Vertical Solutions

Notes on trading system design and the pursuit of automation

Trading Unstable Systems, 10/26/05

How do you trade an unstable system?

How do you trade a system that is just starting to show proimise but which has historically been a train wreck of either noise or losses?

The control charts three standard deviation cutoff won't be fast enough for these 'emerging' systems - the cost of being wrong will be too great.

I've been experimenting a bit w/ using a rolling 20 period P&L as a system on/off switch.

Speaking of stability, the average month end close in 2005 has been 1210.

The mean highest high of the last five days of the month has been 1217.

The mean lowest low of the last five days of the month has been 1197.

Henry Carstens
Vertical Solutions
carstens@verticalsolutions.com