Pros:
You can usually get better bid/ask prices since they come from several sources
Variable spreads between bid and ask may give no spread or tiny spreads at times
If they are a true ECN, they will not be forex trading against you but will pass on your orders to a bank or another customer on the other end of the transaction.
You will be able to offer a price between the bid and ask with a chance of it getting filled
If they support Stop-Limit orders, you can prevent slippage during news by making sure that your order either gets filled at the price you want or not at all
Prices may be more volatile which will be better for forex scalping
Cons:
Many do not offer integrated forex charting
Many do not offer integrated forex news
Many of the forex trading platforms are less user-friendly
Because of variable spreads (between bid and ask,) it may be more difficult to calculate stop loss and profit target in forex pips beforehand.
Examples of some ECNs*:
http://www.mbtrading.com
http://www.efxgroup.com
http://www.hotspotfx.com
http://www.interactivebrokers.com
* Some of these "ECNs" may not be true ECNs, and you may be going through a dealing desk. It is impossible to verify for sure because of the lack of regulation governing forex brokers.
It is important that you carefully look into the pros and cons of each forex broker before choosing the one which best suits your needs. You may also wish to have several broker accounts to mitigate the risks, and so that you can compare bid/ask prices and trade on the broker with the best prices for the direction you wish to forex trade.
Because of the unregulated nature of forex, US brokers are not required to keep your money in an untouchable account that only you can have access to if they were to collapse.
As customers of Refco (was one of the world's largest forex brokers) found out, their unprotected accounts made them unsecured creditors, and thus are less likely to get their money back than those who had given secured loans to Refco. What this means is that the customers' money was used to pay other creditors.
The moral of the story is this:
Deposit as little money with your forex broker as you need for forex trading, and withdraw your profits when they exceed a certain amount. Keep the rest of your trading capital in your own bank accounts which are probably government-insured.
Saturday, October 11, 2008
Friday, October 10, 2008
RSI-R2 – SUPER RSI forex Expert Advisors Frequently Asked Questions
History: (from www.tradingmarkets.com/.site/stocks/commentary/editorial/The-Improved-R2-Strategy.cfm)
The Improved R2 forex Strategy: 84% Correct with Just 6 Rules
By Larry Connors & Ashton Dorkins
TradingMarkets.com
February 21, 2007
In early 2005, we published the R2 forex Strategy on TradingMarkets which quickly became one of our more popular forex strategies. The forex strategy was also presented at "The Traders Expo" in Fort Lauderdale last year. In the "MoneyShow.com Best Webcasts of 2006" it was voted the number one presentation in the "Best for Traders" category. We recently updated and improved our research, leading to this article that shares our latest findings with you.
What is the Improved R2 forex Strategy?
The Improved R2 forex Strategy is a simple six-rule forex Market Timing Strategy which uses the 2-period RSI as its primary tool. Our research has shown that there is little statistical evidence using the standard 14-period RSI. But, when you shorten the period to a 2-, 3- or 4-period RSI, test results significantly improve. By using the 2-period RSI as we do here, you can see back-tested results of 84.31% correct in the S&P 500 Index going back to 1995 (12 years).
Here are the Rules:
The SPX is above its 200-day simple moving average (you can use any S&P 500 derivative product, including the SPYs, E-minis, etc).
Day 1 - the 2-period RSI is below 65. This tells us that the market is in a neutral to possibly oversold condition.
Day 2 - the 2-period RSI closes lower than Day 1.
Day 3 - the 2-period RSI closes lower than Day 2.
Buy the market (SPX, SPY, E-mini, etc) on the close Day 3.
Exit when the 2-period RSI closes above 75.
Comment by EA Author: The forex EA only references the closing values of RSI for the prior three days. Whatever RSI is doing during the current day has no bearing on anything and will not be taken into consideration for any forex signals. Therefore, a forex signal is generated immediately after closing of the 3rd day if all of the criteria are met, and that forex signal will be valid all day during the 4th day.
EA development history
Peter Henry introduced this concept to this trading group after trying to get forex EA programmed by members of Forex-TSD . He explained that this forex method had been designed for stocks but had universal appeal and can be applied to any market. He then posted within this Yahoo news group requesting help in designing an forex EA, as Forex-TSD members produced an forex EA but did not make the code public. Bluto responded and took on the project from there on. Peter’s original post.
www.forex-tsd.com/expert-analysis/6494-rsi-r2-84-accurate.html
Then, a Yahoo MT Group member known as Bluto picked up the above story and developed an EA titled RSI-R2, which evolved in version 1.0 to 1.3. At that point, Bluto decided to add further refinements but keeping the code unavailable (Versions 1.4 onwards). At about the same time, another member (Dave Roland) developed the same forex EA but able to trade ALL forex currencies without needing to open a chart for each and add the forex EA into it manually. That EA's title is: Multipair RSI. It also developed several versions.
How it works
In layman's terms, this is how the RSI-R2 Ver 1.1 forex EA works:
With each new tick, the EA is called and control passes to the init_start() mainline
function. First, we perform the money management option via the "Calc_Money_Management()" function call if the value of the UseMoneyMgmt variable is set to true. This function calculates the appropriate lot size to use based on available equity and the "RiskPercent" setting. If money management is disabled, the value of the default "LotSize" variable is used.
-Then-
Using a daily timeframe, first, get the closing value of RSI three days ago (RSI_Day_1), the closing value of RSI two days ago (RSI_Day_2) and the value of RSI one day ago (RSI_Day_3) . Also, get the closing value of a 200-day simple moving average one day ago (SMA200_Day3). We will analyze the behavior of a short term RSI over the prior three days as our primary buy/sell trigger.
-Then-
Check for forex Buy Signal: We're looking for a decreasing value of RSI over the past three days into a deeper oversold status as price remains above SMA200. If the value of RSI_Day_1 < 65 and the value of RSI_Day_2 < RSI_Day_1 and the value of RSI_Day_3 < RSI_Day_2 and the value of Closing Price from one day ago is SMA200_Day3, we have a forex Buy signal, so set the boolean Buy Flag (Buy_Mode) to True, otherwise set it to false.
-Then-
Check for forex Sell Signal: We're looking for an increasing value of RSI over the past three days into a deeper overbought status as price remains below SMA200. If the value of RSI_Day_1 35 and the value of RSI_Day_2 RSI_Day_1 and the value of RSI_Day_3 RSI_Day_2 and the value of Closing Price from one day ago is < SMA200_Day3, we have a forex Sell signal, so set the boolean Sell Flag (Sell_Mode) to True, otherwise set it to false.
-Then-
Before we act on any potential signals that may have fired, we do some housekeeping on any order that may already be open. The forex EA only allows one sell or one buy order to be open at a time. If we have an open Buy order in progress and the value of RSI_Day_3 75, we close the order because RSI is entering extreme overbought status (reversal coming?) If we have an open sell order and the value of RSI_Day_3 < 25, we close the order because RSI is entering extreme oversold status.
The order closures would actually happen on the opening bar of day 4 since we're on a D1 timeframe.
We then update trailing stop using Parabolic SAR. Managing these stops can cause an order to stop out if things get nasty.
-Then-
We now act on any new forex buy and sell signals:
- If we have a new forex buy signal and there isn't a buy order already open (OpenBuyOrders = 0), we check first to see if a sell order may be open and if so, we close it. Then we simply open a new buy order and increment the open buy order counter (OpenBuyOrders++). The counter keeps us from opening multiple buy orders since we only want one. - If we have a new forex sell signal and there isn't a sell order already open (OpenSellOrders = 0), we check first to see if a buy order may be open and if so, we close it. Then we simply open a new sell order and increment the open forex sell order counter (OpenSellOrders++). The counter keeps us from opening multiple sell orders since we only want one.
