REQUIRED U.S. Government Disclaimer NOTICE: HYPOTHETICAL HYPOTHETICAL PERFORMANCE RESULTS HAVE HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE IS THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER OTHER FACTORS RELATED TO THE MARKETS MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE SUCCESS. DO NOT TRADE WITH MONEY YOU CAN NOT AFFORD TO LOSE. ALL ASSET CLASSES INCLUDING FUTURES, OPTIONS, FOREX, ETF'S AND STOCKS HAVE LARGE POTENTIAL REWARDS BUT ALSO LARGE POTENTIAL RISKS. YOU MUST BE AWARE OF THE RISKS AND WILLING TO ACCEPT THOSE RISKS IN ORDER TO INVEST. ALWAYS CONSULT A REGISTERED FINANCIAL ADVISOR BEFORE TRADING OR INVESTING TO DETERMINE IF THE INVESTMENT IS APPROPRIATE FOR YOU. THIS WEBSITE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SOLICITATION TO BUY OR SELL ANY ENTITY MENTIONED.
ABSOLUTE PERFORMANCE INDICATORS
Throughout this manual we refer to the “Absolute Performance Indicators” as the “AP Indicators”. Whether you are a neophyte to trading or an experienced trader, the AP Indicators and trading strategies will provide you with tools that you can begin to use immediately to improve your technical trading approach. Every AP indicator is founded on “evidence based technical analysis”. Evidence based technical analysis means that every indicator in this package must show its medal as part of an empirical test using clear and simple entry rules and clear and simple exit rules. Right now you probably have a 100 or so technical indicators on your technical analysis software. Not one of them comes with instructions that shows you how to use use the indicator, and/or provides any sort of evidence evidence that the indicator provides any “edge” that can aid in making profitable trades. We will show you how each of our indicators works with some simple entry/ exit strategies. All test rules are fully explained such that users can program the same tests themselves. AP INDICATOR FEATURES •
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Indicators can readily be displayed on a chart and called up just like any other indicator your software displays. Indicators can be easily imported to your own trading system or strategy test as your software allows. Indicators are displayed free of distracting screen clutter. Price ultimately is what we are trading, and the indicators were designed to be able to see price, with with minimal competition competition from anything else on on the trading screen. Trading Set Ups are clearly explained and readily recognizable on the fly as markets are trading. tr ading. A trader can process only limited information “in the moment” and the indicators are designed with that philosophy.
The following explanations are as focused as possible, such that the info is readily available when you are learning. We will give one example of each buy and each sell set up. up.
ABSOLUTE PERFORMANCE INDICATORS
Throughout this manual we refer to the “Absolute Performance Indicators” as the “AP Indicators”. Whether you are a neophyte to trading or an experienced trader, the AP Indicators and trading strategies will provide you with tools that you can begin to use immediately to improve your technical trading approach. Every AP indicator is founded on “evidence based technical analysis”. Evidence based technical analysis means that every indicator in this package must show its medal as part of an empirical test using clear and simple entry rules and clear and simple exit rules. Right now you probably have a 100 or so technical indicators on your technical analysis software. Not one of them comes with instructions that shows you how to use use the indicator, and/or provides any sort of evidence evidence that the indicator provides any “edge” that can aid in making profitable trades. We will show you how each of our indicators works with some simple entry/ exit strategies. All test rules are fully explained such that users can program the same tests themselves. AP INDICATOR FEATURES •
•
•
•
Indicators can readily be displayed on a chart and called up just like any other indicator your software displays. Indicators can be easily imported to your own trading system or strategy test as your software allows. Indicators are displayed free of distracting screen clutter. Price ultimately is what we are trading, and the indicators were designed to be able to see price, with with minimal competition competition from anything else on on the trading screen. Trading Set Ups are clearly explained and readily recognizable on the fly as markets are trading. tr ading. A trader can process only limited information “in the moment” and the indicators are designed with that philosophy.
The following explanations are as focused as possible, such that the info is readily available when you are learning. We will give one example of each buy and each sell set up. up.
