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During a non-trending period, the price of an asset usually crosses above and below its moving average several times in a short period. The power of the bulls is almost equal to that of the bears. The more crossovers occurring between the price and the moving average the more the direction of the price movement is uncertain.
Given the above conditions, the moment the trading range is broken is a powerful signal that could indicate that the bulls may have won the battle and that a strong bullish trend is forming. The likelihood of this movement continuing its upward trend improves if the trading range breakout is accompanied with an increase in trading volume.
The non-trending period (characterized by several crossovers), the trending range breakout and the increase in volume are the main buy rules of this trading system. The sell rules consist of two stop rules: A 30% trailing stop and a 60-Period N-Bar Stop.
The strategy includes also an additional rule that prevents it from buying illiquid stocks.
Here are some stats generated by the simulation report of this trading system for the U.S. Stock Market and for the period that spans from 2000 to 2011:
- System Type: Long Only
- Maximum number of positions: 10
- Annual Return: 21.86%
- Maximum Drawdown: -45.67%
- Sharpe Ratio: 0.83
- Profit Factor: 1.54
- Payoff Ratio: 1.48
- Ulcer Index: 15.56
- Standard Deviation: 20.4%
- Average Bars Held: 52
- Number of Trades: 506
- Percent of positive trades: 50.99%