That's it. Control then passes back to MT4 via the last statement of "return(0)" in the init_start() routine until the next tick occurs and calls the forex EA at which point we repeat the entire process again.
I hope that this helps clarify what the forex EA is doing under the hood.
-bluto
Forex Indicators used with the EA (not required to use the EA):
For those interested in knowing what is "under the hood" of the forex EA, there is a list of indicators which can be utilized with the EA.
R2_Arrows_v4 is and indicator for RSI_R2 EA by TransportDavid. It places buy/sell arrows. He also made another forex indicator for Robert's Optimized EA. (AnyMA_Rsi_R2_Indi_Opt.mq4)
Forex Indicator written just for bluto's Super RSI does not exist at this time. But you can use R2_Arrows_v4 on it. It is close although not 100% since bluto's Super Rsi have some additions.
With both forex EA you can also use another forex indicator which is regular RSI with daily dots on top of it, so you can easy see follow forex buy sell rules. Made by Accrete. Name RSI_LiDo.mq4 (included in V. 1.9)
The most recent versions (June 16, 2007) of this forex EA are
AnyMA_RSI_R2_EA_Opt.mq4 - Robert
Super RSI Ver. 1.7.ex4 - Bluto
Super RSI Ver. 1.8.ex4 - Bluto
Super RSI Ver. 1.9.ex4 - Bluto
Super RSI Ver. 1.9.1.ex4 - Bluto
These versions use the same logic, the same forex method, but they are different enough to try them. Robert is using addition filter HMA3.mq4. With Robert's EA you can play with different Moving Averages, not only simple as in original forex method. You can also try many different (trailing) stops.
Bluto's EAs offer two different exits. Default is parabolic stop. If you want to use his trailing stop, you should turn off parabolic stop (lots of Q’s on this below).
What else? Open all charts on DAILY timeframe, put EA and both forex indicators on each chart, let EA use default settings - optimized RSI. Each, Bluto's and Robert's EA use different optimized RSI numbers.
Roberts numbers you will find inside EA in the code, and Bluto's optimized numbers you will find in setting menu of EA. Don't forget to enter correct RSI setting into each forex indicator for every chart. Remember, each chart have it's own RSI settings.
Both EA's use Daily forex charts.
The RSI-R2 EA FAQ: mostly replies by Bluto (43) to questions (38). New with V. 1.9: “Authors comments”
Q: Bluto, are you using this forex EA (on Daily charts) on all of the forex currency pairs or just the 4 majors? Also, when you say "15 lots per forex signal", are these standard lots or mini lots and which broker are you using? Thank you.
A: I'm running the forex EA on a chart for every pair. It should work equally well for any pair. I'm using 15 mini-lots @ IBFX. And yes, those would be daily forex charts. The EA is coded to use daily RSI & SMA forex signals.
-bluto
Forex Trading ECN Lesson
More about forex market http://www.e-junkie.com/trader-info?&pn=0
The Improved R2 forex Strategy: 84% Correct with Just 6 Rules
By Larry Connors & Ashton Dorkins
TradingMarkets.com
February 21, 2007
In early 2005, we published the R2 forex Strategy on TradingMarkets which quickly became one of our more popular forex strategies. The forex strategy was also presented at "The Traders Expo" in Fort Lauderdale last year. In the "MoneyShow.com Best Webcasts of 2006" it was voted the number one presentation in the "Best for Traders" category. We recently updated and improved our research, leading to this article that shares our latest findings with you.
What is the Improved R2 forex Strategy?
The Improved R2 forex Strategy is a simple six-rule forex Market Timing Strategy which uses the 2-period RSI as its primary tool. Our research has shown that there is little statistical evidence using the standard 14-period RSI. But, when you shorten the period to a 2-, 3- or 4-period RSI, test results significantly improve. By using the 2-period RSI as we do here, you can see back-tested results of 84.31% correct in the S&P 500 Index going back to 1995 (12 years).
Here are the Rules:
The SPX is above its 200-day simple moving average (you can use any S&P 500 derivative product, including the SPYs, E-minis, etc).
Day 1 - the 2-period RSI is below 65. This tells us that the market is in a neutral to possibly oversold condition.
Day 2 - the 2-period RSI closes lower than Day 1.
Day 3 - the 2-period RSI closes lower than Day 2.
Buy the market (SPX, SPY, E-mini, etc) on the close Day 3.
Exit when the 2-period RSI closes above 75.
Comment by EA Author: The forex EA only references the closing values of RSI for the prior three days. Whatever RSI is doing during the current day has no bearing on anything and will not be taken into consideration for any forex signals. Therefore, a forex signal is generated immediately after closing of the 3rd day if all of the criteria are met, and that forex signal will be valid all day during the 4th day.
EA development history
Peter Henry introduced this concept to this trading group after trying to get forex EA programmed by members of Forex-TSD . He explained that this forex method had been designed for stocks but had universal appeal and can be applied to any market. He then posted within this Yahoo news group requesting help in designing an forex EA, as Forex-TSD members produced an forex EA but did not make the code public. Bluto responded and took on the project from there on. Peter’s original post.
www.forex-tsd.com/expert-analysis/6494-rsi-r2-84-accurate.html
Then, a Yahoo MT Group member known as Bluto picked up the above story and developed an EA titled RSI-R2, which evolved in version 1.0 to 1.3. At that point, Bluto decided to add further refinements but keeping the code unavailable (Versions 1.4 onwards). At about the same time, another member (Dave Roland) developed the same forex EA but able to trade ALL forex currencies without needing to open a chart for each and add the forex EA into it manually. That EA's title is: Multipair RSI. It also developed several versions.
How it works
In layman's terms, this is how the RSI-R2 Ver 1.1 forex EA works:
With each new tick, the EA is called and control passes to the init_start() mainline
function. First, we perform the money management option via the "Calc_Money_Management()" function call if the value of the UseMoneyMgmt variable is set to true. This function calculates the appropriate lot size to use based on available equity and the "RiskPercent" setting. If money management is disabled, the value of the default "LotSize" variable is used.
-Then-
Using a daily timeframe, first, get the closing value of RSI three days ago (RSI_Day_1), the closing value of RSI two days ago (RSI_Day_2) and the value of RSI one day ago (RSI_Day_3) . Also, get the closing value of a 200-day simple moving average one day ago (SMA200_Day3). We will analyze the behavior of a short term RSI over the prior three days as our primary buy/sell trigger.
-Then-
Check for forex Buy Signal: We're looking for a decreasing value of RSI over the past three days into a deeper oversold status as price remains above SMA200. If the value of RSI_Day_1 < 65 and the value of RSI_Day_2 < RSI_Day_1 and the value of RSI_Day_3 < RSI_Day_2 and the value of Closing Price from one day ago is SMA200_Day3, we have a forex Buy signal, so set the boolean Buy Flag (Buy_Mode) to True, otherwise set it to false.
-Then-
Check for forex Sell Signal: We're looking for an increasing value of RSI over the past three days into a deeper overbought status as price remains below SMA200. If the value of RSI_Day_1 35 and the value of RSI_Day_2 RSI_Day_1 and the value of RSI_Day_3 RSI_Day_2 and the value of Closing Price from one day ago is < SMA200_Day3, we have a forex Sell signal, so set the boolean Sell Flag (Sell_Mode) to True, otherwise set it to false.
-Then-
Before we act on any potential signals that may have fired, we do some housekeeping on any order that may already be open. The forex EA only allows one sell or one buy order to be open at a time. If we have an open Buy order in progress and the value of RSI_Day_3 75, we close the order because RSI is entering extreme overbought status (reversal coming?) If we have an open sell order and the value of RSI_Day_3 < 25, we close the order because RSI is entering extreme oversold status.
The order closures would actually happen on the opening bar of day 4 since we're on a D1 timeframe.
