). No where near as good a result. and is very similar to the way super-traders like Ed Seykota. and Ed Seykota’s Magic Trading System What Do You Think Of This Article And Research? Did It Help? What Else Would You Add? Leave your comments in the comments section below.5 out of 10 trades.86% and average loss 1. FastMA ). . SlowMA = EMA( C. (Check Your Junk Mail. Dave McLachlan @ASXDave A bad trade is not a losing trade.77%) and the net profit was 31. meaning we won around 4. it is one where you Tweet to @ASXDave Are You Share Market Aware? Stock Market Courses and Tools Does Ed Seykota’s First Trading System Still Work? While Ed Seykota moved on to other things after his first trading system.00 (the average profit being 4. subscribe and get the latest updates for free: Enter Your Email Address: Subscribe By Email .asxmarketwatch. . Not bad at all! Testing the same system on the S&P 500 : The win percentage was 30. Seeking out trading rules and testing them automatically is one of the benefits of a charting program like Amibroker.50% over 21 years.67%) and the net profit was 225. Sell = Cross( SlowMA. SlowMA ). the profit to loss ratio was 2.44 to 1.29%.08% and average loss 1. but still a profit.Ed Seykota’s First Trading System: Using Moving Averages and Richard Donchian’s Four Week Rule | ASX Market Watch Testing A Five and Twenty Day Exponential Moving Average Crossover 19 Aug System: Does It Still Work Today? If we can test Richard Donchian’s four week rule.00 (the average profit being 4. here are the results: The win percentage was 45. Buy = Cross( FastMA. If you enjoyed this. 5 ).74 to 1.com/2011/11/ed-seykotas-first-trading-system-using-moving-averages-and-richard-donchians-four-week-rule/[8/20/2013 3:35:12 PM] .
SAM . required Email (will not be published). 2012 hi. Cheers. richard donchian. backtesting. 2012 Hey Sam. Styled by Sapphire Stretch. indicators and bar ranges to play with. Dave Leave a Reply Name.February 11.February 9. but I would highly recommend “introduction to amibroker” by Howard Bandy – a great book it has a complete list of AFL codes for things like highest highs. s&p 500.com/2011/11/ed-seykotas-first-trading-system-using-moving-averages-and-richard-donchians-four-week-rule/[8/20/2013 3:35:12 PM] . Dave McLachlan . four week rule. Amibroker. Do you mean an EOD bar with a range of 10% of the total stock or commodity price? This is beyond my limited AFL. trading system. looking for amibroker afl files which gives high low difference of 10% or more in intraday trades or for 1 day in EOD 2. ed seykota. 2011 Tags: AFL. required Website (if present) Submit « Previous post Next post » © ASX Market Watch. xao Posted in: Articles On Building Wealth 2 Responses 1. Great question. All Ordinaries.asxmarketwatch.Ed Seykota’s First Trading System: Using Moving Averages and Richard Donchian’s Four Week Rule | ASX Market Watch Trading Psychology: On The PROPER Use Of Hope and Fear Outperforming The Market With The Post Earnings Announcement Drift (PEAD) Finding Stocks About To Explode Using Company Announcements See Your Financial Future Here: The Results Could Shock You Email this • Share on Facebook • Subscribe to this feed November 20. Powered by WordPress. moving average. http://www.