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SP index waves define structure and trade opportunity. Some wave patterns lead to small wins, some have
above average odds of a bigger win.
Wave Structure
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Rising Wedge w converging Trendlines Crude play for big win or trail stop.
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The trend in 30-year yields reversed on the daily charts at the end of 2005.
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A failed bear flag is the same as a failure test or failure swing. The breakout
from this equilibrium point did not lead to a big win. A trailing stop may have
still led to a small win.
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Wheat - Daily
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4 Basic Patterns:
Simple continuation pattern (bull or bear flag in a trend):
Enter with limit order or market order, play for small win (.5 to
1.5 ATR), Initial Risk 2 ATR. Tighten stop when market
moves in your favor.
Corrective A-B-C: enter after you see your stop point,
Play for big win (more then 1 ATR) or new highs or lows.
Initial Risk: 1 ATR from swing high or low.
Failed A-B-C (trend reversal): Enter on buy or sell stop,
play for big win or trail stop. Initial Risk: 1 ATR
Breakout from converging trendlines. Enter with buy
or sell stop or market order, add on first consolidation or
pause. Trail stop or play for big win. Initial Risk: 1ATR from
first entry.
Copyright (c) LBRGroup 1996-2006. All Rights Reserved.
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Simple bear flag after a break down from a sideways line and a lower high.
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Volatility Stops
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A profitable system that is durable and robust based off random entries!
At this point we know we can randomly enter a trade and get better
then an 80% win rate on most markets. By adding a trend filter,
random entries can be made into a profitable system.
Only long entries are taken in an up trend and only short entries are
taken in a downtrend. (Again, all entries are at randomly generated
points). The Profit Target is 4 ATRs and the Stop Level is set to 3
ATRs (just outside of the noise). This ensures that if we can get
better then a 50% win rate, the system will be profitable.
This system was run 100 times on each market with randomly
generated trade entries each time. The time period tested was from
1995 to 2005 on 22 domestic futures markets that included
currencies, bonds, index futures, metals, agricultural products, and
softs.
Copyright (c) LBRGroup 1996-2011. All Rights Reserved.
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Summary:
Random entry produces a high win/loss rate when the stop is large
enough to be just outside the noise. By using a time stop, we can
avoid taking repeated large losses at the expense of a slightly lower
win rate. With addition of one trend filter, a larger target can be
played for.
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While Volatility and Channel breakout systems are purely price driven,
momentum functions are based on a derivative of price. Momentum has
many interesting properties, including a leading function for price. The
tradeoff is an increase in noise over smoothed functions such as moving
averages, which have a lag. What is the best combination of exit strategies,
stops and targets to compensate for this increase in noise?
A variety of look back periods for momentum functions were examined and
tested against permutations of fixed targets ranging from .5 ATRs to 3 ATRs.
Fixed stops, time stops, as well as delayed entries (so as not to be entering
on a momentum spike were also tested.
Similar conclusions could be drawn as what was modeled with random entry
systems:
Smaller targets are more profitable then Large targets, Time stops are better
then fixed stops, and Time stops combined with Fixed stops are optimal.
Momentum driven models perform better with a weighting given to additional
use of time stops which was not the case with random generated entries.
Copyright (c) LBRGroup 1996-2006. All Rights Reserved.
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The End!
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