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All Rights Reserved Copyright © 2003-2004

Printed in the USA

Adaptick, Inc.

1082 East 8175 South Sandy, UT 84094

www.adaptick.com

MetaStock is a registered trademark of Equis International (a Reuters company). The DownLoader is a trademark of Equis International (a Reuters company). PowerStrike, ICE, ICE System Wizard, Indicator Classification and Election System, and Adaptick System Framework are trademarks of Adaptick,Inc.

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Table of Contents The Cold Hard Facts about ICE for MetaStock ........................................ 1

A Paradigm Shift in Trading System Development ................................... 1 Installing and Running ICE ........................................................................ 1 ICE in a Nutshell ........................................................................................ 2 What ICE is all About ................................................................................ 2 TIP™ - The Technical Indicator Pyramid .................................................. 2

An Overview of ICE...................................................................................... 4 ICE can be used from Australia to Zimbabwe............................................ 4

Building Your Custom Trading System with ICE..................................... 8 Using Your Custom Trading System ........................................................ 16

Trade Manager.......................................................................................... 16 Trade Filter ............................................................................................... 18

Judging the Performance of a Trading System........................................ 20 Expectancy –a Valuable Metric for Evaluating a Trading System........... 21

Appendices................................................................................................... 23 Troubleshooting FAQs ............................................................................. 23 A Few More Facts about ICE ................................................................... 24 A Trading System Defined ....................................................................... 25 What is a MetaStock Trading System?..................................................... 26 The Organization and Logic of ICE ......................................................... 27 The Four V’s of a Technical Trading System .......................................... 27 Entry Signals ............................................................................................ 27 Adaptick IntelliStops™ ............................................................................ 28

Getting Help with ICE................................................................................ 30

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The Cold Hard Facts about ICE for MetaStock This chapter quickly explains the nuts and bolts of getting up to speed fast with ICE for MetaStock

A Paradigm Shift in Trading System Development ICE builds reliable, robust trading systems by combining raw computing power with your creative passion. ICE builds trading systems using Adaptick’s 4-V approach for trade entries and Adaptick’s IntelliStops™ for trade exits.

ICE changes the way traders approach trading system development. The old method of developing (or buying) a “one-size-fits-all” trading system is gone. With a computer, MetaStock, and ICE, you can efficiently build robust trading systems that are custom fit for each of your securities—trading systems that have a high probability of outperforming any system you could otherwise buy or create.

Installing and Running ICE ICE is a plug-in software program for use with MetaStock 8.01 (or higher). A companion web application, called the ICE System Wizard, requires Internet access. ICE shares the same system requirements as MetaStock. See your MetaStock documentation for more details.

To install the ICE for MetaStock plug-in:

1. Ensure that MetaStock 8.01 or higher is successfully installed. 2. Insert the ICE CD-ROM in your drive. Or if you downloaded

ICE, click OPEN or double-click the downloaded SETUP.EXE file. The Installation Wizard for ICE will start.

3. Enter your Install Password when prompted. 4. If you want to get right to it, then jump ahead to the “Building

Your Custom Trading System with ICE” chapter. You can verify that ICE was successfully installed by running MetaStock and confirming the existence of the “ICE System Wizard” item on the Tools menu.

To create an ICE System Wizard account:

1. After installing ICE, run MetaStock. 2. Choose ICE System Wizard from the Tools menu. (If this menu

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item does not appear, then try reinstalling ICE.) 3. After MetaStock’s built-in web browser opens, click the link

named New User? Enter the Product Code provided with your copy of ICE. Then complete the registration.

4. Finally, verify your new account by clicking the link in the email you will receive.

ICE in a Nutshell ICE is a plug-in for MetaStock that helps you quickly and efficiently build robust trading systems for individual securities. ICE provides a logical, systematic set of System Tests to help you find a set of diverse indicators to use as signaling components in a complete trading system. ICE isolates every “testable” technical indicator in MetaStock and wraps it with a common set of logic and exit rules. Users of ICE should not make the assumption that any single System Test in ICE can be a robust or complete trading system. Only after entering your optimized results into the online ICE System Wizard will you have a robust trading system.

