The Acme systems were derived empirically—they are based on historical studies of daily and intraday price patterns that occur with regularity in the stock market. We use the inductive process preferred by some of the traders profiled in the Market Wizards books, who discovered price anomalies in diverse instruments such as mutual fund sectors, futures, and options.
In contrast, many of the current systems are based on deductive, top down combinations of technical analysis indicators. The Acme Trading Systems do not rely on traditional technical analysis, mainly because technical indicators derived from price lag the real price action.
Moreover, because many traders use these indicators as a foundation for their systems, their overuse renders them ineffective; instead, the indicators are more useful as trade filters, not as trade signals. The main strength of the Acme systems is that they are mechanical, and nothing is left to chance.
They take long and short positions with specific entry and exit points. Each of these systems has been programmed in a trading programming language3, EasyLanguage®. Consequently, a trader can run stock scans each night and then generate real-time order alerts for the following day.
The Acme F System is based on the technical work of W.D. Gann and a book by Steve Woods called The Precision Profit Float Indicator. The system uses the float of a stock to analyze supply and demand patterns created by custom float indicators. The F System then pinpoints breakout and turning points by combining float turnover points with geometric patterns such as triple bottoms and retracement patterns such as pullbacks.
The Acme M System identifies combinations of bar patterns. For example, a bar that forms a Tail and a Test is a combination of two distinct bar patterns. The M System scans for bars that have two, three, or even more patterns.
The success rate of this system is directly proportional to the number of identified patterns. Associated with each bar pattern is a set of qualifiers. For example, a bar may be a narrow range bar, or a bar may overlap its 50-day moving average. Since technicians attach significance to these conditions, they are denoted on the chart.
The Acme N System is based on a simple concept: identify narrow range bars on strongly trending stocks, entering a trade in the direction of the trend on a breakout of the narrow range bar. The appeal of this system is that the risk on the trade is limited to the range of the narrow range bar, but the reward is high because the trending stock is in transition from low to high volatility.
The Acme P System is a pair trading strategy that has been gaining popularity because it is a hedged trade, i.e., the trader enters both a long trade and short trade simultaneously. The allure of pair trading is that it is a strategy with little risk; however, no stock is immune to the risk of a trading halt or an earnings warning. As with every other system, specific entry points, exit points, profit targets, and stop losses are defined.
The Acme R System is based on a simple pattern: the rectangle. The theory behind the rectangle is that it represents a period of consolidation where traders have already taken positions over several days, but the stock has not moved decidedly in cither direction.
Once the stock breaks the rectangle range, the move is usually explosive; further, the narrow range of the rectangle allows the trader to reverse direction if the i n i t i a l move is a head fake.
Chart Indicators
The Acme V System goes against all the trading truisms such as "the trend is your friend", "don't try to pick bottoms", "never catch a falling knife", etc. In general, these observations are correct, but at times the trader wants to catch the knife and hold it for a few days before releasing it. This system is called the V system because the chart formation traces the letter V. The system exploits this pattern with a statistical method known as linear regression.
The M and N systems are swing-trading systems. Performance improves linearly with higher values for momentum indicators such as the ADX. The performance of the other systems does not improve with such filters. Although each system can be improved with proper optimization, none of the systems has been optimized to avoid overstating results.
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