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Author: just1trader Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2705  
Subject: Testing 3 Line Break Date: 5/31/2013 7:50 PM
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Quill,

I just looked at charts for every stock in the SP400, alternating between 3 Line Break (3LB) and Candlesticks. Here's a quick sample in which the signals generated by the crossover in 3LB are left in place in the Candlestick chart.

http://stockcharts.com/h-sc/ui?s=MCY&p=D&yr=0&mn...
http://stockcharts.com/h-sc/ui?s=MCY&p=D&yr=0&mn...

http://stockcharts.com/h-sc/ui?s=MDP&p=D&yr=0&mn...
http://stockcharts.com/h-sc/ui?s=MDP&p=D&yr=0&mn...

The mid caps don't lend themselves as well as the SP500 to be traded with 3LB. But that's a minor issue. The more serious problem is that entries and exits are generally later than with candles. But that, also, could be a virtue. 3LB filters out a lot of the "noise", so that just the major trend is being tracked and traded.

I know I need to do more testing. But my guess is that a viable system could be put together whose essence is the following:

Trading Rules:
(0) Benchmark everything to be traded against the broad market.
(1) If the broad market is rising (falling), then only go long (short).
(2) If the tradable is doing better (worse), put on a position.
(3) When it stops doing better (worse), exit the position.

Risk-Management Rules:
(4) All opening positions are in equal dollars.
(5) Scaling is done 3x-2x-1x.
(6) Exits are with the full position.
(7) A stop is always trailed.

That's the rough outline. Now come the grim facts. The only way a small account could implement this system (a campaign of putting on dozens of positions) is to execute through Foliofn. But that means putting up with their 11AM and 2PM execution windows and having to use mental stops rather than orders already in the market. OTOH, to the upside, there'd be no constraints on price or liquidity. If Foliofn tracks it, it could be traded, which creates interesting possibilities.

Charlie
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