Analyzing a Mechanical System.

ANAS writes:
QUOTE
…The following is my mechanical trading system (or what I assume to be a system, ]. I use daily charts , and trade only in NIFTY. I use MACD(12,26,9]. I short after, when the FAST line crosses the SLOW line, from above. (both are above 0] and the FASTline stays below the SLOW line , for the next three days. I short near the end of the third day. also, i use SLOW STOCHASTICS(14,3] and CCI(20 & 30 too], to ascertain OVERBOUGHT&OVERSOLD levels. Sometimes I just check the ADX(14] , to find the strength of the TREND(I Consider trend as my friend as adviced by you ]. The stop-loss is kept above the most recent turning point. The above principals apply also, when I go LONG (of course the opposite set]

MY QUERY IS: is the system overall correct?, can you please suggest some alternate strategy of ascertaining stop-loss?, are the time frame of using above indicators correct? or will you suggest some other sets ?, many times I miss a considerable portion before I enter the trade, can you suggest some better method where I can take positions early and without facing any whipsaws? I understand and respect the considerable effort & time, which will taken on your part to advice on my query. I request a generous reply from you. THANK YOU ONCE AGAIN , for KEEPING IN TOUCH WITH US.. Other readers are also welcome to give suggestions.
UNQUOTE

My Notes:
Let us try to analyze the system decstibed here.

INSTRUMENT : Nifty Futures
Time Frame fo analysis: End of Day
Analysis done on: Not known. Are you using Cash or futures chart ?
Trading Rules:

Go Long When
MACD(12,26,9) Crosses above its trigger 3 days ago AND Both are below Zero (at crossover?)
StopLoss below latest turning point (turning point definition not available)

Go Short When
MACD(12,26,9) Crosses below its trigger 3 days ago AND Both are above Zero (at crossover?)
StopLoss above latest turning point (turning point definition not available)

So far this is a mechanical system. The turning point definition needs to be clear, but once that is done this is a trading system.

ANAS says “also, i use SLOW STOCHASTICS(14,3] and CCI(20 & 30 too], to ascertain OVERBOUGHT&OVERSOLD levels”

There is no rule mentioned on the use of stochastics and CCI. How is it used?

ANAS says again “Sometimes I just check the ADX(14]”

When is it checked and what is checked ? Rules not available.

Therefore, in analysis, I am ignoring the stoch, CCI and ADX.

The basic MACD rule is a trend following system. By requiring the lines to be above zero when selling, and, below zero when buying, the trader is buying on dips and selling on rallies. This is sensible.
By waiting for three days before entering, the system will often avoid buying in euphoria and selling in panic. Again, this is sensible.

Overall, this appears to be a profitable system, if used with discipline and some discretion. There should be a profit taking method. How do you exit a trade? Often, the MACD may remain above zero but a rally starts. You do not wish to continue your short position when this happens. Same for buy positions.

ANAS asks: many times I miss a considerable portion before I enter the trade, can you suggest some better method where I can take positions early and without facing any whipsaws?

MACD will often miss the early parts of a move. Sometimes it will push you in a trade at the best possible trade location. So, you win some and you lose some. If you develop a sense of the market, then you can trade in the direction of the priamry trend most of the time. When you feel that a reversal is imminent, take both sides of the trade. If the reversal happens , fine, and, if it does not then you have taken a loss or two and are back in the correct direction. In the same way, when you feel that the market may be going sideways, stop trading.

Now, this is not a mchanical system in the sense that it is not 100% automated. But it instills discipline and you can use your judgement to improve your trading.

Cheers.