Methodology: Slow TAO 3 Mechanical Model #1 (ST3MM1):
1) Three daily arithmetic moving averages (dama) are used: 12, 16 and 192.
MA 1 = the 192 dama
MA 2 = the average of the 12 dama and the 16 dama.
(An aside: 12 and 16 are recurrent numbers in my systems, as are squares).
2) Three daily MACD's (moving average convergence/divergence) are used:
MACD 1: 16/48/9
MACD 2: 25/64/9
MACD 3: 64/144/9
3) The Slow TAO 3 Bias is used for leveraging of the technical signals.
The general methodology for the ST3MM1 is being given below. It applies to the global index ETF's in Sector 1 (and, to some extent, the more specific ETF's in Sector 2), and to TIP/TLT/IEF using a reverse TAO bias. I have kept it as simple as possible while maintaining the system's logical integrity and functionality.
RULES:
1). The 192 dama is Primary. Trading position: if rising, long or flat only; if falling, short or flat only.
1a. The TAO 3 bias is used for leverage. If the 192 is rising and TAO 3 bias is long, leverage long. If the 192 is falling, and the TAO 3 bias is short, leverage short. When leveraged, if the TAO 3 bias changes to go contrary to the 192, then deleverage. If not leveraged, if the TAO 3 changes to favor leverage, then leverage.
1b. When leveraged long, the signal remains valid as long as the average of the MACD 3 and its 9 dama is greater than zero. When short, the signal remains valid as the average of MACD 3 and its 9 dama is less than zero.
1c. If the MACD 3 goes contrary to the prevailing 192 dama, then de-leverage, if any. Re-enter leverage using MACD 1, and validated by the 12/16 average (12/16 moving higher for buys, lower for sells).
2). When the 192 dama is changing bias (for simplicity, when the current 12 day average of the 192 is intersecting the 12 day average of the 192, 192 trading days earlier), then MACD 2 becomes primary.
2a. MACD 2 greater than zero validates a buy, and MACD 2 less than zero validates a sell.
2b. If rule 2a is valid, then, for three weeks, MA 2 (12/16) becomes primary, and must validate MACD 2.
For buys, MA 2 must be rising during those three weeks; for sells, MA 2 must be falling during
those three weeks. If MA 2 validates MACD 2, then MACD 2 becomes primary, and eventually,
MACD 3 becomes primary once it confirms MACD 2, and the system returns to rule #1.
2c. If MA 2 fails to confirm, and reverses direction before the 3 weeks expire, it remains primary, and its direction gives the signal. (Depending on the significant digits that are chosen for the calculations,
if there is any doubt about the 12/16 direction, use a 12/16/20 average for confirmation)(fewer
trades rather than more).
3). For now, use a 5% stop loss from any entry price (wasn't used during the last 10 year period).
There are other, more effective ways of capturing more long term profit. And, also, with this ST3MM1 system, there are additional techniques to both lock in profits and improve the timeliness of reversals. However, they all increase the complexity of the system greatly. It has been demonstrated, with some statistical certainty, that a technical trading system (ST3MM1) can be profitable with the SP 500, and that the profits can be enhanced with the use of the TAO 3 bias.
