Pre-Validating a Trading Idea, 09/07/09

Pre-Validating a Trading Idea - A First Look at Brett's Transition Trading System

Again, I'm going to use some of the concepts from Introduction to Testing Trading Ideas to run a quick test of Brett's Transition Trading system in order to validate it and share the lessons we can learn from such a test. The test technique works with trading ideas the same way we saw it work in validating the Trend Day Indicator.

To validate the Transition Trading System, I'm going to examine the historical results as if it had been a traded as an automated trading system. Then I'm going to review those results looking for positive expectation and statistical significance.

The Transition Trading System in Action - Busy Isn't It?

Transition Trading System Rules

Results, e-mini S&P Futures, 1998-present, slippage and commissions not deducted

630/1941, 32%, avg 0.27 pts, sd 4.3 pts, z 2.8
The t score of 2.8 means the results are significant to almost 3 standard deviations leaving little liklihood they occurred by chance alone. In general, we are looking for a t score higher than 1.6.

Thoughts on the Results

What does it all mean?

Since the results and t score show the Transition Trading System produce a positive expectation on its trades and the t score shows those results are unlikely to have occurred by chance alone, it means the Transition Trading System is generating statistically valid signals and providing real information about potential future market movements.

That doesn't mean the edge can be exploited. I, for example, wouldn't be able to automate this. That may be good news for discretionary traders because they probably won't be fighting a lot of computers for the same expectation.

Henry Carstens
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