Time: 4/82-7/95

Figure 4.39 Equity curve for bottom-fishing pattern (9/82-7/95) with X = 1 and /= 0 (aggressive trades) for SScP-500 data with rollovers. Initial money man­agement stop was $2,000.

Figure 4.40 The bottom-fishing pattern with X = 4 and / = 3 picked off the im­portant December 1994 bottom.

A Pattern for Bottom-Fishing 137

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Figure 4.41 The bottom-fishing pattern with X = 1 and Y = 0 entered the mar­ket closer to the December 1994 bottom.

You can try a variety of exit strategies. Instead of an exit on the close of the twentieth day (case 1), use a trailing stop on the 5-day low after a $1,000 profit on the trade (case 2). Case 2 with X = 4, Y •= 3, a $2,000 initial stop, and $100 for slippage and commissions from Febru­ary 12, 1988, through July 10, 1995, had a profit of $59,025 over 44 trades (45 percent winners) with a drawdown of-$7,625. You can com­pare these data to the second row in Table 4.20 (case 1). Thus, the new exit strategy produced approximately the same profits, but with a smaller drawdown and more winners. The equity curves for case 1 and case 2 are shown in Figure 4.42. You can see that case 2 has shallower draw­downs than case 1.

To check the basic validity of the bottom-fishing pattern on other markets, we must modify the pattern slightly to make it more general. Values ofX= 0.1 and Y = 0 are chosen in order to test across many mar­kets. A trend-following exit, at the lowest low of the last 20 days, was chosen because not all markets are as dynamic as the S&P-500 market. The entry is switched to above the high of the signal day, instead of buy­ing at the next days close, to reduce the number of entries in down­trends. The initial money management stop is $2,000, and as usual, $100 is deducted for slippage and commissions. The pattern uses all available data from January 1975 through July 1995 using continuous contracts on 17 markets. The results are for trading one contract at a time.

138 Developing New Trading Systems

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Equity Curve: SP#1 A=4 B=3 MMS=$2000 Case! =exit on 20th close Case2 = $1000 profit + 5day trailing stop

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Figure 4.42 Equity curve for case 1 and case 2.

The generalized bottom-fishing pattern was profitable on 11 of 17 markets, including deutsche mark, Eurodollar, gold, Japanese yen, coffee, orange juice, Swiss franc, S&P-500, silver, 10-year T-notes, and the U.S. bond market. Thus the pattern also seems to work on mar­kets that trend well or have good swing moves. The results are given in Table 4.21.

These data suggest that the bottom-fishing approach captures a ba­sic trading pattern in the markets. The long test period and the profits on a variety of markets indicate that the idea is robust. The difference in performance between markets seems to be the amplitude of the move­ment after forming the pattern.

An extension of the test of the bottom-fishing pattern to stocks ex­plores its performance over different time periods. Figures 4.43 (weekly) and 4.44 (monthly) illustrate how the generic bottom-fishing pattern works. Figure 4.43 has weekly data for Union Carbide showing how the pattern picked the bottoms in 1990 and 1991. The pattern also stayed long throughout the major uptrend. The pattern tests well with weekly data on stocks. Figure 4.44, page 140, has monthly data for Caterpillar

A Pattern for Bottom-Fishing 139

Table 4.21 Results of testing the generic bottom-fishing pattern on other markets

Market	Profit (S)	Number of Trades	Percentage of Wins	Maximum Intraday Drawdown ($)	Profit Factor
British pound	-17,694			-6,403	0.92
Coffee	86,740			-62,251	1.36
Crude oil	-35,660			-38,000	1.43
Eurodollar	20,650			-5,825	1.71
Gold	7,510			-40,000	1.06
Heating oil	-19,687			-50,124	0.88
Japanese yen	98,513			-15,188	1.95
Live hogs	-17,853			-22,1 76	0.83
Orange juice	12,653			-11,978	1.16
Silver	121,970			-54,550	1.81
Soybeans	-1 7,869			-35,719	0.86
S&P-500	127,925			^3,065	1.64
Sugar	-23,660			-34,166	0.75
Swiss franc	64,450			-28,387	1.48

91 92 93 94 95 Figure 4.43 Example of generic bottom-fishing pattern on weekly stock data.

140 Developing New Trading Systems

9 90 91 92 93 94 95

Figure 4.44 Example of generic bottom-fishing pattern on monthly stock data.

Tractor. The bottom-fishing pattern responded to the 1992 bottom and stayed with the stock throughout the rally.

In summary, the bottom-fishing pattern-based system is a good ex­ample of a market-specific system. You can use it as a model to develop other pattern-based systems on the S&P-500 market. The pattern can be generalized successfully to other markets, including stocks. The bot­tom-fishing pattern also works across time periods such as daily, weekly, or monthly. Thus, the bottom-fishing pattern captures a fundamental pattern of price evolution.