Archive for July, 2010
I wanted an indicator that provides a view of the strength of the market. In particular I wanted it to capture the spikes that occur prior to trend direction changes.
The basic idea is an RSI accept instead of capturing the relative size of up and down moves it is calculated on how strong the high (push up) and low (push down) are from open.
The other difference is two sets of horizontal lines set at 30, 40, 50, 60 and 70. The inner two at 40 and 60 provide a channel between which the indicator moves when range bound. When the Price is bullish it moves between 50 and 70 and when Bearish 30 and 50.
Overbought and oversold when it hits a line. If the range bound then that means 40 and 60. When trending choose either the 50 and 70 pair or 30 and 50 pair.
I have also added a 4 point EMA as a signal line.
It works pretty well for my purposes. It tracks oversold and overbought signals generated by the stochastic, but has additional information regarding trend strength.
UpTick=High-Open
DownTick=Open-Low
//N a 12 point EMA for data collection.
Av1=ExponentialAverage[N](UpTick)
Av2=ExponentialAverage[N](DownTick)
//M as 9 point EMA for smoothing
Strength=ExponentialAverage[M](100*Av1/(Av1+Av2))
return Strength as “Strength”,30 as “Lower”, 40 as “Lower Channel”,50 as “Mid”,60 as “Upper Channel”,70 as “Upper”
July 16 2010 | Trading and Uncategorized | No Comments »
The new plan is in essence based upon the old plan in that it attempts to capitalize upon the strength of the London session. Where it differs is that it attempts to create more trading opportunities. So in effect it moves the trading sessions into the background as context. In particular the session boundaries are places to expect significant trend changes. The focus is on entry, exit signals and trade direction.
Background Problem.
Having tried a few different ideas, I decided to trade a stochastic overbought and oversold strategy. It seemed to make sense. Nearly every move up or down was preceded by the stochastic being oversold or overbought. In practice I found myself stopping out all the time. So how could I have consistently been on the wrong side of the trade? What would have happened if I had made the exact opposite trade? What could I use to suggest a different trading direction?
The answer turns out to flow from another error with the previous plan. I mentioned in the update below that if you change time scales you will see that an entry signal on one time scale may well be an exit signal on another.
So how can that make any sense. Does it mean that technical indicators are simply a steaming pile of bullshit that provides a perfect 20/20 in hindsight view of the market?
What I was doing was trading on the 2 or 5 minute time scale, ignoring the context of the 15 minute time scale. I was for example entering long on a stochastic oversold that would in fact go up a little, but then turn around and come down further.
I also was holding past the end of the cycle. When the stochastic had moved from oversold to overbought I was holding through the next half of the cycle from overbought down to oversold “hoping” it would just be a retracement. In fact what I was trading was the retracement against a background opposite trend….
Solution: Entry and Exit.
To beat this problem use two charts. One on fifteen minutes and one on five or two minute.
The fifteen minute chart provides context. If the market on a fifteen minute time scale is moving from stochastic oversold to overbought then it is reasonable to expect the market to continue in that direction. Care as usual on major support and resistance levels indicated by moving averages, pivot levels etc. Care also on major market “mood” changes that occur on session boundaries.
The two or five minute chart provides your entry and exit signals. Trade in the direction suggested by the fifteen using the shorter time frame chart to signal your entry and exit. When the fifteen is overbought or oversold use the hourly to provide a bit of context as to whether it will keep trending or reverse.
It is important not to hold the trade past the half of the cycle of the short term time frame you are trading on. It might simply stall and continue if the trend is strong. It most likely will retrace at least a little which will provide you with a better entry. In any case you must make a decision to exit and reenter or hold it through that point. You can’t just ignore it and hope.
So far this is working. My success rate has turned around dramatically. But early days yet. We will see in a month how it pans out.
Indicators: I use a slower than normal stochastic set on 12 and 6 rather than 14 and 3. It is a a lot smoother but otherwise reliable. For context on the chart I use Pivot levels and 25, 50 , 100 and 200 moving averages to let me know if there are resistance/support levels the price may bounce or slow down on. I also have the background of the chart coloured differently for each of the Tokyo, Hong Kong, London, New York sessions and the period when all markets closed. In fact I change session colours about 15 minutes before the actual start as a heads up that a big change may be imminent.
Stop Loss: 10 pips when using a two minute chart. Limit initially at 20 pips and then move it to around a likely resistance level as required.
July 10 2010 | Trading | No Comments »
A few weeks into the new trading plan and things have changed to a point that an update and a new plan is needed.
First things first though a summary of the last month. The essence of the old plan was to capitalize upon changes in market strength that occur on session boundaries. Particularly London open.
Problems and Solutions
1) Too few entry opportunities.
This was a big one. The way the old plan was structured I had to get the entry at the start of the session. If I missed it, it was 24 hours before I could try again.
Solution: Change the Plan.
2) Scared to pull the trigger.
After months of sitting and watching I found myself too indecisive to enter the trade. The reason was that I had a lack of confidence in the entry signals. It could go one way, but then again could go another.
Solution: Spent a couple of weeks simply marking entries on the chart as they rolled across the screen. Then when I had that working moved to a demo account and tried it with orders and finally to a live chart.
3) Lack of a good entry strategy.
When I found myself on a live chart I found myself changing strategies mid stream. A sort of chaotic mix of Heiken Ashi trend change signals, Stochastic signals and varying time scales. In effect I was randomly clicking and hoping. That by the way is not trading, it is gambling.
Solution: Only trade using one strategy. Only trade on one time scale. If you change time scales you will find that what was an entry on one may well be an exit on another.
4) Staying alert: Not a problem if you are in the Northern Hemisphere, but from Oz the London session starts at 5:00 pm.
Solution: Roll my sleeping hours around – and lots of coffee and energy drinks.
July 10 2010 | Trading | No Comments »
