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A Work on System Design-IV: Testing the Indicators

June 1, 2010

This is the fourth part of a seven post series,  I will be talking about the art and science of trading system designs.The blog posts will encompass,the logic,the philosophy behind the logic,the code, developments, design and other technicalities of trading systems.Previous parts here: Part -1, Part-2, Part-3

System traders are capricious lots. A lot of them have trouble with the objectivity their skill brings to the table. They are in a constant struggle to resolve the signals on the axis of their psychological and financial comfort. During times,when a trader suffers psychological setback, the best of the traders dont try to fight it, they ride the period. But its important that you have in some way, a Plan B or Plan C to fall back upon, when your system underperforms. A usual method is to quit and take a break. Not a bad idea per se.

But, a far more prudent idea is to bring in systems in your portfolio which have low or near zero returns correlation with your existing system. So a natural tendency is to bring in systems which have a different flavour. Say, you are having trend following systems(which is often very simple to trade) then the natural idea is to have a mean reverting system in place. And so on and so forth.

Off late, there is a lot of online literature on the greatness of ultra-short perioded indicators like RSI. Effectively the oscillatory nature of such indicators become highlited. But in my earlier blog posts, I have talked about how RSI(2) fares in Indian markets.[Short Term RSI as market timers]

Trading the Odds came up with a modified form of RSI,which I would recommend highly for you to take a look at.(here)

In the next post, we will be detailing how does modified RSI stand upto the beast called Indian markets.

Till then,

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