Red Light Green Light Indicator
The Red Light Green Light Indicator's goal is to identify the best potential direction for trades taken within its 1-12 day horizon. The indicator is always in the market.
- A Green Light means look for opportunities for long trades
- A Red Light means look for opportunities for short trades
Viewed, for a moment, as a trading system, its results from Janauary 1, 1997 to 2/6/2009 were:
274/453, 60%, avg 7.0 pts, sd 33.5 pts, w/l ratio 1.15:1, net profit: $795,675, max drawdown: 133 pts!From the standard deviation and the max drawdown, it's clear that by itself, Red Light Green Light isn't a good trading system. The indicator has the most trouble when the market 'jumps' to a new level in the opposite direction of the current signal. Because the indicator has no stops it won't recognize the jump as risk but instead will see it as opportunity.
Despite it's flaws as a trading system, the Red Light Green Light indicator is interesting as an automated tool for gaining insight into potential market direction and opportunity which can be factored into other trading decisions.
[Brett Steenbarger began encouraging me to refine this signal over three years ago - here it finally is, Brett, now robust enough to be useful. With thanks. --h]