Ultimate Algorithmic Trading System

indicator of trend and it will put you into the market in the direction it thinks the
trend is going. It is self-adapting. The following is the pseudocode used in the testing
of these three simplistic methodologies:
‘Trend Following with Different Averaging Methods
‘Simple Price MAV Cross Over
myAVG = SMA(C,80) ‘Comment out the two you do not want to use
‘myAVG = WMA(C,80)
‘myAVG = EMA(C,80)
If close of today > myAVG then
Buy this bar on close
If close of today < myAVG then
‘by placing a single quote at the
start of the line
SellShort this bar on close
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STOCHASTICS AND AVERAGES AND RSI! OH, MY!
Bollinger Bands
John Bollinger is the originator of this volatility-based channel indicator. It is
considered a channel because the indicator consists of two lines that never intersect.
The channel width is based on a standard deviation value, which is derived from an
N-length moving average. Most Bollinger Bands are one or two standard deviations
above/below the moving average. In a perfectly ‘‘normal’’ world, 95 percent
of values from a sample will stay within two standard deviations of its mean.
Theoretically speaking, would it not make sense that once price rises to the upper
channel/band there exists a higher probability of price reverting to its mean? Or
does it make more sense that a penetration of a band indicates strong momentum
and the beginning of a trend. Like many indicators, Bollinger Bands can be used
as mean reversion as well as trend following. The most successful trend-following
systems use a longer-length Bollinger Band penetration algorithm for trade entry.
Mean-reversion traders use a much shorter length input for this indicator.
If the market demonstrates enough momentum to carry price through two
standard deviations, it seems there is a real good chance it has enough gusto to
continue on in that direction. Well, this is what the trend followers of the 1990s
thought, and they turned out to be right.
Figure 2.14 shows a 60-day two-standard-deviation (SD) Bollinger Band on crude
oil. The Bollinger Bands are the outside lines and the centerline is the moving
average. This is a perfect example of why this trend entry technique gained so much
popularity in the 1990s and in the new millennium. Crude penetrated the lower
band and never looked back until the trend entered into a congestive phase—a $50
move or $50,000 per contract. That’s right, $50,000! And you thought I wasn’t
going to reveal the Holy Grail! Remember, one monster trade doesn’t make a
trading algorithm.
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