SCOUPE
Our first indicator is Scoupe which rhymes with “Scoop”. The "Scoupe" Indicator is designed to identify entry points for trades in the primary direction of the market under study. There are no user inputs or optimizable parameters in Scoupe and it is applicable to virtually virtually any market market on any time frame. The Scoupe chart display was designed to be clean, simple, and immediately visually intuitive. The Buy Set Up occurs when the Scoupe Histogram is above zero and the Scoupe Line is below zero. The Sell Set Up occurs when Scoupe Histogram is below zero and Scoupe Line is above zero. These are Set Ups representing potential trade entries, not immediate entries. We have several techniques we use for entry as we will discuss next.
SCOUPE DAILY BASED TRADE ENTRY
In our testing on daily charts with Scoupe we used a couple of different entry methods. Our tests were not designed to be finished trading systems. They were basic bare bones modeling to try and help answer the question “does the Scoupe Indicator provide an edge”? The most straight forward test was a simultaneous Scoupe Buy Set Up and a Trend and Retrace Buy Set Up or a simultaneous Scoupe Sell Set Up and a Trend and Retrace Sell Set Up. When both Set Ups occurred together we did not require any further entry trigger. The combination was the trigger and entry was at the market at next open. We used electronic market hour data to test using u sing the 5 most liquid futures markets including e-mini SP, Crude, Gold, Soybeans, and Euro Currency. We used a modest profit objective such that the winning percentage was above 80%. The only optimizable parameter was the size of the stop, s top, which was tuned to each market in the back test. This was a very basic b but ut complete system as it had all the basic components of a system – entry, exit, money management. It is the basis for further system development, but is perhaps a little too basic to trade as is. But again the purpose was not to develop a finished system, the purpose was to see if the Scoupe Set Up has merit.
The second Scoupe test method we employed used the Daily Trend Breakout. The Daily Trend Breakout is a formula we developed particularly for daily based entry. This method facilitates buying on a stop entry if and only if a breakout point is hit to the upside. Conversely it sells on a sell stop if and only if a breakout point is hit to the downside. The test we ran was a simple test. After a Scoupe Set Up a market was bought or sold on a breakout that was calculated off the next day open price. We used electronic market data where applicable, which includes overnight trading. The entry formulas in English stated: Buy: If Scoupe Histogram greater then zero and Scoupe Indicator Line less then zero then buy at the next day open plus (Daily Trend Breakout * optimized multiplier) on a stop. Sell: If Scoupe Histogram less then zero and Scoupe Indicator Line greater then zero then buy at the next day open plus (Daily Trend Breakout * optimized multiplier) on a stop. The “optimized multiplier” was an amount that was multiplied times the Daily Breakout Amount. This gave an optimized threshold for the entry breakout point in the back test. This was the only optimized parameter in the test. This test always held through the day of entry. Thereafter it checked every day open to see if it was profitable in relation to the entry price. If profitable then exit at the market. Other then that the only exit in this test was a signal in the other direction. This was not a complete system test that could be traded as is. It had no money management. It was not meant to test so much for profitability as probability. It was meant to help answer the question as to whether the basic Scoupe Set Up had merit most of the time. With those caveats, below are results.
MARKET
# TRADES
#WINS
#LOSSES
% WINS
$/TRADE
USD FOREX/CURRENCY EUR JPY CHF AUS CAD
118 189 240 89 177
110 165 222 87 167
8 24 18 2 10
92.4% 87.3% 92.5% 97.8% 94.4%
$272 $215 $258 $228 $229
COMMODITIES Corn Soybeans Wheat
188 103 121
177 99 115
11 4 6
94.1% 96.1% 95.0%
$121 $366 $200
Crude Oil Heating Oil Natural Gas
251 230 263
223 208 239
28 22 24
88.8% 90.4% 90.9%
$535 $553 $720
Cocoa Cotton Coffee Sugar
197 121 161 76
180 109 148 75
17 12 13 1
91.4% 90.8% 91.9% 98.7%
$158 $206 $265 $184
10 Year Notes Ger. Bund
172 156
160 145
12 11
93.0% 92.9%
$126 $119
Gold Silver HG Copper
128 181 278
121 165 252
7 16 26
94.5% 91.2% 90.6%
$343 $525 $260
STOCK INDEX FUTURES E-mini SP Ger. Dax FTSE
259 182 250
237 165 226
22 17 24
91.5% 90.7% 90.4%
$208 $414 $220
STOCKS/ ETF's SPY ETF Daily SPY ETF Weekly Goldman Sachs Daily Goldman Sachs Weekly Apple Daily Apple Weekly Google Daily Google Weekly Amazon Daily Amazon Weekly
387 45 318 25 94 47 137 13 320 50
345 43 284 24 85 43 125 13 277 46
42 2 34 1 9 4 12 0 43 4
89.1% 95.6% 89.3% 96.0% 90.4% 91.5% 91.3% 100% 86.6% 92.0%
$187 $1684 $564 $1771 $675 $2448 $1425 $14,098 $308 $552
The table above is based on one contract per futures market and one thousand shares for stocks and ETF's. Test period 2000 through February 2013 for futures and Forex and since inception and/ or liquidity considerations for stocks and ETF's.
