A Simple Trend Following System

On Friday after the market [ IWM ] close, click on the >>> Valueline Geometric Index. Go to Weekly View and look at the Open of the previous week, then look at the % change of this week.

1) If you were long the market and this week change is -4% or more, on Monday morning reverse your position from long to short.

2) If you were short the market and this week change is +4% or more, on Monday morning reverse your position from short to long.

3) If you were long and the % at the end of the week is positive + …or if you were short and the % at the end of the week is negative – …do nothing and stay with your actual position until you get 1 or 2.

Martin Zweig 4% indicator in summary:

The Four Percent Model Indicator uses the Value Line Geometric Index. The model makes use of the weekly close of the Value Line Index. A buy signal is generated when the index rises four percent or more from the previous week. Similarly, a sell signal is indicated when the index falls four percent or more from the previous week. The signal can be traded on IWM or other major indexes.

Additional thoughts:

Although there must be numerous trading styles, the use of a mechanical system allows the development of a plan with rules of entry, exit and risk management. The hardest part is to foster the discipline necessary to weather the inevitable losses inherent to the use of any trading program.

This strategy won’t turn $10k in $100k within one year’s time, but the trading system offered is simple. Because of that very simplicity it is robust in terms of generating overall positive rates of returns while simultaneously minimizing the risk of ruin.

Critics say that no one would give away a succesful trading system and that if a profitable system were given away, it would no longer work since everyone would be using it.

Such criticism suggest ignorance regarding trader psycology. Good traders will argue that the primary reason for failure as a speculator is a lack of disciplined adherence to risk management rules. The reality shows that the development of rock-solid discipline is among the most challenging endeavors to which a trader can aspire. If this were not the case, anyone could do it.

The vast majority of traders with a system do not have the discipline to follow it. While discipline is not a sufficient condition to win, it is a necessary condition.

Trend following is about surrendering to the now situation of the market. It’s about leaving our cherished opinions, hopes, judgments, conclusions and egos at the door. We don’t act on what we think the market should be doing, but on what the market is doing.


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