We then update trailing stop using Parabolic SAR. Managing these stops can cause an order to stop out if things get nasty.
-Then-
We now act on any new forex buy and sell signals:
- If we have a new forex buy signal and there isn't a buy order already open (OpenBuyOrders = 0), we check first to see if a sell order may be open and if so, we close it. Then we simply open a new buy order and increment the open buy order counter (OpenBuyOrders++). The counter keeps us from opening multiple buy orders since we only want one. - If we have a new forex sell signal and there isn't a sell order already open (OpenSellOrders = 0), we check first to see if a buy order may be open and if so, we close it. Then we simply open a new sell order and increment the open forex sell order counter (OpenSellOrders++). The counter keeps us from opening multiple sell orders since we only want one.
That's it. Control then passes back to MT4 via the last statement of "return(0)" in the init_start() routine until the next tick occurs and calls the forex EA at which point we repeat the entire process again.
I hope that this helps clarify what the forex EA is doing under the hood.
-bluto
Forex Indicators used with the EA (not required to use the EA):
For those interested in knowing what is "under the hood" of the forex EA, there is a list of indicators which can be utilized with the EA.
R2_Arrows_v4 is and indicator for RSI_R2 EA by TransportDavid. It places buy/sell arrows. He also made another forex indicator for Robert's Optimized EA. (AnyMA_Rsi_R2_Indi_Opt.mq4)
Forex Indicator written just for bluto's Super RSI does not exist at this time. But you can use R2_Arrows_v4 on it. It is close although not 100% since bluto's Super Rsi have some additions.
With both forex EA you can also use another forex indicator which is regular RSI with daily dots on top of it, so you can easy see follow forex buy sell rules. Made by Accrete. Name RSI_LiDo.mq4 (included in V. 1.9)
The most recent versions (June 16, 2007) of this forex EA are
AnyMA_RSI_R2_EA_Opt.mq4 - Robert
Super RSI Ver. 1.7.ex4 - Bluto
Super RSI Ver. 1.8.ex4 - Bluto
Super RSI Ver. 1.9.ex4 - Bluto
Super RSI Ver. 1.9.1.ex4 - Bluto
These versions use the same logic, the same forex method, but they are different enough to try them. Robert is using addition filter HMA3.mq4. With Robert's EA you can play with different Moving Averages, not only simple as in original forex method. You can also try many different (trailing) stops.
Bluto's EAs offer two different exits. Default is parabolic stop. If you want to use his trailing stop, you should turn off parabolic stop (lots of Q’s on this below).
What else? Open all charts on DAILY timeframe, put EA and both forex indicators on each chart, let EA use default settings - optimized RSI. Each, Bluto's and Robert's EA use different optimized RSI numbers.
Roberts numbers you will find inside EA in the code, and Bluto's optimized numbers you will find in setting menu of EA. Don't forget to enter correct RSI setting into each forex indicator for every chart. Remember, each chart have it's own RSI settings.
Both EA's use Daily forex charts.
The RSI-R2 EA FAQ: mostly replies by Bluto (43) to questions (38). New with V. 1.9: “Authors comments”
Q: Bluto, are you using this forex EA (on Daily charts) on all of the forex currency pairs or just the 4 majors? Also, when you say "15 lots per forex signal", are these standard lots or mini lots and which broker are you using? Thank you.
A: I'm running the forex EA on a chart for every pair. It should work equally well for any pair. I'm using 15 mini-lots @ IBFX. And yes, those would be daily forex charts. The EA is coded to use daily RSI & SMA forex signals.
-bluto
Forex Trading ECN Lesson
More about forex market http://www.e-junkie.com/trader-info?&pn=0
Intersection of fast and slow lines. forex lessons
In this case, indicators calculated by their algorithm.
Blue (long) line shows the forex "strategic" direction of the trend.
Red (short) line indicates the direction of movement of prices.
Long positions. Opening:
1.We are waiting for the price of crossing the red line and blue line.
2. We are waiting for education eighth after crossing the bar.
3.If the price does not kasnulas red line and blue + red and growing distance between the red and blue lines grows opens.
Closing: Closed during the next bar after the previous close below the red line. In this case the profit amounted to 114 points.
A short position is open to the nearest vice versa.
Thursday, October 9, 2008
NoahDePhan, 10Pips
This method dedicates to GP_US, but can also apply to other pair.
(But if you success with GP_US, why try other? . By focus studying and trading only 1 pair, you will gain more experiences. The more exp. you get, the less or NON lost you bear. Remember, you only need 1 trade per day, gain 10 pips only to make 150K per year.)
THE STRATEGY
Study more, do not rush, do not greedy, patient, patient…
The successful in FOREX is not how many trades you gain per day , neither how much pips you gain per trade, but minimum or NOT lost any trade.
You only need gain 10 pips per day, consistently with minimum or almost NON lost to make 150-200 K/ year.
You can do it if and only if you make 10 pips / day NO LOST.
The PLAN math:
You open an account for $1000.
You make 1 trade a day (2 in most but just say only one for sure),
and 2 mini lot, make $20/day x 5 day = $100./week/ $400/month.
Do this for 2 months—January & February
March 2005-acct. 1,600, you trade 4 mini lots, make $800.
April 2005-acct. = 2400, trade 6 lots make 1200
May 2005-acct. = 3600, trade 8 lot make 1600
June 2005-acct. = 5200, trade 10 lot, make 2000
July 2005-acct. = 7200, trade 15 lot, make 3000
August 2005-acct. = 10,200 switch to standard account,
trade 2 STD LOTS, make 1000/week, 4K per month.
September 2005-acct. = 14,200 trade 3 STD LOT, make 6K
October 2005-acct. =20.2K trade 4 STD LOT, make 8K
November 2005-acct. = 28.2K trade 6 std lot make 12K
December 2005-acct. = 40.2K trade 8 lot make 16 K.
Total for year, app. 56K.
After 1 year, from 1K , you make 16 K / month, 192K per year ( and so on if you want, and after 1 year experience, then you can make 2 trades per day)
All of that is ONLY 10 PIPS/ TRADE/ DAY IF and ONLY IF you gain 100% ( or almost) 10 PIPS.
(I think most of us could live on this type of income--don't get greedy)
See you next 12 months, may be we start a club call " 10 PIPS CLUB"
THE METHOD
A. Set up light : ( From left to right) and save setting.
1. 720- SHORT- 480- 240
2. 720- 15- 60 180
You set up lights as above, when you change light set, it will be faster, the software only needs to change the different light, which one the same will not.
B. Check lights:
Check #1 light set:: 720- SHORT- 480- 240 at 7:05 AM, & 19:05 PM ( EST.) (or any time).
We do not care & need direction of SHORT &720 trends ( left to right), we only put attention in the last 2 to 4 time frames.
No Packman on any lights.
All light must same color, ANGLE & SEPARATE, red & green run parallel (or divergently) at least in 1-1/2 to 2 time frames for SH & 720, red & green run parallel 2 to 5 time frames for 480 & 240.( they can be slightly convergent)
Chart can be ANGLE in green & RED in 3:00 O'clock with slightly committed to green.( less 3:00 for UP_GREEN, more than 3:00 for DOWN_RED) No Packman.
How much separate ? the width between red & green about more than half the width of two vertical line in chart. If you can put the mouse cursor between red & green, it good separated.
C. Check current price. Put the mouse in the last 2 time frames of 720.
- Take the HIGHEST & LOWEST as HI & LO ( we call it PRE_DAY HI_LO.)
HI: 1.9450, 1.9380, LO : 1.9360, 1.9320, PRE_DAY = HI = 1.9450, LO = 1.9320
- Minus HI - LO = RANGE (R)
i.e. 1.9480 - 1.9320 = 160 pips = R
- MIdle range ( MR ) = R/2
160 / 2 = 80 pips. = MR
- Take 25% of R : 160 x 0.25 = 40 pips call it R3
- R3 must be bigger than 45 pips, if NOT, choose R3 = 45 pips.