What ICE is all About ICE is an acronym for Indicator Categorization and Election. The name describes the primary purpose of the product well; namely ICE “classifies” the MetaStock indicators into one of four broad categories—Velocity, Verticality, Volatility, Volume. Furthermore, ICE provides a springboard into the world of trading system development by giving you a means of “electing” indicators that are appropriate for trading a stock or group of stocks and then easily constructing a “balanced” trading system using the ICE System Wizard. If this product does nothing more than alert you to a principle that we call “Indicator Diversification” then it will likely pay for itself many times over.

The developer of ICE, John Slauson, was introduced to this important principle by John Bollinger (www.bollingerbands.com) in the Fall of 2000 when the two collaborated on the development of a plug-in for MetaStock called BBS (Bollinger Band System). John Slauson has been a strong advocate of this principle ever since. ICE is not a trading system. It is a tool to help you easily build reliable customized trading systems based on solid optimization results.

TIP™ - The Technical Indicator Pyramid In our experience building trading systems, we have coined the acronym TIP as a cue for remembering the critical components of a good technically oriented stock trading system. The illustration below shows the primary components of TIP. You can think of the mortar that binds the bricks as your own personal discipline.

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The foundation brick and the most important component of a trading system is a reliable Broad Market forecast of the stock market (this can extend to the Industry and Sector level as well). About 70% of an individual stock’s price movement is strongly correlated to movement in the broad market. A product currently in development at Adaptick called FIRE™ will provide traders with a tool to address the needs of forecasting broad market trends. Check www.adaptick.com periodically for updates. Support and Resistance is the second most important brick.

An Adaptick plug-in called PowerStrike™ provides you with a great tool for measuring support and resistance for individual stocks. The remaining four smaller bricks are an individual stock’s volume, volatility, verticality (i.e., trend), and velocity (i.e., momentum) characteristics. Collectively, Adaptick calls these the “Four Vs”. A robust and well-balanced technical trading system is built from one indicator from each of these categories. This variety promotes trading system diversity—an important principle in trading system design.

ICE provides you with the tools required to easily construct your own customized trading systems using these key components. For example, an entry signal based on some combination of RSI, Stochastics, and TRIX is not “diverse.” Even though three indicators with different names have been chosen, each indicator measures the same market phenomenon, namely “velocity.” A better system could be constructed from Stochastics, MFI, and Bollinger’s %b. These three indicators cover three categories, namely, velocity, volume, and volatility. Such a trading system would be more diverse, and would most likely result in better signals.

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An Overview of ICE This chapter provides details on using ICE to find the best indicators for your trading system.

Traders use ICE many different ways. This is to be expected as there are many different traders with many different styles. However, there are some principles in trading system development that must be followed if a trading system is to be reliable and robust. If you use ICE and the ICE System Wizard properly, you can build an arsenal of reliable and robust trading systems customized for each of your securities.

ICE can be used from Australia to Zimbabwe ICE will build reliable MetaStock trading systems for any type of security on any market in the world as long as the security’s data contains OPEN, HIGH, LOW, CLOSE, and VOLUME. ICE is not biased towards any exchange or market. ICE will build robust and reliable trading systems for stocks on the Australian Stock Exchange to the Zimbabwe Stock Exchange. It will build systems for futures contracts trading on the Chicago Board of Trade or the Tokyo Grain Exchange.

The following diagram illustrates the ICE method of constructing a trading system:

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`

`

`

Enter the indicator values in the ICE System Wizard web page

Use ICE with MetaStock to find the best indicator from each of the four “V” categories

Click on the “Step 1” link in the email ISW sends you to install the system test for optimization

Run the system test in MetaStock to optimize your system parameters.

Click on the “Step 2” link in the original email to launch the ISW.

Enter the new values from the test results to generate the finaltrading system.

You’ll receive a new email with a link to install your final trading system.

Use your new complete system in MetaStock to monitor trades and stops for your stock.

Step 1

Step 2

Far too many technical traders purchase a charting program like MetaStock and either become enamored or confused with the large number of indicators, most with “important” sounding names. Make no mistake--indicators are a key component of modern technical analysis. However, the problem lies in the fact that many of these

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indicators, at their mathematical core, are almost identical. They lure unsuspecting traders with a siren song of impressive backtested and optimized trading results.

