I like mean reversion trades. I put this indicator together this evening. It's basically a Bollinger band without the middle line and, instead, I put in an EMA rounded to the nearest tick. The background is painted green when price closes outside of the upper band. At this point we look for reversions to the EMA and go long. The background paints pink for the opposite condition. On the ES It tends to work best during the early hours of the session when the market tends to trend the most, not so good in chop.
It's inspired by the "pullback trades" from the guys over at eminitradingstrategies.com. I've been following their system for several months (blog, videos, etc) but don't have the courage to drop $2,500 on someone's system with very near-impossible-to-claim return policies. I don't know all of their rules or how their system works, and their users seem very tight-lipped about it (even the disgruntled ones, did they sign an NDA or something?) but someone on a forum mentioned it uses Bollinger bands and EMAs. Bollinger's and any StdDev-based/probabilistic based indicators are my favorite to use for automated strats. So after watching their videos with charts of the trades their system called/signaled for the week I decided the pullback trade (1 of 3 entries in their system) is probably like this but I'm not sure.
Going to keep working on this...
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Still working on money management, looking to incorporate ATR into my targets. 1.5 or 2.0 times ATR seems to work well on pull-back trades. Started playing with StdError for identifying exhaustion breaches outside of the Boll bands as potential reversals only when the StdError channel is completely outside of the EMA. They work often and well, but fail miserably when they do, especially in hard-trending markets like today. Also, could be useful for end of trend signals for runners (when price enters then channel then goes out, exit the trade). Here's today's action. The market's been trending pretty hard the last week or so, not much chop, so I'm not inclined to get too excited about this yet.
11/6 - I haven't traded in a while due to strat development and I've been getting anxious so I decided to get up and look for opportunities at the market open. The pre-market jobs report was worse than expected, but I thought the market's reaction was overdone so I looked for an opportunity to fade the pre-market drop. The inside bar at the open (6:30) gave me a signal that a breakout above the consolidation range might be what I'm looking for so I got in just above the inside bar. It ended up filling the entire gap, but I was using an ATM strategy to manage the trade so I didn't get all of it, but it executed my plan and it played out well so I can't ask for anything better than that (except maybe for a better plan ). The usually-correlated 6E gave 40 ticks of profit on the same push but I didn't trade that.
ES- 1 winner, +4/+8/+16 ticks
I'm almost done listening to Reminiscences of a Stock Operator and been enjoying it. That old chap Livermore really knew how to read (and manipulate) the tape. There's some great insight into markets, movement, manipulations, and psychology and recommend it if you haven't read it yet.
Last edited by shodson; November 6th, 2009 at 11:41 AM.
I finally got around to playing with double stochastics this weekend after observing its interesting, cyclical behavior on charts quite a bit. I've got a strat on ES that, optimized, wins 44% of the time put risk/reward of only 0.29, meaning I risk 1 to make 3.5, so even with that win rate I make it up in risking way less than what I expect. I'm using ATR to determine if there is enough action to take a trade and to determine my stop loss and my expectancy.
The "if ATR is big enough" filter really keeps me out of a lot of bad trades and prevents over-trading that would just take every over-bought/over-sold signal the double stoch fires. In the middle of October it went almost two weeks without taking a trade since it was very quiet during that period. I like the adaptability to different market conditions that this provides. It's hard to have an expectancy greater than your risk in a low trading range environment, at least on a linear basis (maybe a logarithmic/parabolic adjustment to market volatility would work)
Also, if double stochastic re-enters the middle zone I check RSI to confirm I'm entering the trade into strength, which helps filter a few bad trades out as well.
Anyways, it needs more forward testing but I really like the low risk nature of the strat even with mediocre win rates as long as my psychology allows me to be OK with losing more often than I win.
11/9 - I decided to fade the opening gap today but with my subscription to MasterTheGap expired I didn't know the odds, but the gap was so large I saw nothing but big dollars waiting for me back down to Friday's close. As the trade was going 2-3pts against me I decided to renew my subscription, something I've been meaning to do, and of course their call was to not fade the gap as the odds and profit factors were awful. Also, there were report after report on CNBC of bullish announcements (housing, McDonalds earnings, etc). While I considered getting out immediately once I learned the odds I still held on hoping to at least get back to break-even but greed kept me in until I finally got stopped out at a 5pt loss. I'm as mad as this woman on the McDonalds cup
Tried to recover on what looked like a rounded top reversal/shooting star but I got in late and it ended up being a bull flag instead. Price eventually did break out of the range for a quick scalp but I've already lost too much today so I didn't want to chase it.
ES - 2 losers, -30 ticks
Last edited by shodson; November 9th, 2009 at 11:43 AM.
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