- Minus HI – R3 ( or 45) : 1.9480 – 45 = HI_up
1.9480 – 45 = HI_up = 1.9435
- Add LO + R3 ( or 45) = LO_up
1.9320 + 45 = LO_up = 1.9365
- From LO_up to HI_up, we call Enter Range ( ER ) ( from 1.6365 to 1.9435 )
Only enter a trade when the current price ( Enter price) between Enter Range ER. (i.e. from 1.6365 to 1.9435)
If the price broke out ER, WAIT UNTIL IT BACKS IN ,we re-calculate HI, LO, R, MR, HI-up, LO-up, ER
Check #2 light set:: Any time, we need all lights same color with SH & 720 , (condition as above).
180-60-15 Angle & Separate, run parallel more than 1 time frame. ( they can be slightly convergent, but NOT tough of run vertically _flat)
We do not need Fresh in the last 2 time frames , but if they were, better.
When every thing meet the condition, ENTER ( market order).
Put Stop loss 80 PIPS,
PUT LIMIT 10 PIPS ONLY.
Maximum 2 trades per day, 1 in evening and 1 in day time ( EST)
RSI-R2 – SUPER RSI forex Expert Advisors Frequently Asked Questions
Best forex Strategies http://scalping.forex-stock-info.com
A New Exit Strategy - The ATR Ratchet By Chuck LeBeau
Recently I've been doing quite a bit of research on new systems for stock trading. The research is on behalf of a new hedge fund that will be starting later this year. The fund will be managed by Tan LeBeau LLC, the company that funded this research project. After some serious internal discussion about the advantages of keeping this new exit strategy a company secret, the LLC has graciously given me permission to share this discovery with our System Traders Club members. Here is a bit of background on how the new exit strategy came about.
In the process of testing various exit strategies for our stock trading systems we found that we needed a profit-taking exit that performed somewhat along the lines of the Parabolic SAR but that could be made more flexible and easier to code and apply. We found that the Parabolic was hard to use because it was often on the opposite side of the market from our trades or it was starting from a point that was too low for what we wanted. After spending a great deal of time with the Parabolic we decided it was not helpful for the particular systems we were creating. As an alternative to the Parabolic exit we decided to test some new exit ideas based on my extensive work and experience with the Average True Range. After a great deal of tinkering and experimentation we were pleased to learn that the new exit strategy worked surprisingly well for profit taking and had many very useful features and applications. I decided to name this new exit strategy the "ATR Ratchet".
The basic idea is quite simple. We first pick a logical starting point and then add daily units of ATR to the starting point to produce a trailing stop that moves consistently higher while also adapting to changes in volatility. The advantage of this strategy over the original Parabolic based exit is that when using the ATR Ratchet we have much more control of the starting point and the acceleration. We also found that the ATR based exit has a fast and appropriate reaction to changes in volatility that will enable us to lock in more profit than most conventional trailing exits.
Here is an example of the strategy: After the trade has reached a profit target of at least one ATR or more, we pick a recent low point (such as the lowest low of the last ten days). Then we add some small daily unit of ATR (0.05 ATR for example) to that low point for each day in the trade. If we have been in the trade for 15 days we would multiply 0.05 ATRs by 15 days and add the resulting 0.75 ATRs to the starting point. After 20 days in the trade we would now be adding 1.0 ATRs (.05 times 20) to the lowest low of the last ten days. The ATR Ratchet is very simple in its logic but you will quickly discover that there are lots of moving parts that perform a lot of interesting and useful functions; much more than we expected.
We particularly like this strategy because, unlike the Parabolic, the ATR Ratchet can easily be implemented any time we want during the trade. We can start implementing the stop the very first day of the trade or we can wait until some specific event prompts us to implement a profit-taking exit. I would suggest waiting to use the exit until some minimum level of profitability has been reached because, as you will see, this stop has a way of moving up very rapidly under favorable market conditions.
The ATR Ratchet begins very quietly and moves up steadily each day because we are adding one small unit of ATR for each bar in the trade. However the starting point from which the stop is being calculated (the 10 day low in our example) also moves up on a regular basis as long as the market is headed in the right direction. So now we have a constantly increasing number of units of ATR being added to a constantly rising ten day low. Each time the 10-day low increases our ATR Ratchet moves higher so we typically have a small but steady increase in the daily stop followed by much larger jumps as the 10 day low moves higher. It is important to emphasize that we are constantly adding our daily acceleration to an upward moving starting point that produces a unique dual acceleration feature for this exit. We have a rising stop that is being accelerated by both time and price. In addition, the ATR Ratchet will often add substantial additional acceleration in response to increases in volatility during the trade.
The acceleration due to range expansions is an important feature of the ATR Ratchet. Because markets often tend to show wider ranges as the trend accelerates the ATR will tend to expand very rapidly during our best profit runs. In a fast moving market you will typically find many gaps and large range bars. Because we are adding multiple units of ATR to our starting point, any increase in the size of the underlying ATR causes the stop to suddenly make a very large jump that brings it closer to the high point of the trade. If we have been in the trade for forty days any increase in the ATR will have a forty-fold impact on the cumulative daily acceleration. That is exactly what we want it to do. We found that when a market was making a good profit run the ATR Ratchet moved up surprisingly fast and did an excellent job of locking in open profits.
Keep in mind that this exit strategy is a new one (even to us) so our experience and observations about it are still very limited. However I am going to discuss a few observations about the variables that might help you to understand and apply this exit successfully.
Starting Price: One of the nice features about the ATR Ratchet is that we can start it any place we want. For example we can start it at some significant low point just as the Parabolic does. Or we can start it at a swing low, a support level, and a channel low or at our entry point minus some ATR unit. If we wait until the trade is fairly profitable we could start it at the entry point or even somewhere above our entry point. The possible starting points are unlimited; use your imagination and your logic to find a starting point that makes sense for your time frame and for what you want your system to accomplish. Our idea of starting the Ratchet from the x day low makes it move up faster than a fixed starting point (as in the Parabolic) because the starting point rises repeatedly in a strong market. If you prefer, you could just as easily start the Ratchet at something like 2 ATRs below the entry price and then the starting point would remain fixed. In this case the Ratchet would move up only as the result of accumulating additional time in the trade and as the result of possible expansions of the ATR itself.
When to Start: We can very easily initiate the exit strategy based on time rather than price or combine the two ideas. For example, we can start the exit only after the trade has been open for at least 10 days and is profitable by more than one ATR. My general impression at this point is that it is best to implement the ATR Ratchet only after a fairly large profit objective has been reached. The ATR Ratchet looks like a very good profit taking exit but I suspect it will kick you out of a trade much too soon if you start it before the trade is profitable.
As I mentioned, one of the things I like best about the ATR Ratchet is its flexibility and adaptability. Here is another idea on how to start it. We can start it after fifteen bars but we don't necessarily have to add fifteen ratchets. The logic for the coding would be to start the Ratchet after 15 bars in the trade but multiply the ATR units by the number of bars in the trade minus ten or divide the number of days in the trade by some constant before multiplying the ATR units. This procedure will reduce the number of ratchets, particularly at the beginning of the trade when the exit is first implemented. Play around with the ATR Ratchet and see what creative ideas you can come up with.
Daily Ratchet Amount: After testing it the daily Ratchet amount we chose when we were first doing our research turned out to be much too large for our intended application. The large Ratchet amount (percentage of ATR) moved the stop up too fast for the time frame we wanted to trade. After some trial and error we found that a Ratchet amount in the neighborhood of 0.05 or 0.10 (5% or 10% of one 20-day average true range) multiplied by the number of bars the trade has been open will move the stop up much faster than you might expect.