For example, nothing backtests and optimizes as nicely as two or three velocity indicators. Yet in the real world they usually perform miserably when traded over an extended period of time into the future. ICE helps guide traders away from this problem by providing a structured, well-grounded framework for building trading systems. What is “plugged-in” to MetaStock by the ICE plug-in? Upon installing ICE, 73 System Tests are added to the MetaStock Enhanced System Tester (EST). These system tests will appear at the top of Systems list in the EST dialog.

Notice the naming convention used for the system tests installed with ICE.

`(Indicator Category) – Indicator Name

For example, the first system test in the list is named “(Velocity) – Accumulation Swing Index.” “Velocity” describes the broad category that the indicator named “Accumulation Swing Index” falls into. The Accumulation Swing Index measures the velocity (or momentum) characteristics of a security.

ICE uses the identical indicator names found in two sources -- the MetaStock User’s Manual and the book Technical Analysis from A to Z by MetaStock creator and Equis founder, Steve Achelis. Each system test deploys the same Exit rules. ICE uses Adaptick’s IntelliStop™ method of trailing stops. Intellistops are volatility-adjusted stops that “trail” the extreme high or low. In fact, the Adaptick IntelliStop indicator can be plotted as an indicator by choosing “zAdaptick – IntelliStop 2” from the Indicator Quicklist. See the Appendices for more information.

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ICE also adds some helper custom indicators that you can simply ignore if you choose. These are called “helper” custom indicators because they help perform calculations for the ICE system tests. With the exception of the indicator named “zAdaptick – IntelliStop 2”, these are not intended for independent use or interpretation. The following illustration shows some of the helper indicators. Note that they are named beginning with the letter “z”. This is done so that they appear out of the way at the bottom of your Indicator Builder list.

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Building Your Custom Trading System with ICE The following step-by-step instructions guide you through the process of creating your own ticker-specific custom trading system using ICE and the online ICE System Wizard. These instructions assume you have MetaStock 8.01 (or higher) and ICE 2.0 installed.

1. Click Enhanced System Tester from the MetaStock Tools menu.

2. Find the best performing Velocity indicator for your security. Do this by selecting all the “Velocity” system tests installed with ICE. Then click the New Simulation button.

3. Click Next. Click the Add Securities button and choose a single security for which you want to build a custom trading system.

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4. Click Dates. Choose a date range for the security that contains upward, downward, and sideways trends. This will usually require a 3 or 4 year period. (Note: testing across data dominated by a single trend will adversely bias your trading system)

5. Click Next. Change the settings to appear exactly as shown in the following illustration. (Note: the results of MetaStock’s Enhanced System Tester are greatly affected by these settings. Therefore it is very important that these settings are correct in order for ICE to work properly.). For intraday data and futures see the FAQs in the Appendix for special instructions.

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6. Click More. Change the settings to appear as shown in the following illustration. (Note that you can set Margin, Money Market, Entry and Exit commissions as you desire.)

7. Click the Trade Execution tab. Change the settings to appear exactly as shown in the following illustration. Click OK when complete.

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8. Click the Start button. ICE will test and optimize all Velocity indicators for the security you selected. The Simulation Status window appears as the tests are running (as shown below).

9. Upon completion, click the View Results button on the Simulation Status window.

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10. Choose the best performing indicator. The fastest way to judge the performance of the indicators is to focus on profit. However, the fastest isn’t always the best. See the chapter of this manual entitled “Judging the Performance of a Trading System” for a more reliable metric for judging trading system results. For this example, click the column heading named “Best Profit” twice so that the highest profit indicator appears at the top.

11. Select the highest profit system by clicking on it once and make note of its name (in this example it was the Ultimate Oscillator) and then click the View button. Click the column heading named “% Gain” twice so that the highest profit system for the chosen indicator appears at the top. Make note of all the optimized parameters (i.e., OPT1, OPT2 and/or OPT3). In this example, OPT1 is “7” and OPT2 is “15.” There is no OPT3 value for this indicator. Note that the last unlabeled column is OPT5 which is not used at this point (An issue in MetaStock prevents this column label from displaying.)

12. Click the Back button twice until the System View screen appears as shown below. Find the best performing Verticality indicator for your security. Do this by selecting all the “Verticality” system tests. Then click the New Simulation button. Repeat Steps 8 to 12 above to find the best Verticality indicator along with it’s OPT values.

