MetaStock
Performance
Systems
Introduction
Technical analysis is a powerful tool, but to get the full benefit from it, let the computer do most of the work. MetaStock and the MetaStock Performance Systems do all of the dirty work for you, allowing you to spend your time more productively.
This section gives an overview of MetaStock and each Power Tool. This section also introduces you to the MetaStock Performance Systems, and guides you through selecting a system that is right for you.
MetaStock Power Tools
MetaStock contains all of the tools necessary to design, test, and implement an advanced technical analysis trading system.
MetaStock’s Power Tools include The Explorer™ for finding securities that meet certain conditions, the Enhanced System Tester™ for testing trading systems to see how profitable your ideas have been in the past, the Indicator Builder for creating your own indicators, and the Expert Advisor™ for displaying customized commentary, highlighted bars, symbols, and alerts. The Explorer
MetaStock Help –What is
The Explorer? The Explorer is a powerful, multi-purpose analysis tool that can perform in-depth “explorations” (also called “scans”) on thousands of securities at one
time. It can compare, rank, sort, and filter securities; list multiple indicator values for multiple securities; show securities with current buy and sell signals; and search for any technical criteria set by a trader. Results can be saved to lists for easy future reference.
Enhanced System Tester MetaStock Help – What is
a System Test? The Enhanced System Tester lets users create and back-test trading systems. The user sets entry and exit conditions, commission amounts, and other
important details. Then the Enhanced System Tester tests the criteria on real securities to see how much money would have been made or lost using that system during a set period of time. The Enhanced System Tester can also optimize each system to find the parameters that work best for an individual security and compare multiple systems to show which is most profitable. These tools allow traders to optimize their chances of making profits in the markets—without risking a cent of real money.
Indicator Builder MetaStock Help – What is
the Indicator Builder? Built into MetaStock is a powerful indicator builder that allows users to conveniently create their own custom indicators using MetaStock’s 200+ pre-
built mathematical, statistical, and technical functions. MetaStock’s indicators also support variables, multiple plots, and user inputs.
Expert Advisor
MetaStock’s Expert Advisor works as both a basic teaching tool and a powerful means of automating a trading system, no matter how advanced. Experts include buy and sell signals, alerts, and written commentary. Users can also create their own experts to automate systems of signals, alerts, and more.
MetaStock Help – What is the Expert Advisor?.
MetaStock Performance Systems
The MetaStock Performance Systems are a set of 80 of the best-performing systems ever devised for MetaStock. Twenty-six of these systems come free with MetaStock, and the remaining 54 are available with the MetaStock Performance Systems Plus plug-in.
Each MetaStock Performance System has an associated system test, signal exploration, performance exploration, and expert advisor. Some of the
performance explorations associated with the 26 free systems are only available by purchasing the plug-in. A description of each of the 26 free systems is found in chapter four of this manual, including whether the performance exploration is included with MetaStock or must be purchased with the MetaStock
Performance Systems Plus plug-in.
How the MetaStock Performance Systems were selected The MetaStock Performance Systems, developed by Trading Systems Analysis Group, were chosen by testing many variations of hundreds of different systems on daily data, adding up to about 10,000 different combinations. The tests were done on daily stock data, using no trade delay, with entry and exit on the close. No commission was figured in during the testing. Stops weren’t used, as the systems have their own exit signals that close out a trade fairly quickly. Low-priced and low volume stocks weren’t included in the testing. A system was deemed desirable if its trade efficiency (described on page 51) was positive for more than 50% of all stocks analyzed.
A Stop is an order to sell a long position, or cover a short position, at a predetermined amount, usually to limit losses.
Which System Should I Use?
There are two ways to approach the MetaStock Performance Systems tools. You can choose the stocks you want to trade, and then find the system that works best with that stock.
Or, you can choose the systems you would like to use, and then find the best stocks to trade. You can use the Enhanced System Tester to compare the system’s performance on all the stocks in your chosen database, or even online stocks. The stocks can be ranked by, profit, percent of gain and other criteria, and then you can choose what to trade.
The following sections will explain both approaches. You decide which works best for you.
Comparing System Tests
Choose the stock or stocks that you want to trade, using whatever criteria you find appropriate. You might choose a stock you have a lot of knowledge about. If you are only going to be taking long positions, you should probably choose a stock that you think has good long-term prospects.
We are going to compare different systems' performance with different stocks using the Enhanced System Tester. For more information on using the Enhanced System Tester, see the step-by-step guide to using the Enhanced System Tester on page 44.
One System Tested on Several Stocks
Suppose you’ve chosen the system you want to use, and you simply want to find a stock whose personality fits this system. Maybe after reading through the descriptions in chapter four, you’ve decided that the system that best fits your trading style is the Pattern Trading System 1. It’s built on a bullish premise, and it trades every one to two weeks, so you think you’d like to give it a try. In the following example, we’ll show you how to choose a stock to trade using the Pattern Trading System 1 system.
To Test One System on Several Stocks 1. Open the Enhanced System Tester.
2. Click the New Simulation button. The Select Systems screen appears.
3. Scroll down and select PS Pattern Trading System 1.
4. Click Next. The Select Securities screen appears.
5. Click Add Securities. The Add Securities dialog appears.
6. Double-click the folder titled Stocks - Common, then double-click the folder titled S & P 100.
7. Click the Tools button, and then click Select All.
8. Make sure the periodicity is set to Daily (in the lower left corner) and click Open.
9. Once you return to the Select Securities screen, click Dates. The Simulation Dates dialog opens.
10. Select Use price data from and enter 6/30/2000 in the “from” date and
7/1/2002 in the “to” date.
