In systematic trading, a trading signal is generated and then a trade is made. The question many people ask is when is the signal generated, and when is the trade made? The answer depends upon the rules in the systematic trading plan. Is the systematic trading plan an intraday plan or an end of day plan?
Let’s look at an end of day systematic trading plan for the signal and to determine an entry.
In the example below, we will use the 50 day simple moving average as the trading plan.
Today, December 9, 2009 the DBC ETF had a close below the 50 day simple moving average. In an end of day plan, a trader needs to wait until the close and then determine that an action should be taken. There is no question that a signal occurred at the end of the day. The ETF, stock, or index may move on both sides of a signal during the day, but at the end of day’s close it either is or is not below the value to commence a signal. If I had 100 traders in a room, I doubt I could get all 100 to agree on the direction of the DBC Commodity ETF. I do feel that I could get all 100 to agree that the DBC closed below the 50 day moving average today.
Today’s close becomes the signal. Under the rules of the system, a new trade position needs to take place. The execution of the trade can be built to take place at a specific time.
One would be the next day’s open
The other might be the next day’s close.
Either is appropriate and the key to systematic trading and back testing is to use the same entry and exit signal points and entry points. I like to use a next day Market on Close, MOC order which allows for consistent rules for ETF’s, futures trading, or mutual fund timing strategies.
For more on systematic trading, contact mark@seleznovcapitaladvisors.com
www.seleznovcapitaladvisors.com