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13. Repeat Steps 8 through 12 above for the Volatility and Volume categories of ICE system tests. Armed with the 4 best performing indicators for you security, you are now ready to build a trading system using the online ICE System Wizard. Choose ICE System Wizard from the MetaStock Tools menu.

14. If this is your first time accessing the ICE System Wizard, create a new account by clicking New User. Otherwise, login with your email and password. Complete the forms for Steps 1a, 1b, 1c, and 1d using the Indicator(s) and OPT values you noted previously from Step 11.

Step 1a Step 1b

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Step 1c Step 1d

15. After clicking the Finish button in Step 1d, you will receive the first of two emails in the building of your ICE trading system. The email contains a link to a Custom Installer. The email will arrive within 5 minutes. Follow the instructions in the email for installing the ICE Step 1 results. Return to MetaStock and select the System Test the custom installer created named “$ ICE ticker Step 1” and click the New Simulation button.

16. Upon completion of the “Step 1” system test, click View Results. Make note of the values of OPT1, OPT2, OPT3 and OPT5 (note that a minor issue with MetaStock prevents the“OPT5”label from appearing in the column heading).

17. Open the email you received after completing Step 1. Click the link in the email to Step 2 of the ICE System Wizard. Enter the values for Opt1, Opt2, Opt3, and Opt5 that you noted in the previous step.

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18. Click Finish. Within 5 minutes you’ll receive another email containing a link to the Custom Installer for your finished trading system. Follow the instructions in the email for installing. Your custom trading system consists of 3 components—an expert advisor called ”$ ICE ticker Trade Manager”, a system test called “$ ICE ticker Trade Verifier”, and an exploration called “$ ICE ticker Trade Filter”.

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Using Your Custom Trading System Your custom ICE trading system is comprised of three components: a Trade Manager (i.e, expert commentary), a Trade Verifier (i.e., system test), and a Trade Filter (i.e., exploration).

Trade Manager An ICE Trade Manager is created for each security. An ICE Trade Manager is an Expert Advisor. It is the heart of your custom trading system. Attach the Expert named “$ ICE ticker Trade Manager” to the chart for which you built the trading system. Open your chart and then choose Expert Commentary from MetaStock’s View menu.

The ICE Trade Manager (i.e., expert commentary) displays important information about your trading system. It is divided into three sections.

Trade Entry Instructions Two key pieces of information are provided to help you trade the security. First, the Trade Manager notifies you if an entry signal has triggered on the last bar of the chart. If a signal has triggered, you are provided with information about the type of trade (i.e., Buy or Short) and the Stop/Limit range to use when placing a “good for day” order for the next market day.

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Open Trade Management In order to manage your open trades you are provided with the Stop value referred to as an IntelliStop. This stop value is dynamically adjusted according to volatility and intraday bar patterns. The IntelliStop value MUST be monitored daily and adjusted if necessary. It is the means by which all trades (winning or losing) are exited. Trading System Description The bottom part describes the components of your custom ICE trading system. It displays the Buy and Sell Short indicators along with the amount of weight (%) each indicator contributes. It also displays the system’s optimal weighting scheme (1 to 5), V-score values, and IntelliStop.

Trade Verifier An ICE Trade Verifier is created for each security. It is a System Test specific for your security. It is pre-populated and hard-coded with the security’s optimal components and parameters that your entered in the ICE System Wizard..

You can run the system test named “$ ICE ticker Trade Verifier” to see reported details about the trading system’s past performance. Choose Enhanced System Tester from the Tools menu to run the custom Trade Verifier for your security. The Trade Verifier also

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allows you to plot the buy/sell, short/cover arrows, and an equity curve on your chart for easy historical trade confirmation (as shown in the following chart).

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Trade Filter An ICE Trade Filter is created for every security. A Trade Filter is an exploration that is specific to the trading rules created for your security. A little-known feature in MetaStock allows you to select multiple explorations and run them simultaneously. This time-saving feature is very useful for ICE Trade Filters. Securities triggering entry signals will show a value of “1.0000” in the Buy or Short column of the exploration report.

