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16-May-08
Knish System -- Rules
Rules for the Knish system (as of December, 2007)
Knish is a mean reversion system, looking to capitalize on stocks ready for a quick rebound after being "overly stretched downward".
Entry. Knish uses two methods to determine potential trade entries:
1) A streak. You may enter the day after five consecutive down days, with the condition that the difference of yesterday's close (Bar) and the previous day's close (Bar - 1) is greater than the day before yesterday's close (Bar - 1) and the close of the day preceding (Bar - 2).
2) A band violation. A buy can be be executed if the price goes outside the difference of the highest high of the last 13 days less the lowest low of the last 13 days by at least 24% of that range (the "band").
Filters. Both entry conditions have additional prerequisites, or filters:
1) Oversold. The 11 period RSI must be "oversold" (I use an RSI value of 33 or less);
2) Trend Filter. The longer term trend must be up (Close > 200 day MA). Exception: except if the streak condition has reached seven or more down days, at which point entry is still allowed, if the streak condition in 1) is still met.
3) Band/Volatility filter. In order to make the trade worthwhile, the band needs to be at least 5/8 of 1% of the limit price (since it is the profit target).
Exits. Knish trades have multiple conditions for an exit.
1) Profit target hit. Price rises by 100% of the "band" that is calculated band violation condition in the entry criteria.
2) A two day up streak. Sell at market the following open after two up closes in a row.
3) Rate of change drops below average after 5 days held. If the trade has been held for at least 5 bars, and the one day rate of change is below the average (geometric average) rate of change for the last five days, then exit the trade.
4) Stop hit. The stop is a wide stop - 5 times the "band". It's not meant to be hit as much as it is to prevent a meltdown.
5) Time stop. A trade will not last more than 10 days.
Knish will then review candidates, favoring those with lower RSI, and stocks that that are less correlated to positions already in the portfolio. Only two positions in a security can be open at one time.
Tagged Stocks: MA
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