11. Click OK.
12. Click Next. The System Testing Options screen appears.
13. Make sure the options in your System Testing Options dialog match those pictured above.
14. Click More to open the System Testing Options dialog and select the Trade Execution tab. Make sure the Realistic Market Prices box is checked.
15. Click Next. The Begin Trading Simulation screen appears.
16. Type PTS1 in the top field (where it says The System Tester will now perform the simulation).
17. Click Start. A status window appears in the lower right corner of the screen.
18. When the simulation is complete, click the View Results link.
Click Here
19. The Test View opens. Click the Net Profit column heading twice to arrange the results with the best performers at the top of the list.
The top two performers (according to net profit) are General Dynamics and Schlumburger. But net profit is just part of the picture. Let's look more closely at how well these securities worked with the Pattern Trading System 1.
20. In the results list (the bottom half of the screen), double-click General Dynamics. The Summary Report appears.
21. Look at the Performance section (second section down on the left), and notice the Buy & Hold Profit. It was only $5,236.25. But the Pattern Trading System returned a $5636.25 profit, $400 more. That's a good sign.
22. Now click the Equity tab to view the Equity Report.
23. The equity line rises steadily without any extreme jumps. This suggests that the system is relatively stable and dependable.
24. Now click Back and repeat steps 18 - 20 for Schlumberger.
You’ll find that in this test, Schlumberger’s net profit beat its buy and hold profit, but its equity line is less steady than General Dynamics’. So of the two securities that returned the highest net profit with the
Pattern Trading System 1, General Dynamics is probably the best
candidate going forward. If you decide to use this security with this test, you should attach the Pattern Trading System expert to General
Dynamics’ chart and check it each day for buy and sell signals. Several Systems Tested on a Single Stock
You can also run several systems against a single instrument. To Test Several Systems on One Stock
1. Launch the Enhanced System Tester so we can perform a back-test (see page 28 for more information about the Enhanced System Tester). 2. We want to try all 26 of the MetaStock Performance Systems on our
stock to see which ones do the best. To select all the systems, click on the first PS system in the Systems list, then hold down the shift key and click on the last PS system in the list.
3. Click the New Simulation button to start the Perform Trading Simulation wizard.
4. In the wizard, click Next.
5. Click Add Securities. The Add Securities dialog opens.
6. Make sure the Online Vendor button is selected and double-click the
Stocks - Common folder to open it (if you’re not already in it). 7. Click the Options button and select View by Name.
8. Type Amgen in the Symbol field.
9. Make sure the periodicity is set to Daily (in the lower left corner) and click Open. You are returned to the wizard.
10. Click the Dates button.
11. Select Use price data from ___ to ____ and enter 6/27/2001 for the first date, and 6/28/2002 for the last date.
12. Click OK.
13. Click Next. In the wizard, the System Testing Options dialog appears. 14. Check the Points Only Test checkbox. Make sure the rest of the System
Testing Options dialog matches the picture below.
15. Click More to open the System Testing Options dialog, and click the
Trade Execution tab.
16. Uncheck the Realistic Market Prices box. 17. Set the Buy Price and the Sell Price to Close. 18. Click OK.
19. Click Next. The Begin Trading Simulation dialog appears. In the field at the top (The System Tester will now perform ...) type
My Simulation. (Don’t include the quotes.)
20. Click Start.
21. When the simulation is complete, click View Results.
22. The Test View appears, listing all the systems and showing how well they did according to profit and other criteria.
23. Click the Net Profit column once to sort the systems in ascending order, and twice to sort them in descending order (puts the best results at the top).
In this example, net profit represents points since we are doing a points- only test. This report shows that the PS Cycle Progression system performed best, returning 39.93 points (the column titled Net Profit) over the one-year period. PS Bull Power Bear Power is a close second, with a net profit of 31.79 points.
Looking at the total number of trades (the column titled Trades); the
PS Bull Power Bear Power system only had 15 trades.
The PS Cycle Progression had 48 trades, three times as many as the
PS Cycle Regression. All else being equal, we’d prefer the system with
fewer trades. Fewer trades mean fewer commissions paid out to a broker. 24. Double-click PS Bull Power Bear Power to open the Result Details
View.
25. Click the Plot on Chart button so we can see the equity line plotted in a chart (the equity line represents our system’s profits).
26. Close the Enhanced System Tester to see the equity line plotted in the accompanying chart.
The equity line shows a relatively steady up trend for the entire year. That’s what we like to see. It would appear that the PS Bull Power Bear
Power is in tune with Amgen for these dates.
Now all we need to do is attach the PS Bull Power Bear Power expert advisor and check the chart each day for signals. The expert alerts will notify us if there have been any signals since the last time we opened our chart, and the expert commentary will give us details on each signal generated.
Now we’ve done everything we can to reduce our risks. We’ve found a system that back-tests well on a stock that we understand well. The system fits our trading personality, and we understand the theory behind the indicator. We’re only going to put a small part of the money we can afford to lose into any one trade. We’ve removed the emotion factor as much as is possible. We’re ready to trade.
This concludes our discussion of choosing a system and stock to trade. Remember these points:
• Load enough data for a valid test. • Look for systems that beat buy-and-hold. • Look for steady, up-trending equity lines. • Limit your risks.