More profit from your trading system!

How many times have you wished that your trading system was more profitable? Is it possible to make a trading system more profitable? Of course it is! If you are aware of the seasonality in the stock market you are well ahead of most traders. Understanding stock seasonality can be the “holy grail” in stock trading. Let me give you an example of how to take a losing trading system and make it profitable.

Lets use a generic trading system as an example. If you use MetaStock you have this system already. It is the “PS Exponential Moving Average” trading system included in MetaStock. This system buys if a 2 period exponential moving average is higher than yesterday and sells if a 2 period exponential moving average is lower than yesterday. If you back test this system using the last 10 years of data from Diamond ETF (DIA), and add a 5% stop to the system you will see that it lost $9750.77 over that time frame. The performance was -19.50% where a buy and hold performance over the same period of time would have only been -2.55%. There were 616 unprofitable trades and only 380 profitable ones. Doesn’t look like a very good system, does it?

Let’s see if we can take our knowledge of stock seasonality and improve these results. If you take a look at the seasonal chart for DIA you will see that from Jan to Mar it trades lower, from Mar to May, higher, lower in Jun and Jul and higher from Oct to Dec.

If we take our trading system and allow only long trades when DIA trades higher and only short trades when DIA trades lower we can improve the results dramatically!

Using the same 5% stop, our trading system went from losing almost $10,000 to gaining $4635.26 over the same 10 years of data! The performance is now a positive 9.27%. There were 142 profitable trades with 198 unprofitable trades with the average profit being $175.92 and average loss being $102.76. Now we have a much better trading system!

Let’s take it a step further. Lets only take long trades when DIA is higher and only allow the system to exit the long trades when DIA is seasonally lower and the opposite for short trades. Technically speaking, you are using the 2 period moving average as a trigger to enter a seasonal trade so you might as well just trade the seasonal dates instead but for kicks lets just see how it turns out.

This time our system produced a profit of $20,866.78. The performance is 41.73%. There were 31 profitable trades and only 15 unprofitable trades. The average profit is $849.45 and the average loss is $364.42.

As you can clearly see, having knowledge of stock seasonality can add tremendous profit to any trader’s account. For more information on the seasonality of the stock market keep your eye out for my upcoming book on the subject.

Joe Trader

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