The straightness of the equity growth is far more important

than the final value of the account.

“this” refers to the method of moving five bars in one direction and five bars in the other direction.

a substantial loss. Slow and steady wins the race. Moreover, if your system is prone to equity swings, then you must ask yourself whether you would stay the course when it gives back profits or whether you would panic and halt trading until your blood pressure drops.

To do this work, you need an understanding of your tools.

You have help files and the Internet (and this magazine) to explain what’s going on inside an RSI, a stochastic, or a Bol-linger Band. If you don’t know the internals of your project, then you can only guess about how to avoid pitfalls.

You also need imagination. You will struggle if you are doing the same thing as everyone else. Say you construct a well-reasoned algorithm. When you test it against historical data, you may learn that it doesn’t produce the outcome you expect. One possible explanation is that many other traders are using that same logic, and the limited historical profits are a result of too many shares trading in the same direction at the same time and thus distorting the market. You must do something different.

T

Let’s step outside the box. Watch your head; I’ve seen people knocked unconscious trying to step out of the box. Here, I’ll give some examples of something different.

(But first, a note and disclaimer. The examples shown here are

FIGURE 1: AN IDEAL EQUITY CURVE. The pullbacks in the equity curve in the middle window are unnoticeable. It generates 82% winning trades and yields $100,000 in profits.

The starting equity is $2,300. The bottom window shows what happens when you start with a $40,000 account and trade 75% of equity, reserving 25% for possible pullbacks.

Neuroshell DayTraDer

based on futures trading; $4 roundtrip commissions; daytrading with conservative margins; and charts built around static data that can be used for optimization and measurement of outcomes on your favorite platform. I am not presenting actual market experience. No slippage is assumed. The ideas I present here are applicable to equity markets and forex markets.)

The chart in Figure 1 of the emini S&P continuous futures contract, which looks at two months in 2013, indicates what I believe is an ideal equity curve. Look carefully at the eq-uity curve in the middle window. The pullbacks are almost unnoticeable. Here, one contract of the emini S&P futures contract is traded. It generated 82% winning trades. It made 8,535 total trades yielding a $100,000 profit and a 35,500%

APR. To begin trading, it required a $2,300 account. This chart is out-of-sample.

What’s so different about this example? When you have a high-quality equity curve, then you can test for a more normal trading pattern. No one who achieves that kind of result would keep on trading one contract. The bottom window shows what happens when you start with a $40,000 account and trade 75%

of equity, reserving 25% for possible pullbacks. As you can see, the two-month profit goes to $47+ trillion. However, before you try to place a down payment on the purchase of Costa Rica, please keep in mind that the required trade volume cannot be executed. The other thing that makes this different is that

it behaves the same way when applied to any time frame for the S&P contract, and it requires no optimization.

Here’s another example of thinking outside the box. The

chart in Figure 2 shows the input to a neural net. The neural net input shown is the only input. No price data or anything else is input. From this sole source, the neural net was able

FIGURE 2: NEURAL NET INPUT. Using the curve shown here as the only input to a neural net generated the trades shown in this backtest.

FIGURE 3: ANOTHER GREAT EQUITY CURVE. This system generated 73% winning trades. There were a total of 81 trades yielding $13,575 in profit and a 1,572% APR.

to configure itself to generate the trades shown.

Figure 3 shows the data of Figure 2 when zoomed out. Note the equity curve when one contract is traded. This data is from four months in 2014. It generated 73% winning trades. It made 81 total trades yielding a $13,575 profit and a 1,575% APR.

To begin trading it required a $2,900 account. As before, I asked the system to set up a $40,000 account and trade 75%

of equity while holding back 25% for drawdowns. As you can see, this resulted in a $2,750,000 profit in four months with a 31,000% APR. You will also notice that the small pullbacks in the one-contract equity curve are magnified by the com-pounded profits. Still, considering the performance, I would expect that these temporary losses should be tolerable.

The chart in Figure 4 uses optimized renko bars to absorb the noise. The noise removal is so effective that the trading strategy consists of only two statements. The simple rule is:

Compare the current optimized renko bar to the previous one and place the appropriate trade. Note that the renko bars are not displayed. Only the underlying ticks are shown. Again, this system was set up with a $40,000 account and to trade 75%

of the account balance, reserving 25% to cover drawdowns.

The final equity curve is excellent, with 78% of the trades being profitable. The final result is a profit of $74,000 with an APR of 99,000%.

k

In summary, the equity curve is everything. In the three charts shown, there are no lagging functions of any kind. The first chart’s algorithm predicts the next bar and generates 82%

profitable trades. If that sounds difficult, it is. If you’re going to use optimizable functions, then you must keep an eye on

the total number of variables that can be manipulated. As this number rises, it becomes easier for the optimizer to give you a great backtest and terrible out-of-sample results. Remember, you and the optimizer are partners. Find a fixed (nonoptimized) way to block data that the optimizer can’t accommodate and you will generate superior results.

Robert Cocchiola is a consultant and the author of the Inter-chart Tools series of add-ons for NeuroShell Trader software.

These programs allow NeuroShell Trader’s optimizer to select the correct bar size for a given symbol and algorithm. The optimized bars work with all 800 NeuroShell functions and are tradable on TradeStation accounts. Cocchiola may be reached by email at [email protected] or by contacting NeuroShell Trader sales at Ward Systems (301 662-7950).

f

Peterson, Dennis [2011]. “NeuroShell Trader 6,” product review, Technical Analysis of S^tockS & c^ommoditieS, Volume 29: September.

Sherald, Marge [2010]. “Neural Network Pair Trading,”

Technical Analysis of S^tockS & c^ommoditieS, Volume 28: February.

‡NeuroShell DayTrader (Ward Systems Group)

FIGURE 4: REMOVING THE NOISE. Using renko charts to absorb the noise resulted in 78% of trades being profitable, a $74,000 profit, and an APR of 99,000%.

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by Donald W. Pendergast Jr.

nce an individual makes the important decision to pursue the goal of becoming a successful trader, chooses a stock/option/forex/

commodity broker, and funds his ac-count, he may then find himself faced with some vital questions that, for many newer or struggling traders, could take years to get answered — if at all. In the meantime, new traders may lose so much trading capital that they could end up quitting in disgust and frustration.

Some of these vital questions could be along the lines of: anal-ysis and trading workflow routines that can help me toward consistent profitability — thus saving me lots of trial and error?”

n “How/where can I find other trad-ers to interact with; those who are willing to share the acquired wisdom and trading procedures that have helped them become successful?”

n “Are any/all of the above resources available to me in a convenient, easy-to-access venue, and free of charge?”