A SIMPLE SCOUPE ES SYSTEM
This is a simple system that tests consistently well every year in the ES v(emini SP) using daily bars. Buy Signal If Scoupe Histogram > 0 and Scoupe Line < 0 then buy at (highest high of last 2 days) or at the (close + (Daily Range Breakout Amount * 2.5)) on a stop entry. Whichever level is lower will be elected first on the entry stop. Exit Long Entry Price + (Entry Price – lowest low in the trade) * 1.5 Exit Long Lowest low since up to the day before entry. Exit Long If occurrence of close > entry price and yesterday close > entry price and close > yesterday close has happened since trade entry then stop loss at lowest low since entry. Exit Long Stop Loss $500 Exit Long Profit Target $1200. Short Signal If Scoupe Histogram < 0 and Scoupe Line > 0 then sell at (lowest low of last 2 days) or at the (close - (Daily Range Breakout Amount * 2.5)) on a stop entry. Whichever level is higher will be elected first on the entry stop. Exit Short Entry Price – (Highest high in the trade – entry price) * 1.5 Exit Short Highest High since up to the day before entry. Exit Short If occurrence of close < entry price and yesterday close < entry price and close < yesterday close has happened since trade entry then stop loss at lowest low since entry.
Exit Short Stop Loss $500 Exit Short Profit Target $1200. 211 trades Average Trade $255 Win 55% Total P/L since 2000 $53,000 Drawdown: $4175 Profit Factor 2.23 You can really jump the stats, but fewer trades if you require either the day before entry to be lower then yesterday or lower then the day before for buys and be higher then yesterday or higher then the day before for shorts. With the above simple addition: 100 trades Average Trade: $430 Win: 64% Total P/L since 2000: $43,000 Drawdown: $2000 Profit Factor: 3.63
REQUIRED U.S. Government Disclaimer NOTICE: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE IS THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE SUCCESS. DO NOT TRADE WITH MONEY YOU CAN NOT AFFORD TO LOSE. ALL ASSET CLASSES INCLUDING FUTURES, OPTIONS, FOREX, ETF'S AND STOCKS HAVE LARGE POTENTIAL REWARDS BUT ALSO LARGE POTENTIAL RISKS. YOU MUST BE AWARE OF THE RISKS AND WILLING TO ACCEPT THOSE RISKS IN ORDER TO INVEST. ALWAYS CONSULT A REGISTERED FINANCIAL ADVISOR BEFORE TRADING OR INVESTING TO DETERMINE IF THE INVESTMENT IS APPROPRIATE FOR YOU. THIS WEBSITE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SOLICITATION TO BUY OR SELL ANY ENTITY MENTIONED.
