Evaluating A Trading System

One of our readers this week expressed concern over a trading system that's no longer producing the kind of results he's become accustomed to. Because the market is in a continual cycle of change, it's very difficult, if not impossible, to rely on a single trading methodology for all market situations. Knowing this, we must look for trading systems that reflect the general trend of a stock. This will undoubtedly help to improve the probabilities of a successful trade.

For example, a trading system based on a moving average crossover would probably work well in a trending stock. However, using a moving average to time entries and exits in a consolidating stock, could lead to several false breakouts and consequent losses. On the other hand, an oscillator would produce much better results in congestion zones, but might signal false tops and bottoms in a trending market. That said, we believe that using different trading methods for different market conditions can only help to improve our trading results.

Lets move on to the charts.

Amgen's earnings on 7/26 were met by heavy selling. Although the company reported strong quarterly sales for its blockbuster Epogen, its other blockbuster Neupogen, fell short of revenue expectations. Four new drugs to be released in the near future should help the company to find the kind of growth that investors have become accustomed to.

An interesting stock you've chosen here! Motorola's fall near $60 in the first week of March was due in large part to equipment shortage concerns and its consequent effect on earnings. The surprise here is that MOT managed to meet its expectations of 23 cents per share in the quarter. However, the stock only managed to get as high as its last top (near $40), before selling pressure again pushed shares lower.

Lucent has really been stuck in a congestion range since the company's initial earnings warning back at the first of the year. So, using a trading system that has been designed to profit from a trending stock would have had difficulty churning a profit over the last 6 months. Just recently, LU fell through its established trading range when the company announced that it expected to miss earnings estimates for the next 2 consecutive quarter.

Good Luck!

Michael Fairbourn
Research Analyst

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