Trading Strategy: Defining Trend

An update on how my strategy development has progressed over the last two weeks. Nearly all of it has focused on Crude Oil.

Strategy development continues (in parallel to a couple of hours of futures trading on a daily basis).  A couple of times I have posted the diagram below (see yourtradingcoach site for the original un-edited diagram) – I am posting it again, because it’s useful for providing a bit of a framework:

Trading Project Plan (Abbrev)

In that blog post from two weeks ago, I wrote about creating a testing engine in Microsoft Excel, and creating 3,000+ test trades.  It took a week to generate 3k trades applying a setup consistently and rigidly.  The initial data showed that the strategy parameters did not add any value – that the overall result (across a bunch of time periods and instruments) was roughly equal to the transaction costs.  I then talked about what steps I would be working on next.

detail

 

A good portion of the last two weeks have been spent specifically on the ‘trend definition’ aspect – or the ‘Context’, as another trader likes to call it.  Thus, I am backtracking a little further and now working on this specific corner of the diagram.

 

 

The following things have been very helpful in this regard:

  • Conversations with professional traders at the hedge fund here, sharing their views
  • Idea of using price movements of ATR multiples to make judgements about the trend status (this stems from work done by Linda Raschke, who was one of the ‘market wizards’, in the early 2000’s)
  • Markttechnik (or market structure) principles taught by Michael Voigt
  • For non-German speakers, a simple outline of market structure can be found on the educational section of the Pepperstone broker’s site – (rather unusual to find something so solid on a broker’s site!)
  • Observing Carlos Diaz trading CL futures on lower timeframes on daily basis in his live trading room
  • And of course, a lot of time studying the charts by yours truly

The very interesting point here is that these different sources talk about the same principles, using different terms – there is a lot of overlap.  The approach makes good sense to me.

A lot of this approach comes down to spotting turning points on the charts, and seeing whether a market continues to make higher highs and higher lows or whether it’s essentially going sideways.  The charts become very simple and clear, with all indicators being removed – see example below (see the Pepperstone article link for more examples) – once the context is in place, it provides a framework for spotting and judging setups:

oil simple

Over the last week, I found a way to identify the swing points in a semi-automated manner.  The points can then be connected for a good visual image, and connecting several timeframes on the same chart – this now looks very similar to a typical zig zag indicator:

oil structure

 

Other developments:

  • Continued trading oil futures in the trading room mentioned above, still doing 4 contracts per trade
  • Continued conversations with various traders and trader buddies
  • Digesting advice and tips from various places (comments on the blog, whatsapp messages, emails) – it’s always very appreciated

 

Wish everyone a good weekend!

This entry was posted in Financial Markets 101, Testing, Trend-Following Strategy. Bookmark the permalink.

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