SCOUPE INTRADAY
Scoupe Intraday we have had success trading based on Range Bars though these same principles can be applied to time based bars. A Range Bar is the same number of ticks in size then a new bar starts. Hence a chart based on 10 Range Bars means all bars in the charts are 10 ticks from high to low. We construct the trading screen such that it has at least 2 time frames of Scoupe displayed simultaneously in different windows. We often use 40 Range and 10 Range bars. These can be adjusted for the relative volatility of the market you are trading. For example the ES may require slightly smaller range bars … perhaps 32 and 8. But this can change a bit as volatility changes. There are no “magic numbers” but getting down to less then 5 on the smallest range bar and you get closer and closer to market noise. In our example the 40 Range determines the direction we want to trade. We want to trade in the direction of a Scoupe Set Up on the 40 Range. At this point we also might be aware of the Pivot Trading Channels so we are not trying short into long term support or buy into long term resistance. You need a “big picture” chart somewhere on your trading screen at all times. Trading in sympathy with the longer term chart and never against the longer term chart is one of the keys to success! Remember that the market is 90% losers so you want to avoid what everyone else is doing. And as you probably already know most of that 90% is fixated on very short term charts.
The above chart is the basic Scoupe Set Up. A Set Up by itself is not an entry. The entry may occur at any time in the highlighted box and sometimes not at all. INTRADAY SET UP
A Scoupe Set Up is not the same as an entry. We do not catch falling knives or stand in front of rockets! So after we recognize the basic set up, we need to go to step 2, which now means going down to the shorter term chart. We are looking to the short term chart to confirm what the long term chart is telling us about the potential direction. Essentially the shorter term or 10 Range Bar chart time frame is used as a confirmation or “permission” to enter a trade in sympathy with the longer term or 40 Range Bar time frame.
The major way we look for confirmation or permission to attempt an entry on the lower time frame is to see the 10 Range Bar momentum start to turn. The sign that momentum is turning is shown by rising Scoupe lows for longs and falling Scoupe highs for shorts.. After we see the Histogram and Scoupe Line turn then we are looking for a 10 Range bar closing at the high, then enter. Even after the momentum turn, the price bar itself showing evidence is needed to enter the trade. These bars would be referred to a “pin bars” or “engulfing candles” or “piercing candles”. When we go down to that lower time frame it is not going to look like the higher time frame. The higher time frame has that intuitive set up that says buy set up or sell set up by the contrast of each on either side of the zero line. On the short term or 10 Range Bar both the histogram and the line are going to be on the same side of the zero line. The best entry permission is when the histogram has rising troughs for longs and falling peaks for shorts. The charts below show it much clearer then we can say it.
STEP 1 Identify on the 40 Range Bar chart a potential Scoupe Buy Set Up as shown in the chart below.
STEP 2 Go down to the 10 Range Bar chart and look for rising momentum in the Scoupe Oscillator.
The blue shaded box is the exact same area outlined on the 40 Range Bar chart. Points A and B clearly show rising momentum. This is the trade permission. Against that backdrop buy the first 10 Range Bar that closes at the high.
The next best permission after rising lows in the histogram is rising lows in the Scoupe line.
After the rising momentum at Point B and Point C in the Scoupe Line the entry is the first 10 Bar strong close.
Next we'll look at the Sell Set Up that was highlighted in the Set Up example
Remember even though this short “Set Up” above does not look great on this chart, at the right edge of the chart as it is happening no one knows how it will turn out. So we will proceed through with our rules to look for a sell short signal to see how it would have played out.
First of all the rally yielded no falling momentum in the histogram until the 40 period set up had passed without any permission to enter on the 10 Bar. The chart blow illustrates this. Even if one decided to stretch the parameters and trade on the falling histogram when it did show up at Point B, the trade would have been a scratch or a small winner. We'll discuss our Trade Plan Exits in just a minute that explain why.
The more aggressive trade would have been to sell lower momentum at Point C or Point D based on the falling Scoupe Line highs. Point C would have yielded a good return according to our exit rules. Point D a small gain.
To recap always, always start the trade off on the longer term chart. If you start to trade off the shorter term chart you will get beat around by the bigger trends. Be the 10%, not the 90%! Only go to the short term chart when you know what direction and exactly what set up you are looking for. This will allow for calm, patience, and discipline. You have a plan and are not ruled by the noise of lower time frames.
