Ed Seykota’s First Trading System: Using Moving Averages and Richard Donchian’s Four Week Rule | ASX Market Watch
Home
First Time Here?
Disclaimer
Suggestions, Questions, Comments
Stock Market Plans, Courses and Tools
Ed Sey S eykot kota’s a’s First F irst Trading Trading Syst S ystem em:: Us Using ing Moving Moving Averages and Richard Donchian’s Four Week Rule
Search Find
Free Courses and Free Updates
By Dave McLachlan
Where Do You Want To Go?
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
Home
the market.
Members Only Area S&P ASX 200 Prices & Charts Free Stock Market Course For Beginners Free Intermediate Trading and Investment Course
Of course, this was back in the early 1970s – when computers were very new and not even one thousandth 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 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.
Enter Your Email Here:
Free Amibroker Course
Ed Seykota was initially influenced by Richard Donchian who was a pioneer of trend
Dave's Trading Diary Free Market Watch Videos Free Lessons On Building Wealth
following systems. systems. The main difference difference was that Donchian was doing most of his
Subscribe
calculations by hand, Ed was pioneering pioneering computer research. Richard Donchian used a five and twenty day moving average cross over system, and Ed used exponential
(Check Your Junk Mail)
moving averages (where more weight is given to the more recent data to calculate the
Most Popular Posts
moving average).
Free Stock Market Course For Beginners
We decided to test these two systems and see if they still hold any weight in today’s
Free Intermediate Trading and Investment Course Free Amibroker Course Technical Analysis Cheatsheet
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).
Fundamental Analysis Cheatsheet The 7 Forces That Move A Stock Price
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 results absolutely blew me away. The variation with the best back-tested result out of over 2,700 variations was to buy on a
The Top 10 Risks In Trading
four week high and sell on a four week low, in other words the exact same system that Richard Donchian Donchian pioneered over 50 years ago. ago. I couldn’t believe it! Did that
Top 41 Reasons Why Investors Fail
mean that his ridiculously ridiculously simple system still worked? worked? See for yourself:
The Top 30 Jesse Livermore Quotes
Market: All Ordinaries Ordinaries (XAO) (XAO) from 1990 to today (21 years). years). The win percentage percentage was
The Truth About "Sell In May" Results from Trading the 52 Week High
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.
Dave McLachlan On Twit Tw ittter
Tweets Tweet s
Obviously it pays to choose your market when you are trading or investing, and to
Follow @ASX @ASXDave Dave
16h 16 h
Dave
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:
McLachlan
@ASXDave
HighestHigh HighestHigh = Optimize (“HighHigh”, (“HighHigh”, 4, 1, 52, 1); LowestLow = Optimize (“Lowlow”, 4, 1, 52, 1);
BRG, ARI, AR I, ANN, all up up significantly significantly after earnings. earnings. CGF C GF followed followed through from yesterday thank thank goodness.
HI = HHV (C, HighestHigh); LW = LLV (C, LowestLow); Buy = C >= HI; Sell = C <= LW;
All Ords
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?
Dave McLachlan
If we can test Richard Donchian’s four week rule, then we can test an exponential
@ASXDave
moving average crossover system as well. Testing a five and twenty day exponential moving average crossover system on the All Ordinaries over 21 years, here are the
A bad trade is not a losing trade, it is one where you
results:
Tweet to @ASXDave
profit to loss ratio was 2.44 to 1.00 (the average profit being 4.08% and average loss
The win percentage was 45.00%, meaning we won around 4.5 out of 10 trades; the 1.67%) and the net profit was 225.50% over 21 years. Not bad at all!
Are You Share Market Aware?
Testing the same system on the S&P 500: The win percentage was 30.29%, the profit to loss ratio was 2.74 to 1.00 (the average profit being 4.86% and average loss 1.77%) and the net profit was 31.57% over 21 years. No where near as good a result, but still a profit. Here is the AFL code I used for this Moving Average back-test: FastMA = EMA( C, 5 ); SlowMA = EMA( C, 20); Buy = Cross( FastMA, SlowMA ); Sell = Cross( SlowMA, FastMA );
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, 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. Seeking out trading rules and testing them automatically is one of the benefits of a charting program like Amibroker, and is very similar to the way super-traders like Ed Seykota, Larry Hite and others started getting their phenomenal returns. More On Ed Seykota: Ed Seykota: Everybody Gets What They Want; 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 . . . If you enjoyed this, subscribe and get the latest updates for free: Enter Your Email Address:
Subscribe By Email
. (Check Your Junk Mail, 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, 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
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, 2011 Tags: AFL, All Ordinaries, Amibroker, backtesting, ed seykota , four week rule, moving average, richard donchian, s&p 500, trading system, xao Posted in: Articles On Building Wealth
2 Responses 1.
SAM - February 9, 2012 hi, looking for amibroker afl files which gives high low difference of 10% or more in intraday trades or for 1 day in EOD
2.
Dave McLachlan - February 11, 2012 Hey Sam, Great question. Do you mean an EOD bar with a range of 10% of the total stock or commodity price? This is beyond my limited AFL, 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, indicators and bar ranges to play with. Cheers, Dave
Leave a Reply Name, required Email (will not be published), required Website (if present)
Submit
« Previous post
© ASX Market Watch.
Next post »
Powered by WordPress. Styled by Sapphire Stretch .
