In Keith’s wonderful book, “Building Reliable Trading Sytems”, he reveals several algorithms that classify an instruments’ movement potential. In the part of the book that is titled Scoring by a Bar Type Criterion, he describes eight different two-day patterns that involve 3 different criteriaEight different Bar-Types
He looks at the relationship between today’s open and today’s close, today’s close and yesterday’s close, and today’s close in terms of the day’s range. Bar-Types 1 to 4 all have the close of today >= close of yesterday. Bar-Types 5 to 8 have close of today < close of yesterday.
I wanted to program this into my TradeStation and do some research to see if the concept is valid. In his book, Keith tested a lot of different stocks and commodities. In this post, I just test the ES, US, and Beans. This form of research can be used to enhance an existing entry technique.
Here is how I defined the eight different bar types:
I used a brute force approach by creating an 8-element array of boolean values. Remember EasyLanguage uses a 0 index. If the two -day pattern matches one of the eight criteria I assign the element a true value. If it doesn’t match then a false value is assigned. I use an input value to tell the computer which pattern I am looking for. If I choose Bar-Type and there is a true value in that array element then I take a trade. By providing this input I can optimize over all the different Bar-Types.
Here are some results of looping through all eight Bar-Types, Buy and Sell, and holding from 1 to 5 days.
ES – ten – year results – remember these are hypothetical results with no commission or slippage.
Here’s what the equity curve looks like. Wild swings lately!!
Keith was right – look at the Bar Category that bubbled to the top every time – the most counter-trend pattern. My Bar-Type Number 7 is the same as Keith’s 8. Here is the code in its entirety.
Keith’s book is very well researched and written. Pick one up if you can find one under $500. I am not kidding. Check out Amazon.