Timetotrade Quad Indicator Trading Strategy

Discussion in 'Trading Strategies' started by Dary, Oct 1, 2013.

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  1. Dary

    Dary Dary McGovern Staff Member

    Strategy Overview

    When analysing the Rule #1 Trading Strategy, it generated a high number of losing trades when the market was range bound and trading sideways. In this thread a mechanism for dialling out trades during these periods is discussed, which is implemented using Bollinger Bands.

    Building upon the Rule #1 Trading Strategy, a trading rule will be added that requires the width between the Bollinger Bands to be greater than a given value. In this example the 5 minute interval will be used and the Bollinger Band Width will have to be greater than 10 pips on the GBPUSD:
    1. If not long, switch to a long buy position when the:
      • Price is above the 10 period Moving Average
      • MACD is above the SMACD with a Leading MA of 8, Trailing MA of 17, Smoothing Factor of 9
      • Stochastic %K above Stochastic %D using K Period of 14, Slowing 3 and D Period of 3
      • Bollinger Band Width is above 0.0010 (10 pips on GBPUSD) using a Deviation of 2 and a Period of 20
    2. If not short, switch to a short sell position when the:
      • Price is below the 10 period Moving Average
      • MACD is below the SMACD with a Leading MA of 8, Trailing MA of 17, Smoothing Factor of 9
      • Stochastic %K below Stochastic %D using K Period of 14, Slowing 3 and D Period of 3
      • Bollinger Band Width is above 0.0010 (10 pips on GBPUSD) using a Deviation of 2 and a Period of 20
    This indicator, which is called the Timetotrade Quad Indicator (TQI) and can be imported using the import code: 1F0C-145F-6E84 and used in the same manor as the custom Rule #1 Indicator i.e. if the TQI Buy Signal rises above 0 it is a long entry buy signal, and if the TQI Sell Signal falls below 0 it is a short entry sell signal.

    Two additional exit trade rules will be added, based on the original Rule #1 rules, to ensure that open positions are exited if the Bollinger Band Width is less than 10 pips when the Price Moving Average, MACD and Stochastic change trend i.e.
    1. If short, buy to close the position when the:
      • Price is above the 10 period Moving Average
      • MACD is above the SMACD with a Leading MA of 8, Trailing MA of 17, Smoothing Factor of 9
      • Stochastic %K above Stochastic %D using K Period of 14, Slowing 3 and D Period of 3
    2. If long, sell to close the position when the:
      • Price is below the 10 period Moving Average
      • MACD is below the SMACD with a Leading MA of 8, Trailing MA of 17, Smoothing Factor of 9
      • Stochastic %K below Stochastic %D using K Period of 14, Slowing 3 and D Period of 3
    The Rule #1 Trading Indicator can be imported using the import code: ADCE-964C-7B3E

    Click here for help on how to import custom indicators.


    TQI Trading Strategy Execution

    The following screen shots illustrate how to set up the alert based trades to execute this strategy. Firstly lets create the entry trade for the Long position. To do so the TQI Buy Signal must rise above 0 as illustrated:

    Timetotrade_Quad_Indicator_1.png

    If not in a long position when the TQI Buy Signal rises above 0, execute a buy switch, which will buy to close any long positions that might exist and then buy to open a long position. If there is no existing short position to close, then only a buy to open trade will be executed:

    Timetotrade_Quad_Indicator_2.png

    Repeat the process to add the short entry Sell Switch trade:

    Timetotrade_Quad_Indicator_3.png

    Execute a Sell Switch order to close any long positions that might exist, then open a short position and only execute this order if not already short:

    Timetotrade_Quad_Indicator_4.png

    Now add the long exit trade. Using the Rule #1 Sell Signal, if it falls below 0 then sell to close if long at that point in time.

    Timetotrade_Quad_Indicator_6.png

    Lastly add the short exit trade. Using the Rule #1 Buy Signal, if it rises above 0, then buy to close if short at that point in time.

    Timetotrade_Quad_Indicator_5.png

    Note that the if not long, if not short, if long, if short position logic is used to prevent repeated opening and closing trades as the Buy and Sell signals rise above / fall below 0. The objective is to have one long or short open position at a time and when long or short, only execute one closing trade or switch the trade strategy from long to short or vice versa.


    TQI Trading Strategy Analysis

    The objective of this strategy is to improve upon the Rule #1 Trading Strategy to minimise trading activity when the markets are trading sideways during low volatility periods. When the strategy was back tested over a week of 5 minute GBPUSD price data, it was profitable as illustrated:

    Timetotrade_Quad_Indicator_9.png

    Interesting points to note about the results is the almost 3:1 reward to risk ratio with 45% of the trades being successful. In addition the profit has improved with significantly less transactions when compared to the 5 minute interval Rule #1 Trading Strategy, when back tested over the same period:

    Timetotrade_Quad_Indicator_10.png

    As with any set of back test results, it is important to put them into context by analysing the underlying price action and considering the probability of that price pattern repeating in the future.

    From looking at the historical trades displayed on the chart, the key breakout trades where executed, with a reduction in the trades during periods of low volatility (up arrows are 'buy'; down arrows are 'sell'; grey arrow is an opening trade; green is a profitable closing trade; blue is a losing closing trade):

    Timetotrade_Quad_Indicator_11.png

    When compared to the following Rule #1 trades for the same period, note the reduction in the blue arrows around periods of range bound trading:

    Timetotrade_Quad_Indicator_12.png


    TQI Trading Strategy Conclusions

    When developing a trading strategy it is important to analyse the underlying price action in terms of trend, oscillation and trading range. This strategy brings these key components quite nicely together for breakout trading opportunities and markets that tend to be quite direction.

    Extended periods of range bond low volatility or short term price oscillations will erode profits. When tested on the EURUSD during the same time frame that strategy resulted in a small lose. The EURUSD has a greater tendency to oscillate in a relative tight range while trading sideways for extended periods; this type of price action does not suit this strategy, as there are not enough breakouts to offset losses during those periods.

    The introduction of the Bollinger Bands helps reduce, but not eliminate the weakness during periods of sideways and range bound trading. The Bollinger Band Width used in the TQI indicator was based on the GBPUSD behaviour at the time of testing and should be adjusted for varying market volatility profiles.
     

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  2. Customer Questions

    Customer Questions John @ timetotrade

    Hi, can you provide details on how the TQI signal is coded? I tried to replicate the signal using the individual indicators as instructed in the forum, but I am still getting a zero TQI signal when all 4 indicators become true.
     

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  3. Customer Care

    Customer Care John @ timetotrade

    Hi - if you click on each of the TQI Buy and Sell Signal indicators after importing it, you can see the how it is calculated it e.g.

    upload_2014-10-31_13-39-30.png
     

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