As a variation on this strategy the very small initial Ratchet can always be increased later in the trade once the profits are very high. We could start with a small Ratchet and then after a large amount of profit we could use a larger daily Ratchet increment. There are all sorts of interesting possibilities.
ATR Length: As we have learned in our previous uses of ATR, the length that we use to average the ranges can be very important. If we want the ATR to be highly responsive to short term variations in the size of the range we should use a short length for the average (4 or 5 bars). If we want a smoother ATR with less reaction to one or two days of unusual volatility we should use a longer average (20 to 50 bars). For most of my work with the ATR I use 20 days for the average unless I have a good reason to make it more or less sensitive.
Summary: We have just scratched the surface on our understanding of the possibilities and variations of the ATR Ratchet as a profit taking tool. We particularly like the flexibility it offers and we suspect that each trader will wind up using a slightly different variation. As you can see, there are many important variables to tinker with. Be sure to code the Ratchet so it gets plotted on a chart when your are first learning and experimenting with it. The ATR Ratchet is full of pleasant surprises and the plot on the chart will quickly teach you a great deal about its unusual characteristics.
Be sure to let us know if you come up with any exciting ideas on how to apply it.
Good luck and good trading.
More about Elder Stops
In the process of testing various exit strategies for our stock trading systems we found that we needed a profit-taking exit that performed somewhat along the lines of the Parabolic SAR but that could be made more flexible and easier to code and apply. We found that the Parabolic was hard to use because it was often on the opposite side of the market from our trades or it was starting from a point that was too low for what we wanted. After spending a great deal of time with the Parabolic we decided it was not helpful for the particular systems we were creating. As an alternative to the Parabolic exit we decided to test some new exit ideas based on my extensive work and experience with the Average True Range. After a great deal of tinkering and experimentation we were pleased to learn that the new exit strategy worked surprisingly well for profit taking and had many very useful features and applications. I decided to name this new exit strategy the "ATR Ratchet".
The basic idea is quite simple. We first pick a logical starting point and then add daily units of ATR to the starting point to produce a trailing stop that moves consistently higher while also adapting to changes in volatility. The advantage of this strategy over the original Parabolic based exit is that when using the ATR Ratchet we have much more control of the starting point and the acceleration. We also found that the ATR based exit has a fast and appropriate reaction to changes in volatility that will enable us to lock in more profit than most conventional trailing exits.
Here is an example of the strategy: After the trade has reached a profit target of at least one ATR or more, we pick a recent low point (such as the lowest low of the last ten days). Then we add some small daily unit of ATR (0.05 ATR for example) to that low point for each day in the trade. If we have been in the trade for 15 days we would multiply 0.05 ATRs by 15 days and add the resulting 0.75 ATRs to the starting point. After 20 days in the trade we would now be adding 1.0 ATRs (.05 times 20) to the lowest low of the last ten days. The ATR Ratchet is very simple in its logic but you will quickly discover that there are lots of moving parts that perform a lot of interesting and useful functions; much more than we expected.
We particularly like this strategy because, unlike the Parabolic, the ATR Ratchet can easily be implemented any time we want during the trade. We can start implementing the stop the very first day of the trade or we can wait until some specific event prompts us to implement a profit-taking exit. I would suggest waiting to use the exit until some minimum level of profitability has been reached because, as you will see, this stop has a way of moving up very rapidly under favorable market conditions.
The ATR Ratchet begins very quietly and moves up steadily each day because we are adding one small unit of ATR for each bar in the trade. However the starting point from which the stop is being calculated (the 10 day low in our example) also moves up on a regular basis as long as the market is headed in the right direction. So now we have a constantly increasing number of units of ATR being added to a constantly rising ten day low. Each time the 10-day low increases our ATR Ratchet moves higher so we typically have a small but steady increase in the daily stop followed by much larger jumps as the 10 day low moves higher. It is important to emphasize that we are constantly adding our daily acceleration to an upward moving starting point that produces a unique dual acceleration feature for this exit. We have a rising stop that is being accelerated by both time and price. In addition, the ATR Ratchet will often add substantial additional acceleration in response to increases in volatility during the trade.
The acceleration due to range expansions is an important feature of the ATR Ratchet. Because markets often tend to show wider ranges as the trend accelerates the ATR will tend to expand very rapidly during our best profit runs. In a fast moving market you will typically find many gaps and large range bars. Because we are adding multiple units of ATR to our starting point, any increase in the size of the underlying ATR causes the stop to suddenly make a very large jump that brings it closer to the high point of the trade. If we have been in the trade for forty days any increase in the ATR will have a forty-fold impact on the cumulative daily acceleration. That is exactly what we want it to do. We found that when a market was making a good profit run the ATR Ratchet moved up surprisingly fast and did an excellent job of locking in open profits.
Keep in mind that this exit strategy is a new one (even to us) so our experience and observations about it are still very limited. However I am going to discuss a few observations about the variables that might help you to understand and apply this exit successfully.
Starting Price: One of the nice features about the ATR Ratchet is that we can start it any place we want. For example we can start it at some significant low point just as the Parabolic does. Or we can start it at a swing low, a support level, and a channel low or at our entry point minus some ATR unit. If we wait until the trade is fairly profitable we could start it at the entry point or even somewhere above our entry point. The possible starting points are unlimited; use your imagination and your logic to find a starting point that makes sense for your time frame and for what you want your system to accomplish. Our idea of starting the Ratchet from the x day low makes it move up faster than a fixed starting point (as in the Parabolic) because the starting point rises repeatedly in a strong market. If you prefer, you could just as easily start the Ratchet at something like 2 ATRs below the entry price and then the starting point would remain fixed. In this case the Ratchet would move up only as the result of accumulating additional time in the trade and as the result of possible expansions of the ATR itself.
When to Start: We can very easily initiate the exit strategy based on time rather than price or combine the two ideas. For example, we can start the exit only after the trade has been open for at least 10 days and is profitable by more than one ATR. My general impression at this point is that it is best to implement the ATR Ratchet only after a fairly large profit objective has been reached. The ATR Ratchet looks like a very good profit taking exit but I suspect it will kick you out of a trade much too soon if you start it before the trade is profitable.
As I mentioned, one of the things I like best about the ATR Ratchet is its flexibility and adaptability. Here is another idea on how to start it. We can start it after fifteen bars but we don't necessarily have to add fifteen ratchets. The logic for the coding would be to start the Ratchet after 15 bars in the trade but multiply the ATR units by the number of bars in the trade minus ten or divide the number of days in the trade by some constant before multiplying the ATR units. This procedure will reduce the number of ratchets, particularly at the beginning of the trade when the exit is first implemented. Play around with the ATR Ratchet and see what creative ideas you can come up with.
Daily Ratchet Amount: After testing it the daily Ratchet amount we chose when we were first doing our research turned out to be much too large for our intended application. The large Ratchet amount (percentage of ATR) moved the stop up too fast for the time frame we wanted to trade. After some trial and error we found that a Ratchet amount in the neighborhood of 0.05 or 0.10 (5% or 10% of one 20-day average true range) multiplied by the number of bars the trade has been open will move the stop up much faster than you might expect.
As a variation on this strategy the very small initial Ratchet can always be increased later in the trade once the profits are very high. We could start with a small Ratchet and then after a large amount of profit we could use a larger daily Ratchet increment. There are all sorts of interesting possibilities.
ATR Length: As we have learned in our previous uses of ATR, the length that we use to average the ranges can be very important. If we want the ATR to be highly responsive to short term variations in the size of the range we should use a short length for the average (4 or 5 bars). If we want a smoother ATR with less reaction to one or two days of unusual volatility we should use a longer average (20 to 50 bars). For most of my work with the ATR I use 20 days for the average unless I have a good reason to make it more or less sensitive.
