Ed Seykota’s First Trading System_ Using Moving Averages And Richard Donchia 6x6e

Ed Seykota’s First Trading System: Using Moving Averages and Richard Donchian’s Four Week Rule | ASX Market Watch

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By Dave McLachlan

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During Ed Seykota’s interview in the book Market Wizards by Jack Schwagger, Ed

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the market.

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describes the influences on the first trading system he ever used to make money in Of course, this was back in the early 1970s – when computers were very new and not

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even one 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 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.

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Ed Seykota was initially influenced by Richard Donchian who was a pioneer of trend following systems.  The main difference was that Donchian was doing most of his calculations by hand, Ed was pioneering computer research.  Richard Donchian used a five and twenty day moving average cross over system, and Ed used exponential moving averages (where more weight is given to the more recent data to calculate the moving average).

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We decided to test these two systems and see if they still hold any weight in today’s markets.

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Results from Trading the 52 Week High

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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). 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 absolutely blew me away.  The variation with the best back-tested result out of over 2,700 variations was to buy on a four week high and sell on a four week low, in other words the exact same system that Richard Donchian pioneered over 50 years ago.  I couldn’t believe it!  Did that mean that his ridiculously simple system still worked?  See for yourself: 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.

Obviously it pays to choose your market when you are trading or investing, and to

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BRG, ARI, ANN, all up significantly after earnings. CGF followed through from yesterday thank goodness.

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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.

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Market:  All Ordinaries (XAO) from 1990 to today (21 years).  The win percentage was

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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: HighestHigh = Optimize (“HighHigh”, 4, 1, 52, 1); LowestLow = Optimize (“Lowlow”, 4, 1, 52, 1); HI = HHV (C, HighestHigh); LW = LLV (C, LowestLow); Buy = C >= HI; Sell = C <= LW;

http://www.asxmarketwatch.com/2011/11/ed-seykotas-first-trading-system-using-moving-averages-and-richard-donchians-four-week-rule/[8/20/2013 3:35:12 PM]

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

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System: Does It Still Work Today? If we can test Richard Donchian’s four week rule, then we can test an exponential 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 results: The win percentage was 45.00%, meaning we won around 4.5 out of 10 trades; the profit to loss ratio was 2.44 to 1.00 (the average profit being 4.08% and average loss 1.67%) and the net profit was 225.50% over 21 years.  Not bad at all!

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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 );

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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:

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http://www.asxmarketwatch.com/2011/11/ed-seykotas-first-trading-system-using-moving-averages-and-richard-donchians-four-week-rule/[8/20/2013 3:35:12 PM]

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

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http://www.asxmarketwatch.com/2011/11/ed-seykotas-first-trading-system-using-moving-averages-and-richard-donchians-four-week-rule/[8/20/2013 3:35:12 PM]