Frequency distribution of 65sma-3cc trades

0 0 0 0 0 0 Q Q Q 0 Q 0 Q 0 Q 0

in o m q in o i" q u) o u> o w> o in o

h- 5 cm in f^- o cm in c\j p h- i/> cm Q f^ "3

<y <a- co cm ••- ••- ' ••- cQ cm co ^t in m <o

Bin width = $250

Figure 4.5 Histogram of all 2,400 trades for the 65sma-3cc trading system.

The 65sma-3cc Trend-Following System 83

65sma-3cc trades. A histogram of all 2,400 trades shows the distribution of trade profits and losses (see Figures 4.5 and 4.6). There are more large winners than large losers, and many small losers. Remember that these results were calculated without using an initial money manage­ment stop. Most of the trades are bunched between -$3,000 and $2,000, with the highest frequency near zero. There are few losing trades worse than -$5,000, balanced by even more trades with profits greater than $5,000. An initial money management stop will clean up the negative part of this histogram.

Thus, it should be obvious that most of the profits come from a relatively small number of trades. In Figure 4.6, 12.5 percent of the trades are seen to have closed-out profit greater than $3,000. Be aware that if you get out too soon, you are likely to miss one of 100 or so (4 percent) of the mega-trades that make trend-following worth the aggra­vation.

Many measurements follow what is called a standard normal distri­bution. For example, if you measured the diameter of ball bearings, the