Summary: We have just scratched the surface on our understanding of the possibilities and variations of the ATR Ratchet as a profit taking tool. We particularly like the flexibility it offers and we suspect that each trader will wind up using a slightly different variation. As you can see, there are many important variables to tinker with. Be sure to code the Ratchet so it gets plotted on a chart when your are first learning and experimenting with it. The ATR Ratchet is full of pleasant surprises and the plot on the chart will quickly teach you a great deal about its unusual characteristics.
Be sure to let us know if you come up with any exciting ideas on how to apply it.
Good luck and good trading.
More about Elder Stops
Elder Stops
Your money management stops belong in the forexmarket. They represent your maximum allowable risk level, which you may not violate under any circumstances. If your technical analysis stops are closer to the forex market, you may hold them in your mind as you monitor prices and are prepared to exit if those levels gets hit.
Here, I want to share with you two advanced forex methods for placing stops. Try to program them into your forex software and test them on your forex market data. Until now, I have never disclosed SafeZone to traders, except to small groups in Trader’s Camps, where I like to share my latest research. It is my principle not to withhold information from my books. I write as I trade and maintain my edge not by secrecy but by developing new forex methods.
The SafeZone Stop
Once in a trade, where should you put your stop? This is one of the hardest questions in technical analysis. After answering it, you’ll face an even harder one—when and where to move that stop with the passage of time. Put a stop too close and it’ll get whacked by some meaningless intraday swing. Put it too far, and you’ll have very skimpy protection.
The Parabolic forex System, described in “Trading for a Living”, tried to tackle this problem by moving stops closer to the market each day, accelerating whenever a stock or a commodity reached a new extreme. The trouble with Parabolic was that it kept moving even if the market stayed flat and often got hit by meaningless noise.
The concept of signal and noise states that the trend is the signal and the nontrending motion is the noise. A stock or a future may be in an uptrend or a downtrend, but the noise of its random chop can obscure its signal. Trading at the right edge is hard because the noise level is high. I developed SafeZone to trail prices with stops tight enough to protect capital but remote enough to keep clear of most random fluctuations.
Engineers design filters to suppress noise and allow the signal to come through. If the trend is the signal, then the countertrend motion is the noise. When the trend is up, we can define noise as that part of each day’s range that protrudes below the previous day’s low. When the trend is down, we can define noise as that part of each day’s range that protrudes above the previous day’s high. SafeZone measures market noise and places stops at a multiple of noise level away from the market.
We may use the slope of a 22-day EMA to define trend. You need to choose the length of the lookback period for measuring noise level. It has to be long enough to track recent behavior but short enough to be relevant for current trading. A period of 10 to 20 days works well, or we can make our lookback period 100 days or so if we want to average long-term market behavior.
If the trend is up, mark all downside penetrations during the lookback period, add their depths, and divide the sum by the number of penetrations. This gives you the Average Downside Penetration for the selected lookback period. It reflects the average level of noise in the current uptrend. Placing your stop any closer would be self-defeation. E want to place our stops farther away from the market than the average level of noise. Multiply the Average Downside Penetration by coefficient, starting with two, but experiment with higher numbers. Subtract the result from yesterday’s low, and place your stop there. If today’s low is lower than yesterday’s, do not move your stop lower since we are only allowed to raise stops on long positions, not lower them.
Reverse these rules in downtrends. When a 22-day EMA identifies a downtrend, count all the upside penetrations during the lookback period and find the Average Upside Penetration. Multiply it by a coefficient, starting with two. When you go short, place a stop twice the Average Upside Penetration above the previous day’s high. Lower your stop whenever the market makes a lower high, but never raise it.
I anticipate that SafeZone will be programmed into may software packages, allowing the traders to control both the lookback period and the multiplication factor. Until then, you will have to do your own programming or else track SafeZone manually (See Table 6.1). Be sure to calculate it separately for uptrends and downtrends.
Here are the rules for calculating the SafeZone using an Excel spreadsheet. Once you understand how it works, try to program SafeZone into your technical analysis software and superimpose its signals on the chart. Compare the numbers from the spreadsheet and the trading software. They should be identical; otherwise, you have a programming error. Comparing results from the two software packages helps overcome pesky programming problems.
Rules for Longs in Uptrends When the trend is up, we calculate SafeZone on the basis of the lows because their pattern determines stop placement.
Obtain at least a month of data for your stock or future in high-low-close format, as shown in Table 6.1 (lows are in column C with the first record in row 3).
Test whether today’s low is lower than yesterday’s. Go to cell E4, enter the formula =IF(C3>C4,C3-C4,0) and copy it down the length of that column. It measures the depth of the downside penetration below the previous day’s range, and if there is none, it shows zero.
Choose the lookback period and summarize all downside penetrations during the time. Begin with 10 days and later experiment with other values. Go to cell F13, enter the formula =SUM(E4:E13), and copy it down the length of that column. It will summarize the extent of all downside penetrations for the past 10 days.
Mark each bar that penetrates below the previous bar. Go to cell G4, enter the formula =IF(C4
Find the Average Downside Penetration by dividing the sum of all downside penetrations during the lookback period by their number. Go to cell I13, enter the formula =F13/H13, and copy it down the length of that column. It will show the Average Downside Penetration for each day, that is, the normal level of downside noise in that market.
Place your stop for today at a multiple of yesterday’s Average Downside Penetration below yesterday’s low. Multiply yesterday’s Average Downside Penetration by a selected coefficient, starting at 2 but testing as high as 3, and subtract the result from yesterday’s low to obtain today’s stop. Go to cell J14, enter the formula =C13-2*I13, and copy it down the length of that column. It will place a stop two Average Downside Penetrations below the latest low. If today’s low penetrates yesterday’s low by twice the normal range of noise, we bail out.
Refine the formula to prevent it from lowering stops in uptrends. If the above formula tells us to lower our stops, we simply leave it at the previous day’s level. Go to cell K16, enter formula =MAX(J14:J16), and copy it down the length of that column. It will prevent the stop from declining for three days, by which time either the uptrend resumes or the stops is hit.
Rules for Shorts in Downtrends
When the trend is down, we calculate SafeZone on the basis of the highs because their pattern determines stop placement.
Obtain at least a month of data for your stock or future in high-low-close format, as shown in Table 6.1 (highs are in column B with the first record in row 3).
Test whether today’s high is higher than yesterday’s. Go to cell L4, enter the formula =IF(B3>B4,B3-B4,0) and copy it down the length of that column. It measures the height of the upside penetration above the previous day’s range, and if there is none, it shows zero.
Choose the lookback period and summarize all upside penetrations during the time. Begin with 10 days and later experiment with higher values. Go to cell M13, enter the formula =SUM(L4:L13), and copy it down the length of that column. It will summarize the extent of all upside penetrations for the past 10 days.
Mark each bar that penetrates above the previous bar. Go to cell N4, enter the formula =IF(B4 < B3 ,1,0) and copy it down the length of that column. It will mark each upside penetration with 1 and no penetration with 0.
Count the number of upside penetrations during the lookback period, in this case 10 days. Go to cell O13, enter the formula =SUM(N4:N13), and copy it down the length of that column. It will show how many times in the past 10 days the highs have been violated.
Find the Average Upside Penetration by dividing the sum of all upside penetrations during the lookback period by their number. Go to cell P13, enter the formula =M13/O13, and copy it down the length of that column. It will show the Average Upside Penetration for each day, that is, the normal level of upside noise in that market.
Place your stop for today at a multiple of yesterday’s Average Upside Penetration above yesterday’s high. Multiply yesterday’s Average Upside Penetration by a selected coefficient, starting at 2 but testing as high as 3, and add the result from yesterday’s high to obtain today’s stop. Go to cell Q14, enter the formula =B13-2*P13, and copy it down the length of that column. It will place a stop two Average Upside Penetrations above the latest high. If today’s high penetrates yesterday’s high by twice the normal range of noise, we bail out.
