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The trend is your friend!

Published on November 29, 2012

“The trend is your friend”. This famous phrase is in almost all trading books. But how important is it to trade in the direction of the trend? This is the question I asked myself. Before answering this question, we will discuss some generalities. Whereof is usually composed a trading strategy:

  • An entry that gives us an advantage (edge) compared to a random input. The input can be decomposed into elements such as setup, filters, signal, execution, etc …
  • Exit with loss (stop loss) or profit (take profit).
  • Management of risk (money management) that allows us to maximize profit while minimizing risk.

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Random entry + ATR Trailing Stop

Published on November 26, 2012

Can a strategy based on a random input  with a suitable output and money management be profitable? Dr Van Tharp in his book Super Trader, said he did the test in 10 markets over a period of 10 years, and says the results were positive in a consistent manner.

“It didn’t make a lot of money and you had to live through some nasty drawdowns, but over the 10 years it made money.” Super Trader p.149.

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Moving Average Crossover

Published on November 26, 2012

If there is a popular technique in trading, it is the moving averages (MA) crossover. We saw in a previous article that the problem of the strategy based on the MA was whipsaw. We then presented a technique that corrects the issue in the article on the Keltner bands. The technique of using crossing of two MA goes in the same direction. In fact, see the slow MA (the one with the largest period) as a trend indicator and the fast MA as a filter that shows the price movement without noise (random and sudden movements which immediately affect the main  movement of the price). So, by waiting the fast MA to cross the slow one, we avoids the disadvantages of whipsaw.

As usual, the strategy I will test today will be based on the basic technique, the Stop-and-Reverse one. The rules are simple and can be summarized as follows:

  • Buy: When the fast MA crosses the slow MA from bottom to top, buy at the opening of the next bar.
  • Sale: When the fast MA crosses the slow MA from top to bottom, sell at the opening of the next bar.

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Reinventing the MACD

Published on November 25, 2012

The MACD is the famous indicator invented by Gerald Appel in the 70s.  It measures the amplitude of divergence between two moving averages. This indicator is very popular, systematically found in all trading platforms. It can be used in different type of strategy: like momentum indicator for trend following, oscillator for range-trading, etc. … In this article we will see how someone could reinvent the MACD. The goal of the exercise is to learn together some techniques and mathematical manipulations that can eventually help you later to create your own indicators to highlight a particular observation or answer any needs.

I take this opportunity to pay tribute to this talented man who created the MACD Gerald Appel. It is always easier to reinvent the wheel when someone has already done. Mr. Appel, in addition to being an outstanding manager and trader, is the author of several books on trading, including:
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The Donchian Channel

Published on November 25, 2012

The Donchian Channel was developed by Richard Donchian, who used a 50 weeks period in the original strategy.  The idea is to buy when the price breaks the upper band of the channel (maximum 50 weeks) and sell when it breaks the lower band of the channel (minimum 50 weeks). However, this is Richard Dennis who popularized the technique in the 80s because it was the basis of the technique taught to a group of turtles. This famous group born out of a bet between Richard Dennis and his friend Bill Eckhard.

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Keltner Channel

Published on June 25, 2012

One weakness of the strategy of price crosses its moving average, is the many whipsaw, closing the position at a loss before the trend has a chance to settle. This is why trading slope of the moving average gives better results; It takes position when the trend is sufficiently established.

The whipsaw is a component of market volatility. One way to avoid them is to create a band of volatility around the mean. We have already discussed this approach in the article about Bollinger Bands. Indeed, trading the breaks of Bollinger Bands reduces sensitivity to market noise.

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All flavors of moving average!

Published on June 21, 2012

The moving average is perhaps the most popular  technical analysis tool of markets. According to this article, its use for smoothing data goes back to the early 20th century. Its use to define the market trend is everywhere, on traders screen  as well as specialized media screens. It is impossible to find a book of technical analysis that does not speak about moving average and it seems that strategies based on the crossing of two moving averages are the few classics that continue to work.
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Bollinger Bands

Published on June 16, 2012

There are several strategies based on Bollinger Bands.  I choose two of them for my first test.

 

Strategy # 1:

The classic strategy uses Bollinger bands as support and resistance. Indeed, we trade the bounce of bands. The basic rules are as follows:

Buy: when the price tests the lower band and closes above it, buy at the opening of the next bar. Close the position when the price closes above the moving average.

Sale: when the price tests the upper band and closes below it, sell at the opening of the next bar. Close the position when the price closes below the moving average.

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The great masters

Published on June 16, 2012

Trading is much like the practice of martial arts. To succeed, you need discipline, perseverance and a lot of practice. You’ll be lucky if you could find a good mentor (the master). The analogy becomes even more striking when I think to the concept of the great masters. In the world of trading, we think of legends like Charles Dow, W. D. Gann, Ralph Nelson Elliot, and among those who still alive, John Bollinger, Ed Seykota, Larry Williams, Joe DiNapoli and others.

When you read a book of these great masters, because you do not have the chance to meet them and even less have them as a mentor, you feel their great wisdom, talent and you are touched by great humility. I recently started reading the book by Joe DiNapoli  and then I found a series of interviews with him on youtube. This guy symbolizes the great masters of modern times.

That’s why I decided to add a page of quotations. Whenever I read a book and find a quotation that inspires me, I’ll write it in this page.

 

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The reason to be

Published on June 5, 2012

Some time ago when we were started to look at Forex-Trading, we had read a hundred of books, spend many hours online looking for information and especially looking for a trading system. We found several, from simple to complex. But few sources show the validity of the systems they have. What we are left unsatisfied and especially worried to use a system which we don’t know the validity. So, armed with our programming skills, we will try to fill this void by testing on Metatrader 5 trading systems that seem interesting.

The systems we will test will be taken from books, websites (forums, blogs, …) or proposed by our readers. We will whenever necessary references for those who want to dig a little more. Our goal is to test the maximum allowed by our free time.

 
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