TRADE PLAN EXITS
If we are entering intraday trades based off the 10 Range Bar we would use an 11 tick stop. If our shortest Range Bar was 8 then we would use a 9 tick stop etc. We usually work in terms of 3 lot trades. We set up the DOM such that upon any fill on the entry the 11 tick stop is entered automatically. We always set profit targets to exit. If the market is active we will use profit targets at +11, +17, and +21 ticks from out entry price. When the market hits the first target at +11 we then move our stop loss to -5 on the other 2 contracts or trail the stop at -15. We do not move the stop loss to the entry point. When the +17 target is hit we use a trailing stop of -15 from the best price in the trade looking for +21 target on the last contract. If the market is less active we will set targets at +6, +11 and +17 ticks from entry price. When the +6 target is hit move the stop loss to -5 on the other 2 contracts. When the +11 target is hit we use a trailing stop of -14 from the best price in the trade looking for +17 on the last contract. The principle oft HOW to move the stop ---- and NOT to move the stop to breakeven too quickly and knock the legs out from under your edge ----. are principles that we have tested empirically across many different trading systems and methods, not just with Scoupe. In this sense the principles are important, the exact numbers are not. So please feel free to change the 6-11-17-21 to whatever. But here are the principles we adhere to: Initial profit targets can between .5 and 1 of initial risk. You will need to be right at least 3 of 4 in achieving first target at .5 to 1. Your edge should provide that. After first target do not move your stop loss to breakeven. After first target do cut your stop loss amount by 50%.
By cutting your stop loss in half you now raise the risk/reward on your remaining trades to better then 2:1 and better then 3:1. Time in the trade is important to the edge. Remember that the longer the time that has passed since the entry edge, the more likely the effect is to dissipate. Act accordingly. Price distance traveled is also important to the edge. The further price travels from the entry price the less effect your initial edge continues to have.
PLEASE STOP HERE. If you can manage the entries above with success you can read on. But what follows is harder to do and not as reliable in intraday trading!
More Aggressive Scoupe Entries – TREND
The trend occurs after the initial set up starts to move in the forecast direction on the longer term or 40 Range Bar chart. In these cases using just the Scoupe Set Up with the entry bar trigger is the more aggressive entry. A “rabbit ears” or double bottom or double top in the Scoupe Oscillator Line can sometimes appear in these situations and when it does it adds to the probability of the trade. The the strong entry bar trigger is still required to enter the trade. This is not as high a probability trade as the first set up we discussed. But in sustained trends it is an absolute killer entry technique. In the following chart we see a 10 Range Bar with no filters other then just wait for the set up and then an entry trigger. In trends it works fantastic. But when trends die and pullbacks rollover like at Point A … Points B and C did provide good entries with the trend.
In these circumstances also have a look at using the Scoupe set ups with Down-A-Level divergence and pay attention to the information the Pivot Channels are giving you. This is getting further away from combinations we can test empirically and as such it is not as much our preference.
The “rabbit ears” or any type of double top or bottom in the Scoupe oscillator is more reliable. Example in the chart above.
TREND AND RETRACE
As the name implies this indicator provides evidence based analysis to the trader on two fronts; the strength of a trend and the identification of retracement levels within that trend. Through many, many historical tests we found that in most markets and under most conditions entering on a signal after pullback in the direction of the main trend is a superior strategy to entering on signals that do not follow pullbacks. Given this evidence we needed an indicator to help identify high probability trade zones after a retracement in the trend. Our research eventually led to another very important discovery; the strength of the trend is directly related to the probabilities of successfully entering during a retracement to the trend . The Trend and Retrace indicator therefore first measures “trend strength” and second identifies the area of a potential “retracement”. There are zero user optimizable parameters in the Trend and Retrace indicator. However in a system test, or using highlight bars, a strength of trend measure is optimizable by the user if desired. This does not change the indicator, as it is not an input into the indicator, rather it is a threshold measure of how much strength does the indicator show. For Trend and Retrace we set up another very basic entry and exit. Our test is: Buy Signal If Trend and Retrace < -100 trend and strength of trend > 4 buy at the market next day. Sell Signal If Trend and Retrace > 100 and strength of trend > 4 then sell at the market next day. You could optimize the threshold for different markets. For example instead of strength of trend being set at “4”, one could use an optimizable parameter for this value. We set the default at 4 as that works for most markets on a daily time frame.