Refine the formula to prevent it from raising stops in downtrends. If the above formula tells us to raise our stops, we simply leave it at the previous day’s level. Go to cell R16, enter formula =MIN(Q14:Q16), and copy it down the length of that column. It will prevent the stop from rising for three days, by which time either the downtrend resumes or the stops is hit.
To use SafeZone with your favorite stock or future during an uptrend, begin by multiplying the average downside penetration by the factor of three, and subtracting that from the low of the latest bar. Putting your stop closer than the average level of noise means asking for trouble, and even twice the average level is often too close. Once your system identifies an uptrend, SafeZone starts following prices, getting you out before the trend reverses. You can see that SafeZone stop as hit at points A, B, C, and D, catching the bulk of the uptrend and avoiding downdrafts.
The right edge of the chart illustrates why it is a good idea never to hold a stock below its SafeZone level. JEC is in a free fall, wiping out the profits of a month in just two days—a trader using SafeZone cashed out early in the decline.
Here, I want to share with you two advanced forex methods for placing stops. Try to program them into your forex software and test them on your forex market data. Until now, I have never disclosed SafeZone to traders, except to small groups in Trader’s Camps, where I like to share my latest research. It is my principle not to withhold information from my books. I write as I trade and maintain my edge not by secrecy but by developing new forex methods.
The SafeZone Stop
Once in a trade, where should you put your stop? This is one of the hardest questions in technical analysis. After answering it, you’ll face an even harder one—when and where to move that stop with the passage of time. Put a stop too close and it’ll get whacked by some meaningless intraday swing. Put it too far, and you’ll have very skimpy protection.
The Parabolic forex System, described in “Trading for a Living”, tried to tackle this problem by moving stops closer to the market each day, accelerating whenever a stock or a commodity reached a new extreme. The trouble with Parabolic was that it kept moving even if the market stayed flat and often got hit by meaningless noise.
The concept of signal and noise states that the trend is the signal and the nontrending motion is the noise. A stock or a future may be in an uptrend or a downtrend, but the noise of its random chop can obscure its signal. Trading at the right edge is hard because the noise level is high. I developed SafeZone to trail prices with stops tight enough to protect capital but remote enough to keep clear of most random fluctuations.
Engineers design filters to suppress noise and allow the signal to come through. If the trend is the signal, then the countertrend motion is the noise. When the trend is up, we can define noise as that part of each day’s range that protrudes below the previous day’s low. When the trend is down, we can define noise as that part of each day’s range that protrudes above the previous day’s high. SafeZone measures market noise and places stops at a multiple of noise level away from the market.
We may use the slope of a 22-day EMA to define trend. You need to choose the length of the lookback period for measuring noise level. It has to be long enough to track recent behavior but short enough to be relevant for current trading. A period of 10 to 20 days works well, or we can make our lookback period 100 days or so if we want to average long-term market behavior.
If the trend is up, mark all downside penetrations during the lookback period, add their depths, and divide the sum by the number of penetrations. This gives you the Average Downside Penetration for the selected lookback period. It reflects the average level of noise in the current uptrend. Placing your stop any closer would be self-defeation. E want to place our stops farther away from the market than the average level of noise. Multiply the Average Downside Penetration by coefficient, starting with two, but experiment with higher numbers. Subtract the result from yesterday’s low, and place your stop there. If today’s low is lower than yesterday’s, do not move your stop lower since we are only allowed to raise stops on long positions, not lower them.
Reverse these rules in downtrends. When a 22-day EMA identifies a downtrend, count all the upside penetrations during the lookback period and find the Average Upside Penetration. Multiply it by a coefficient, starting with two. When you go short, place a stop twice the Average Upside Penetration above the previous day’s high. Lower your stop whenever the market makes a lower high, but never raise it.
I anticipate that SafeZone will be programmed into may software packages, allowing the traders to control both the lookback period and the multiplication factor. Until then, you will have to do your own programming or else track SafeZone manually (See Table 6.1). Be sure to calculate it separately for uptrends and downtrends.
Here are the rules for calculating the SafeZone using an Excel spreadsheet. Once you understand how it works, try to program SafeZone into your technical analysis software and superimpose its signals on the chart. Compare the numbers from the spreadsheet and the trading software. They should be identical; otherwise, you have a programming error. Comparing results from the two software packages helps overcome pesky programming problems.
Rules for Longs in Uptrends When the trend is up, we calculate SafeZone on the basis of the lows because their pattern determines stop placement.
Obtain at least a month of data for your stock or future in high-low-close format, as shown in Table 6.1 (lows are in column C with the first record in row 3).
Test whether today’s low is lower than yesterday’s. Go to cell E4, enter the formula =IF(C3>C4,C3-C4,0) and copy it down the length of that column. It measures the depth of the downside penetration below the previous day’s range, and if there is none, it shows zero.
Choose the lookback period and summarize all downside penetrations during the time. Begin with 10 days and later experiment with other values. Go to cell F13, enter the formula =SUM(E4:E13), and copy it down the length of that column. It will summarize the extent of all downside penetrations for the past 10 days.
Mark each bar that penetrates below the previous bar. Go to cell G4, enter the formula =IF(C4
Find the Average Downside Penetration by dividing the sum of all downside penetrations during the lookback period by their number. Go to cell I13, enter the formula =F13/H13, and copy it down the length of that column. It will show the Average Downside Penetration for each day, that is, the normal level of downside noise in that market.
Place your stop for today at a multiple of yesterday’s Average Downside Penetration below yesterday’s low. Multiply yesterday’s Average Downside Penetration by a selected coefficient, starting at 2 but testing as high as 3, and subtract the result from yesterday’s low to obtain today’s stop. Go to cell J14, enter the formula =C13-2*I13, and copy it down the length of that column. It will place a stop two Average Downside Penetrations below the latest low. If today’s low penetrates yesterday’s low by twice the normal range of noise, we bail out.
Refine the formula to prevent it from lowering stops in uptrends. If the above formula tells us to lower our stops, we simply leave it at the previous day’s level. Go to cell K16, enter formula =MAX(J14:J16), and copy it down the length of that column. It will prevent the stop from declining for three days, by which time either the uptrend resumes or the stops is hit.
Rules for Shorts in Downtrends
When the trend is down, we calculate SafeZone on the basis of the highs because their pattern determines stop placement.
Obtain at least a month of data for your stock or future in high-low-close format, as shown in Table 6.1 (highs are in column B with the first record in row 3).
Test whether today’s high is higher than yesterday’s. Go to cell L4, enter the formula =IF(B3>B4,B3-B4,0) and copy it down the length of that column. It measures the height of the upside penetration above the previous day’s range, and if there is none, it shows zero.
Choose the lookback period and summarize all upside penetrations during the time. Begin with 10 days and later experiment with higher values. Go to cell M13, enter the formula =SUM(L4:L13), and copy it down the length of that column. It will summarize the extent of all upside penetrations for the past 10 days.
Mark each bar that penetrates above the previous bar. Go to cell N4, enter the formula =IF(B4 < B3 ,1,0) and copy it down the length of that column. It will mark each upside penetration with 1 and no penetration with 0.
Count the number of upside penetrations during the lookback period, in this case 10 days. Go to cell O13, enter the formula =SUM(N4:N13), and copy it down the length of that column. It will show how many times in the past 10 days the highs have been violated.
Find the Average Upside Penetration by dividing the sum of all upside penetrations during the lookback period by their number. Go to cell P13, enter the formula =M13/O13, and copy it down the length of that column. It will show the Average Upside Penetration for each day, that is, the normal level of upside noise in that market.