To quickly discover which stocks are issuing entry signals, select all the Trade Filters for which you have built trading systems.

Next, click the “Use a single security list for all explorations” radio button. Select the data folder that contains the securities for which you’ve built trading systems. (You might find it helpful to consolidate the securities you have created systems for into a

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single “Favorites” list. See the MetaStock User’s Manual for details on the Favorites feature.)

If you want to search for other securities that are triggering entry signals using the same conditions as your security, then you can run the Trade Filter on those securities (thousands if desired). For example, perhaps you have created a trading system specific to the Computer Software Industry and would like to filter the individual stocks in that industry meeting the broad industry’s entry signal conditions.

A value of “1.0000” in the Buy column of the exploration report means that a buy signal was triggered on the date explored. Likewise, a value of “1.0000” in the Short column signifies a short signal. Be sure to open the specific charts and attach the Trade Manager expert to qualify the signal and the Stop-Limit prices to use for entering.

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Judging the Performance of a Trading System This chapter explains a how to judge the results that the Enhanced System Tester generates so that you can improve the reliability of the trading systems’ performance in actual trading.

At the heart of the ICE method of building a trading system is using the Enhanced System Tester to discover 4 diverse indicators (along with their optimal parameters) that perform best on a given security. The MetaStock Enhanced System Tester generates a lot of data by which to judge the performance of a system test. The metrics that most traders gravitate to is “Performance %” or “Annualized Performance” on the Summary page.

Another metric that is often misused is Percent of Profitable trades. We believe it is a good thing that MetaStock doesn’t directly provide this value. It probably is the MOST misused of any trading system performance metric. But, it is easily calculated by simply dividing Total Profitable trades (6 in the screen above) by the Total Trades (11 in the example above (54.5%). The easiest way to demonstrate how this metric can be misleading is with the following example. Trading System XYZ has 10 trades with 90% profitable trades. But it is a poor performing system. How can this possibly be the case? Simple-- 9 of the 10 trades yielded a $10,000 profit. The single losing trade yielded a $15,000 loss. Again, 90% profitable trades; yet a $5,000 net loss.

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Granted, these numbers are useful and valuable when considered with other metrics; however, when presented in isolation they are easily misrepresented by unscrupulous peddlers of black box trading systems.

Expectancy –a Valuable Metric for Evaluating a Trading System A good metric for evaluating the performance of a trading system is Expectancy. MetaStock does not currently calculate Expectancy directly. The good news is that the calculation is simple and the numbers needed are readily available in MetaStock’s Summary Report. Credit for this trading system performance metric goes to Dr. Van K. Tharp, a renowned trading psychologist (www.iitm.com).

Expectancy = (PW * AW) - (PL * AL), where

PW = Percent Winners, expressed as a decimal (e.g., 52 percent equals 0.52). AW = Average Winner in dollar terms. PL = (1-PW) = Percent Losers, expressed as a decimal AL = Average Loser in dollar terms.

Using MetaStock’s Summary Report lingo, Expectancy is defined as follows (note that the [bolded] numbers correspond with the numbered labels in the illustration):

( (Total Profitable Trades [2]/ Total Trades [1]) * Average Profit [3] ) – ( (Total Unprofitable Trades [4]/ Total Trades [1]) * Average Loss [5] )

Using the actual values in the MetaStock Summary Report shown above, Expectancy would be calculated as follows:

( ( 6 / 11 ) * 419.93 ) - ( ( 5 / 11) * 122.69 ) = 173.28

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What does the Expectancy value of 173.28 really mean? It means that the expected profit for a single trade using this trading system is $173.28.

We recommend that you take the time to perform this simple, yet highly effective, calculation when choosing the best performing “V” indicators as described in the “Building Your Custom Trading System with ICE” chapter.

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Appendices

Troubleshooting FAQs Q: After installing the custom trading system from the second email, how do I find out if the security is issuing a signal? A: You need to use the Trade Manager expert advisor that was installed for your specific security. Open a chart of the security, then choose Expert Advisor from the Tools menu. Locate the “$ ICE ticker Trade Manager” for your security. Highlight and then click the Attach button. If a signal has triggered on the last bar of your chart, then a pop-up alert will appear on the screen. Q: I’ve created many trading systems with ICE. Is there a way to find out which systems are issuing signals without having to open a chart for each one? A: Yes. See the “Trade Filter” section of the “Using Your Custom Trading System” chapter in this manual.

