A Simple Mechanical System
The aims of this chapter are–
- To introduce rule-based trading with an example of a very simple mechanical system, which sets out exact rules as to when to buy and when to sell a security. (More complex systems will be introduced in Part 2 of this book.)
- To test the efficacy of the system as measured against the benchmark of a buy-and-hold approach.
A basic rule-based system
Let us take a rule-based trading system of extreme simplicity. Here are the rules:
- Entry: When the closing price of a stock crosses above a double smoothed 200-day moving average of the closing price of that same stock, buy the stock at the open the next morning.
- Exit: When the price of the stock closes below the 200-day ...