The higher one sets the “strength of trend” parameter to higher more demanding levels, the fewer trades one will get. This is logical as markets are exceptionally strong or weak a smaller percentage of the time. We have found that in general the higher the strength of trend requirement the fewer trades, but the more high quality trades produced. Additionally some markets in general will work better with a higher “strength of trend” requirement then others. We ran the test with no exits on the day of entry and thereafter exit any day the market opened in a profitable position relative to the entry price. A simple dollar stop loss amount was used as well.
The results below show the e-mini SP across various “strength of trend” (SOT) parameters to illustrate the points made above. Strategy Optimization Report ES SOT -1 0 1 1 2 3 4 5 6 7 8 9 10
Win% #Trds 88.6% 175 91.5% 130 93.1% 102 93.8% 80 93.8% 64 92.7% 55 94.6% 37 93.5% 31 100.0% 21 100.0% 17 100.0% 14 100.0% 11 100.0% 10
P/L $40,363 $42,538 $36,300 $30,063 $25,800 $20,513 $17,313 $15,563 $15,263 $10,238 $8,163 $6,963 $6,888
P/F 2.11 3.11 3.79 4.20 4.39 3.70 5.81 5.32 999 999 999 999 999
Avg $231 $327 $356 $376 $403 $373 $468 $502 $727 $602 $583 $633 $689
Drawdown ($3,600) ($3,600) ($3,450) ($3,450) ($3,450) ($3,450) ($1,800) ($1,800) $0 $0 $0 $0 $0
The general tendencies exhibited here hold true over pretty much every market we have tested. This concept of buying dips after strength, or selling rallies after weakness using the Trend & Retrace Indicator holds across all markets we have tested including futures, forex, and stocks. Of course some markets work better then others, but as a concept it is exceptionally robust --- the latter meaning that across non correlated markets and different time frames the concept still produces positive expectancies in historical testing.
Simple System for the 6E (Euro Currency) using Trend and Retrace Based on Daily Bars Buy Signal #1 If Trend Retrace < -100 and Strength of Trend > 4 buy at market Buy Signal #2 If Trend Retrace <-50 and Strength of Trend > 7 buy at the S1 pivot point. Exit Long If occurrence of close > entry price and yesterday close > entry price and close > yesterday close has happened since trade entry then stop loss at 50% of original = (entry price - $1100 stop loss) Exit Long Entry price + ((Entry Price – Lowest Low since day before Entry) * 1.5) Exit Long Entry Price + $50 but not on day of entry. Exit Long Entry Price +600 limit Exit Long Entry Price - $2200 stop. Sell Signal #1 If Trend Retrace > 100 and Strength of Trend > 4 sell at market Sell Signal #2 If Trend Retrace > 50 and Strength of Trend > 7 sell at the R1 pivot point. Exit Short If occurrence of close < entry price and yesterday close < entry price and close < yesterday close has happened since trade entry then stop loss at 50% of original = (entry price + $1100 stop loss)
Exit Short Entry price – ((Highest Low since day before Entry – Entry Price ) * 1.5)
Exit Short Entry Price - $50 but not on day of entry. Exit Long Entry Price - $600 limit Exit Long Entry Price + $2200 stop. 195 trades Average Trade: $272 Win: 93.8% Total P/L since 2000 $53,125 Drawdown: $2500 Profit Factor 3.00
DAILY TREND BREAKOUT
Some of the empirical tests we use particularly on daily data employ an entry trigger commonly called “Daily Trend Breakout”. If you are not using daily data, and not interested in running your own historical test trading simulations, you can skip this section. Those who have been around markets for a while may have heard of the volatility breakout concept. It is nothing more then following an increase in volatility in the direction of the volatility. The thing about it though , is volatility breakout works. It works across a wide variety of markets. It works across different decades. Markets can’t really move without it occurring. It is one of those concepts the market has a hard time outsmarting! So we use it. The theory of Volatility Breakout is that there is a threshold level above the market that if breached triggers a buy entry. If and only if that price threshold is reached or exceeded then one buys. Similarly there is a sell threshold below the market. If and only if that sell threshold is reached or penetrated then one sells short.