Q: Why do more Buy and Short arrows appear after attaching the Trade Manager expert advisor, than when plotting the arrows from the Trade Verifier system test? A: The Trade Verifier System test closely replicates actual trading. For example, when simulating past trading, it does not allow more than one buy position at a time. Likewise with short positions. However, the Trade Manager expert advisor plots arrows at every point where the buy or short conditions triggered, without consideration of past trades.

Q: I would like to create more than one system for a specific stock. How can I do this? A: ICE and the ICE System Wizard create trading systems using the ticker symbol as part of the naming scheme—it doesn’t really matter if the ticker symbol is valid or not.. To create three trading systems for IBM, one could use IBM1 for the first trading system’s ticker symbol, IBM2 for the second, and IBM3 for the third.

Q: Can I create a trading system for intraday/real-time data? A: Yes. However, you’ll likely find that 5-minute bars (or higher) on actively traded securities will be best. We recommend using “Points Only” tests with zero commissions and zero slippage settings.

Q: Can I delete the “Step 1” system tests once the final trading system is built? A: Yes. In fact this is a good idea in order to reduce clutter in your menus.

Q: Can I build trading systems for futures and commodities? A: Yes. ICE can create trading systems for any security on any market in the world so long as the security has OPEN, HIGH, LOW, CLOSE, and VOLUME. We recommend using “Points Only” tests with zero commissions and zero slippage settings.

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Q: I have a new email address. How can I change it on the ICE System Wizard? A: Simply create a new account using your new email address.

A Few More Facts about ICE The rules for the 72 trading systems in ICE were derived from two primary sources: 1) the Indicator Interpretation chapter of the MetaStock User’s Manual, and the best-selling technical analysis book entitled Technical Analysis from A to Z (Second Edition) by Steve Achelis.

These two sources were chosen for three reasons: First, John Slauson (the creator of ICE and founder of Adaptick) helped write both books, so we are very familiar with them. Second, Adaptick is confident that these books are well-researched and reliable. Third, most users of ICE own one of these books.

If a rare discrepancy of an indicator’s interpretation was found between the two sources, preference was given to Achelis’ book as it is deemed the more recent and more thoroughly researched resource. For the most part, however, few discrepancies were discovered.

Every indicator in MetaStock that could be logically and objectively interpreted was included in the library of ICE systems. MetaStock contains 102 technical indicators and line studies. Of these, 72 can be deployed in ICE. The remaining 32 indicators cannot be reasonably backtested using MetaStock’s Enhanced System Tester. Note that the majority of these 28 are classified as technical line studies (i.e., Fibonacci Arcs, Speed Resistance Lines, etc.).

Furthermore, ICE attempts to capture the “essence” of the author’s intention when the indicator was originally constructed.

The purpose of ICE is to provide so-called short-term “swing traders” with an objective, reliable, and fast method of creating a trading system for individual securities . (Note: Using ICE on weekly data is a viable means of discovering indicators for long term systems). Every System Test in ICE is deployed with the same Exit strategy based on an all-new trailing stop loss mechanism called IntelliStop™ . IntelliStops trail the lows (or highs in the case of shorts) by a variable percentage. This percentage is determined by volatility and proximity to option strike price zones.

By allowing the optimized variables to range over a timeframe that is suitable for the swing trader and by allowing each System Test to use the same exit criteria, each indicator’s effectiveness at entering trades can be objectively compared.

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Furthermore, ICE attempts to capture the “essence” of the author’s intention when the indicator was originally constructed.

A Trading System Defined A system is defined as follows in the Webster’s dictionary: “An assemblage of objects united by some form of regular interaction or interdependence.” This definition can be quickly adjusted to fit the definition of a trading system by changing just one word: “An assemblage of rules united by some form of regular interaction or interdependence.” Beyond this very broad definition of a trading system, you will find that trading systems run the complete gamut. Some are based on fundamental analysis, others on technical analysis, and some are a blend of the two. Some are based on planetary movement, others on tea leaves. Without casting judgment on the merits of any particular method, suffice it to say a trading system requires the following: One or more rules to define when to enter a trade, and one or more rules to define when to exit a trade.

