Jun 28, 2009

Trailing Resistance & Support Stops: TAS&C July Traders’ Tips

Traders’ Tips
Eventually, luck runs out; skill does not.” Scalper68 (AlexD)
In this month’s Traders’ Tips, Sylvain Vervoort offers a 3rd trailing stop method, called a trailing resistance & support stop, which evaluates price movements or ‘turning points’. This 3rd trailing stop method most closely resembles the Trade-Ideas concept of automating the creation of a custom trailing stop based on a stock’s natural 15 minute volatility. Therefore our strategy this month, retains all of the settings from last month and an updated set of backtested results. Only a few additional filters are applied to make sure the strategy trades with good volume. Subscribers to Trade-Ideas PRO who use our event-based backtesting tool, The OddsMaker, already understand the different premise these tools use to find high probability winning trades.
To recap briefly The OddsMaker doesn’t just look at 25 stocks, à priori, to generate backtest results, it considers any stock that matched a desired pattern in the market, finds that stock, and applies the backtest’s rule set before summing up the results into a detailed set of totals: win rate, average winner, average loser, net winnings, confidence factor, See Figure 3.
Description: “Modified ATR Volatility Stop Part 2”
Provided by:
Trade Ideas (copyright © Trade Ideas LLC 2009). All rights reserved. For educational purposes only. Remember these are sketches meant to give an idea how to model a trading plan. Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for trading and investment results.
Type or copy/paste this shortened string directly into a browser then copy/paste the full length link into Trade-Ideas PRO using the “Collaborate” feature (right-click in any strategy window):
http://bit.ly/19DiKt (case sensitive)
You can also build the strategy from Figure 1 below.
Trade-Ideas approached the Average True Range stop loss using a modified ATR, called ‘Trailing stop, volatility down’, based on the average 15 minute volatility of a stock. The modified ATR is similar to ‘The Wiggle’ we discussed in last month’s article.
Entry signals were created that went short any time a stock between 5 dollars and 50 dollars moved up 75 cents or more in 1 minute or less.
Figure 1 below shows the configuration of this strategy:
Where 1 alert and 4 filters are used with the following settings:
Running Up Now (in 1 minute or less), $0.75
Min Price Filter = 5 ($)
Max Price Filter = 50 ($)
Max Distance from Inside Market Filter = 0.15 (%)
Min Daily Volume Filter = 300,000 (shares/day)
The definitions of these indicators appear here: https://trade-ideas.54solutions.com/Help.html.
That’s the strategy, but what about the trading rules? How should the opportunities that the strategy finds be traded? For the stop loss we used one of the more advanced options available in the OddsMaker. Instead of using a traditional stop loss we selected ‘Another Alert’ as the exit condition called ‘Trailing stop, volatility down’. This alert is triggered when a stock moves down an amount equal to the average 15 minute volatility multiplied by the number of 15 minute bars we decide – in this case 2. For example if the average 15 minute volatility is 10 cents, this alert would not trigger until a stock moves down at least 20 cents.
Here is what The OddsMaker tested for the past 3 weeks ending 5/08/2009 given the following trade rules:
On each alert, sell short the symbol (price moves down to be a successful trade)
Schedule an exit for the stocks 30 minutes after entry
Start trading from the open and stop trading 30 minutes later
Set a stop using the alert, ‘Trailing stop, volatility down’, with a setting of 2 bars
The OddsMaker summary provides the evidence of how well this strategy and our trading rules did. The settings are shown here in Figure 2.
The results (last backtested for the 3-week period ending 05/08/2009) are as follows:
The summary reads as follows: This strategy generated 228 trades of which 137 were profitable for a win rate of 60%. The average winning trade generated $0.24 in profit and the average loser lost $0.14. The net winnings of using this strategy for 15 trading days generated $21.70 points. If you normally trade in 100 share lots, this strategy would have generated $2170. The z-score or confidence factor that the next set of results will fall within this strategy’s average winner and loser is 99%.
Understand these backtest results from The OddsMaker in more detail by reading the User’s Manual: https://trade-ideas.54solutions.com/OddsMaker/Help.html
— by Dan Mirkin & David Aferiat, Managing Partners, Trade Ideas LLC
www.trade-ideas.com, david@trade-ideas.com
Other Traders’ Tips Articles from TAS&C