The major advantage of using volatility breakout on daily data is that it allows intraday entry. If the trader had to wait until the close of the daily bar to enter a trade, that would often prove to be a significant obstacle to profitable trading. Volatility breakouts use “stop” order entries such that no intraday monitoring is required. If the entry threshold is reached the resting stop order becomes a market order. Most volatility breakout uses “average true range” or simply a measure of the average days trading range over recent history. Any test that we have run that uses average true range as an entry breakout, can be in virtually all cases improved using the “Daily Trend Breakout”. In our tests we use a percentage of the Daily Trend Breakout formula and that percentage is an optimzable parameter. For example in plain English a buy signal would be coded as Buy at the next day open price + (the Daily Trend Breakout Value * “opt1”) stop entry. In this simple code above “opt1” is the optimizable variable.
DOWN-A-LEVEL INDICATOR
The "Down-A-Level Indicator" was designed to be used as an adjunct to "Scoupe" but it is optional. Intraday traders should keep things as simple as possible. We use it our SP Trading System to good advantage. As the name implies this indicator gets down "inside" the recent bars to give additional information. There are several ways we use the "Down-A-Level" Indicator to aid in entry triggers after a "Scoupe" and/ or a "Trend & Retrace" entry set up. All are simple, visually intuitive, and can be recognized easily and quickly on a chart. SIMPLE DIVERGENCE Most traders are familiar with the concept of divergence. It simply means that either a new high in price is not accompanied by a new high in the indicator, or a new low in price is not accompanied by a new low in the indicator.
Of course divergence can and often does signal far too early in a strongly trending market. Other times divergence can nail turns precisely. So how does the trader differentiate when divergence will turn out to be valid? Of course traders can never “know” anything for sure. However when using Down-A-Level exclusively with a Scoupe Set Up, one narrows down the market situations to those that we found provided an edge in historical testing. The charts below show the examples of divergence entry signals with the Scoupe Set Ups and Down-A-Level Indicator on both the buy side and the sell side.
FIVE WAVES A 5 wave pattern on the Down-A-Level Oscillator consists of 3 waves in one direction with 2 intermittent waves dividing such that a 5 wave structure completes. This is a much better visual and will be readily seen in the chart example below. For an up 5 wave to complete the following guidelines are employed:
1. Start the count from most recent swing low in the Down-A-Level 2. 3. 4. 5.
Oscillator, which may or may not be also a swing low in price. The Oscillator swing low start point should be below the 20 level. Each of the 3 drives up has a higher high. Each of the two drives lower has a higher low. The 5th and last wave completes above the 80 level.
For a down 5 wave complete the following guidelines are employed:
1. Start the count from most recent swing high in the Down-A-Level 2. 3. 4. 5.
Oscillator, which may or may not be also a swing high in price. The Oscillator swing high start point should be above the 80 level. Each of the 3 drives down has a lower low. Each of the two drives higher has a lower high. The 5th and last wave completes below the 20 level.
PIVOT TRADING CHANNELS
The empirical testing on the channels though was focused on the times when price closed outside the channels and what that was likely to mean for price action in the near future. In practice it is our experience that the channels can also be used effectively as support and resistance. HOW TO USE PIVOT TRADING CHANNELS We offer the channels as an adjunct to the indicators to aid in identifying support, resistance, as well as early identification of new trends. Closing outside of the trading channels on consecutive closes does not occur very often and hence when it does there is information being given by the market:
1. Two or more consecutive closes outside of the channel means the emerging trend is strong enough that it should not be faded or played for a reversal. 2. Two or more consecutive closes outside of the channel means that traders should look to the first pullback to enter in the direction of the trend.
The strength of the trend as defined by the markets ability to close outside the channel for consecutive or a series of closes shows a clear probability that the first retrace can be traded. It is not an overwhelming majority, a little over 60% depending on the definitions used.
CONCLUSION
The number of trades you make is usually inversely proportional to your success. Start with the bigger picture. Know what you are looking for and know the only direction you will trade when you go down to look at the shorter term charts. Wait for the trigger. Follow the exits in the Trade Plan. If you have any questions about anything please contact me.
[email protected] Thank you. Joe Duffy