Given this definition the following defines a valid trading system:

Buy IBM at tomorrow’s OPEN if IBM closes down 2% or more.

Sell IBM at tomorrow’s OPEN if IBM closes 10% above my BUY price or 5% below my BUY price.

The following would not qualify as a valid trading system:

Buy IBM at tomorrow’s OPEN if IBM closes down 2% or more.

Sell IBM at tomorrow’s OPEN if my car fails to start.

So why is the first example a valid trading system, and the second one not? Both define when to buy and when to sell, right? Well, here’s the reason. Any logical person can deduce that no “regular interaction or interdependence exists between IBM stock and my car’s willingness to start. Even if I ”felt” or could quantify that a connection exists, it doesn’t make it valid. On the other hand, there may be a “logical” connection between the degree to which prices move over a given amount of time (i.e, 10% up or 5% down) and the ideal point to liquidate a position.

Now, a less absurd and perhaps bit more useful illustration of an invalid trading system would be the following. It illustrates a common problem that plagues many trading systems.

Buy IBM at tomorrow’s OPEN if IBM’s 9-day RSI indicator crosses above 30 AND IBM’s 9-day Stochastic Oscillator crosses above 30.

Sell IBM at tomorrow’s OPEN if IBM’s 9-day RSI indicator crosses below 70 AND IBM’s 9-day Stochastic Oscillator crosses below 70.

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The RSI and Stochastic Oscillator are two well-known technical indicators created by some well-known analysts. In addition, the buy and sell rules have been back-tested and optimized specifically for IBM. It has been proven, beyond a shadow of a doubt, that these two indicators produced a 40% net profit (after commissions) in a little under 9 months of trading. You know the expression, “show me the money”. Well that is exactly what has been done here. We are showing you the money with hard evidence of backtested results…right?.

Therein lays the problem. Just because a trading system is constructed of well-known indicators with “different” names and is quantified with backtesting and optimization techniques, doesn’t necessarily mean that the system is valid or well-constructed.

The most obvious problem with this trading system is first, it is constructed using two indicators that measure the same technical characteristic—price velocity (as we call it). The system has no “diversity”. As John Bollinger states it, it is “collinear”. A system constructed of non-diverse components, meaning indicators or measures from the same category, backtest and optimize very well. They “curve-fit” to the price action very well—especially those that only incorporate price movement in the calculation. Unfortunately, these systems usually fail to produce sustainable, reliable results in the future. ICE was designed to help you find a diverse set of indicators to deploy in your trading system(s).

Adaptick has developed many trading systems using MetaStock as the primary tool. We anticipate that the ultimate goal of ICE users will be to construct a robust, reliable MetaStock Trading System. A MetaStock trading system, by our definition, is comprised of two primary components:

What is a MetaStock Trading System? Adaptick has developed many trading systems using MetaStock as the primary tool. We anticipate that the ultimate goal of ICE users will be to construct a robust, reliable MetaStock Trading System. A MetaStock trading system, by our definition, is comprised of two primary components:

#1. An Expert Advisor. An expert advisor is a special “advisory” tool provided with MetaStock. An expert’s primary use is to provide stock specific advice on how to manage an open trade. In specific words, an expert provides day by day feedback on when to exit the open trade. Adaptick relies almost completely on “Stops” as the means of exiting trades. The expert provides periodic feedback on where stops should be set.

#2. An Exploration. An exploration is a special “filtering” tool provided with MetaStock. An exploration quickly scans thousands of stocks searching (i.e., exploring) for specific technical entry (Buy Long or Sell Short) conditions. The end result is a short-list of stocks for you to consider entering a Buy Long or Sell Short trade.

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The Organization and Logic of ICE To help traders logically attack the process of using MetaStock to develop their own trading systems, Adaptick first classified the 72 indicators into four broad categories. These categories include Volume, Volatility, Velocity, and Verticality. Second, Adaptick developed a common set of Close Long and Cover Short exit rules tuned for the swing trader (1 to 6 week timeframe) that could be used for any trading system. Third, we created the online ICE System Wizard to help simplify the construction of the trading system.

