Way of the turtle

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Way of the Turtle

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breakout system is a medium-term, trend-following system, so its entry
needs to have an edge over the medium term, not the short term. One
might say more generally that an entry needs to have an edge only
over the time frame for the system in which it is being used.
The E70-ratio for our entry is 1.20, which means that trades
taken in the direction of a 20-day breakout move on average 20 per-
cent farther in the direction of the breakout than they do in the
opposite direction when one looks at the price movement in the
70 days subsequent to the entry signal.
Figure 5-2 shows how the edge ratio changes for 20-day break-
outs over varying numbers of days. First, the edge ratio starts off
below 1.0, meaning that over the very short term there is generally
more movement against a trade taken at a breakout than there is
in the direction of the breakout. This is one of the reasons trading
breakouts can be very difficult psychologically. It is also one of the
reasons you can make money using a countertrend trading style by
betting on the breakout not holding and in favor of a bounce off of
the support or resistance. There is a positive edge for these strate-
gies in the very short term.
Second, the edge ratio begins to climb steadily but still fluctu-
ates fairly erratically on the positive side of 1.0, indicating a posi-
tive edge but one where it is difficult to quantify with true precision.
The Trend Portfolio Filter Edge
How do the portfolio selection criteria affect the edge for the
Donchian channel system? You can examine this in two ways. First,
you can look at how the portfolio selection filter affects the edge of
purely random entries and compare them with the baseline edge
Trading with an Edge
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