Place your stop for today at a multiple of yesterday’s Average Upside Penetration above yesterday’s high. Multiply yesterday’s Average Upside Penetration by a selected coefficient, starting at 2 but testing as high as 3, and add the result from yesterday’s high to obtain today’s stop. Go to cell Q14, enter the formula =B13-2*P13, and copy it down the length of that column. It will place a stop two Average Upside Penetrations above the latest high. If today’s high penetrates yesterday’s high by twice the normal range of noise, we bail out.
Refine the formula to prevent it from raising stops in downtrends. If the above formula tells us to raise our stops, we simply leave it at the previous day’s level. Go to cell R16, enter formula =MIN(Q14:Q16), and copy it down the length of that column. It will prevent the stop from rising for three days, by which time either the downtrend resumes or the stops is hit.
To use SafeZone with your favorite stock or future during an uptrend, begin by multiplying the average downside penetration by the factor of three, and subtracting that from the low of the latest bar. Putting your stop closer than the average level of noise means asking for trouble, and even twice the average level is often too close. Once your system identifies an uptrend, SafeZone starts following prices, getting you out before the trend reverses. You can see that SafeZone stop as hit at points A, B, C, and D, catching the bulk of the uptrend and avoiding downdrafts.
The right edge of the chart illustrates why it is a good idea never to hold a stock below its SafeZone level. JEC is in a free fall, wiping out the profits of a month in just two days—a trader using SafeZone cashed out early in the decline.
Forex Education - Forex EA Testing Setup and Procedures
1. Setting up a platform for testing:
· To test numerous forex trading EA’s or forex currency pairs, we want to setup and name a different platform for each forex EA and currency pair. When naming the platform, it may be best to name each platform with the forex currency pair that you are testing and from this time forward use this platform to only test that forex currency pair. This may seem cumbersome but this initial work makes testing results later 1000 times easier. The rule here is 1 EA per currency pair, per time frame, per platform. This will then mean only one output to forex review with no cross forex currency results or cross time frame results to pull out before evaluating the forex trade results. Now with these actual forward traded results accumulated, we can go and back test the forex EA against these results and evaluate the back testing of MetaTrader4.
· Open the currency pair chart window for the time frame to test.
· Load the chart template file associated with the forex EA. This template shows the forex indicators that the EA uses. At the end of the testing or each week, we will save the template with a name associated with the forex EA. This will save the trades executed that are displayed for further review. This template file can be sent to anyone at this point to see how the EA traded.
2. Account setup:
· Open a new account for the forex EA on the currency pair platform to be tested. Remember, 1 EA per currency pair, per time frame, per account. So for ex., if you are testing “Ultimate” EA on the 15 min chart on 4 forex currency pairs, you will need 4 different platforms setup.
· When filling out the application to set up the account, in the name field enter the name of the EA that you are testing. Ex Name: “Ultimate EA” this will then be displayed at the top of the reports that can be printed.
· Open a standard account for $10,000.00 and trade 1 lot sizes.
3. Attach your forex EA:
· Attach your forex EA to the correct currency pair and time frame to be tested. Remember to attach the forex EA to only 1 time frame per currency per MT4 forex platform. Hopefully this will not be necessary to do in the future if we can get something like Order History working or another forex program that Mick Mick has told me about that will strip out the needed information automatically instead. For now though this is the only way I see to do these studies and to separate the forex results.
4. Weekly reporting:
· After the trading week has ended you will need to go to the terminal window and open account history.
· Right click in the account history field and choose custom period.
· Set the beginning and ending period to go from before the market opened for the week to after the forex market closed for the week. Ex. Saturday to Saturday.
· Go back to account history field and right click again and click “Save as Detailed Report”.
· Name the report with these rules to allow for easy naming. “forex EA name, forex chart time period, start date of week” Ex. Ultimate 1HR 6_3 This will quickly and simply give us the forex EA name, the forex chart period it was run on and the start date of the test.
· Email the test results that you have now saved. Include in the subject line the name of the forex EA, time period, and forex currency pair.
5. Weekly back forex testing:
· It is now at this point you will look to do the weekly back testing of the forex EA on the same forex currency pair for that time period.
· Name the report with these rules to allow for easy naming. “EA name, chart time period, start date of week, back test” Ex. Ultimate 1HR 6_3 Back test This will quickly and simply give us the forex EA name, the forex chart period it was run on and the start date of the test and that it is the back test results.
· The results of the back test will also need to be saved
· You should look to see how the results compared between the forward traded results and how the back test performed at the end of the week.
· Proper setup for back testing and the procedures involved will follow. This will include checking and confirming the data that will be used for the back test and loading the additional data if required.
Best Currency Forex Strategies and Profitable Forex Systems
· To test numerous forex trading EA’s or forex currency pairs, we want to setup and name a different platform for each forex EA and currency pair. When naming the platform, it may be best to name each platform with the forex currency pair that you are testing and from this time forward use this platform to only test that forex currency pair. This may seem cumbersome but this initial work makes testing results later 1000 times easier. The rule here is 1 EA per currency pair, per time frame, per platform. This will then mean only one output to forex review with no cross forex currency results or cross time frame results to pull out before evaluating the forex trade results. Now with these actual forward traded results accumulated, we can go and back test the forex EA against these results and evaluate the back testing of MetaTrader4.
· Open the currency pair chart window for the time frame to test.
· Load the chart template file associated with the forex EA. This template shows the forex indicators that the EA uses. At the end of the testing or each week, we will save the template with a name associated with the forex EA. This will save the trades executed that are displayed for further review. This template file can be sent to anyone at this point to see how the EA traded.
2. Account setup:
· Open a new account for the forex EA on the currency pair platform to be tested. Remember, 1 EA per currency pair, per time frame, per account. So for ex., if you are testing “Ultimate” EA on the 15 min chart on 4 forex currency pairs, you will need 4 different platforms setup.
· When filling out the application to set up the account, in the name field enter the name of the EA that you are testing. Ex Name: “Ultimate EA” this will then be displayed at the top of the reports that can be printed.
· Open a standard account for $10,000.00 and trade 1 lot sizes.
3. Attach your forex EA:
· Attach your forex EA to the correct currency pair and time frame to be tested. Remember to attach the forex EA to only 1 time frame per currency per MT4 forex platform. Hopefully this will not be necessary to do in the future if we can get something like Order History working or another forex program that Mick Mick has told me about that will strip out the needed information automatically instead. For now though this is the only way I see to do these studies and to separate the forex results.
4. Weekly reporting:
· After the trading week has ended you will need to go to the terminal window and open account history.
· Right click in the account history field and choose custom period.
· Set the beginning and ending period to go from before the market opened for the week to after the forex market closed for the week. Ex. Saturday to Saturday.
· Go back to account history field and right click again and click “Save as Detailed Report”.
· Name the report with these rules to allow for easy naming. “forex EA name, forex chart time period, start date of week” Ex. Ultimate 1HR 6_3 This will quickly and simply give us the forex EA name, the forex chart period it was run on and the start date of the test.
· Email the test results that you have now saved. Include in the subject line the name of the forex EA, time period, and forex currency pair.
5. Weekly back forex testing:
· It is now at this point you will look to do the weekly back testing of the forex EA on the same forex currency pair for that time period.
· Name the report with these rules to allow for easy naming. “EA name, chart time period, start date of week, back test” Ex. Ultimate 1HR 6_3 Back test This will quickly and simply give us the forex EA name, the forex chart period it was run on and the start date of the test and that it is the back test results.
· The results of the back test will also need to be saved
· You should look to see how the results compared between the forward traded results and how the back test performed at the end of the week.
· Proper setup for back testing and the procedures involved will follow. This will include checking and confirming the data that will be used for the back test and loading the additional data if required.
Best Currency Forex Strategies and Profitable Forex Systems
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