The Four V’s of a Technical Trading System In his book, Bollinger on Bollinger Bands, John Bollinger presents an important principle regarding technical analysis and technical trading systems.

The principle, which he calls “collinearity,” stresses the importance of using a diverse set of indicators to improve the reliability of a trading system. For example, a trading system comprised of three seemingly different indicators such as TRIX, RSI, and Stochastics, is likely to perform poorly over the long-term since all three indicators measure the same market characteristic—Velocity (also known as momentum).

A better strategy is to construct a trading system comprised of two or more of the four broad categories defined in ICE. This helps prevent the so-called “collinearity trap” that plagues many trading systems. For example, a trading system comprised of well-tested Stochastics, MFI, and Bollinger Bands stands a good chance of performing well over the long term, assuming of course that the system’s rules are well-founded. This is because these three indicators stem from three distinct categories of technical indicators—Velocity, Volume, and Volatility, respectively.

Entry Signals

To allow for a fair comparison across indicators, a target of 120 combinations was sought (i.e., a range of 100 to 140 combinations of optimized variables were allowed per system). Optimized periods were allowed to range a reasonable distance above and below the author’s recommended defaults For example, Welles Wilder recommends “14” periods for the default of the Relative Strength Index (RSI). ICE optimizes between 5 and 40 in steps of 5 when backtesting the RSI (i.e., 5 period RSI, 10 period RSI, etc. up to 40 periods).

If the author suggests that trend be a pre-qualifier of a crossover entry signal, then Linear Regression was used to qualify the trend. If the 9-day Linear Regression Indicator is

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above the 20-day, then the trend is considered up. Likewise, if the 9-day Linear Regression Indicator is below the 20-day, then the trend is considered down. If the indicator’s author only suggested trading the indicator based on a crossover (with a reference line or signal line), then only a crossover entry signal method was tested. Divergence was tested only if the author specifically mentioned this method in the source material noted. Adaptick tried not to second-guess the authors’ interpretive intentions; so every effort was given to only use the recommended interpretation.

Adaptick IntelliStops™ A long trade is exited upon the triggering of a defined Adaptick Intellistop Exit rule. The Intellistop Exit rules in ICE are based on a type of volatility adjusted “trailing stop”. This is based on the formation of a Volatility Adjusted Pivot Low in the case of Long trades, and Volatility adjusted Pivot Highs in the case of Short trades. Two market conditions cause an IntelliStop to trail tighter to the lows; 1) a decrease in price volatility, and/or 2) indications of price stalling by a relative abundance of long upper shadows over the recent past. In both cases, a reaction is probable, hence, stops are tightened.

In addition, IntelliStops were created with the following principles in mind: let losses die quickly (play defense first), let profits live long, and strive for average profits that outpace average losses by a factor of two.

The following chart shows the Adaptick IntelliStop indicator (Level 2 setting) plotted (i.e., overlaid) on the QQQ. For realistic trading purposes, the current bar’s stop level is based on the previous Adaptick IntelliStop value. This is illustrated in the following chart. The circled bar penetrated the active stop value, causing it to reset/recalc on the low.

To plot the Adaptick IntelliStop indicator on a chart of your securities, simply drag and drop the indicator named “zAdaptick – IntelliStop 2” per the instructions for plotting indicators in the MetaStock User’s Manual.

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More information about this proprietary stop system will be forthcoming on Adaptick’s web site. Suffice it to say, that this form of stop provides excellent and often superior results compared to most exit strategies.

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Getting Help with ICE The following resources are available to you when you have questions or problems with ICE.

User’s Manual. This manual was written to provide clear, straightforward instructions for using ICE to build trading systems. Keep in handy and learn its contents well.

ICE Chat room. MetaStock 9.0 contains a nice feature for creating communities of MetaStock users. A live chat community specifically for ICE is available in MetaStock 9.0. You may find other users of ICE ready to help with any questions or problems you have.

ICE Online User’s Group. Choose ICE Online User’s Group from the MetaStock Tools menu to go to join an evolving, growing online group of ICE users. Post your question or problem and you will likely find many willing ICE users ready to offer help.

Web site. Go to www.adaptick.com and follow the links to the ICE support area.

Email. Send an email to support@adaptick.com and we will try hard to answer you question as promptly as possible.