Building a strategy.

[Zombi]

Hi guys,
After looking around this forum for a few days I have found some invaluable resources to help me along.
One of them was a post containing a few steps towards getting started.
The first thing that was suggested was to decide what you're going to trade and the intended timeframe.
What I wound up with is this:
Due to current time constraints I'm going to be swing trading based on the days closing price and enter orders using limit orders.
I'm looking to trade US stocks with holds from 2-4+ days depending on momentum.

The next suggestion was to forumlate a hypothesis.
For simplicity's sake I'm not going into excruciating detail and will just say "An uptrend that neatly follows price channels will continue to rise after retracing to the lower chanel on low volume."

So, ok now that I've got my hypothesis I need to backtest and papertrade.

Does this look like i'm headed in the right direction? Any suggestions?

*Edit* I didn't want to get into lot sizing and money management in this thread too much because I have a pretty good grasp on those topics and will try to address them seperately.

 

[Scott123]

Definately sounds like you are on the right track! It is getting a good time to start swing trading now that volatility has died down (Check the VIX volatility index). I may be interested in sharing some strategies with you provided that you have some valuable information for me.

Scott

Hi guys,
After looking around this forum for a few days I have found some invaluable resources to help me along.
One of them was a post containing a few steps towards getting started.
The first thing that was suggested was to decide what you're going to trade and the intended timeframe.
What I wound up with is this:
Due to current time constraints I'm going to be swing trading based on the days closing price and enter orders using limit orders.
I'm looking to trade US stocks with holds from 2-4+ days depending on momentum.

The next suggestion was to forumlate a hypothesis.
For simplicity's sake I'm not going into excruciating detail and will just say "An uptrend that neatly follows price channels will continue to rise after retracing to the lower chanel on low volume."

So, ok now that I've got my hypothesis I need to backtest and papertrade.

Does this look like i'm headed in the right direction? Any suggestions?

*Edit* I didn't want to get into lot sizing and money management in this thread too much because I have a pretty good grasp on those topics and will try to address them seperately.

 

[timsk]

Does this look like i'm headed in the right direction? Any suggestions?

Hi Zombi,
As a starting point, I think that's as good as any. However, the devil is, as they say, 'in the detail'! "An uptrend that neatly follows price channels will continue to rise after retracing to the lower chanel on low volume."
1. How will you define an uptrend?
2. Price rarely ever does anything neatly except in hindsight! You'll need to define and refine this a little more, I think.
3. Ditto with channels. Will they be hand drawn by you and, if so, how will you decide where to draw them? You'll need to be consistent. There's no point using highs and lows one day and open and closes the next and a combo' of all four the day after! If you're letting your charting software plot them - what settings will you use and how will you arrive at them?
4. How far should price retrace? Does it matter if price closes below the upper channel for one day? What about two days? What about if it never quite reaches the channel - does it matter?
5. Low volume being what - below a moving average (if so, what setting), less than X% of the previous day's volume, etc.?
Once you've sorted that little lot out, you will have a basic set up. You'll then have to go through a similar exercise to establish your trigger to enter the trade, place your stop and exit(s).
If you want to do all of this publicly so that you get the input and collective wisdom of everyone here - let me know and I'll move your thread into the Journals forum.
Best of luck and enjoy the ride!
Tim.

 

[Shanghai]

Good comments from timsk. A couple from me:

If you are considering drawing channels on an uptrend then you should probably be looking for entry points once prices retrace to the moving average of the channels. However where do you consider that it is a trend change rather than a retracement? I like Keltner channels, where the price needs to hold the -ve 1ATR to be considered a retracement.

That brings me to triggers. You don't want to buy if prices just keep going down. You want prices to show evidence that they are starting to do what you want. I would recommend looking into a trigger that says for example that you will place a buy stop at the previous bar's high. That way if prices continue to fall you won't be in the trade.

Limit orders are fine however I find that they work best on longer terms trades than you are looking at. Others may disagree.

 

[Shanghai]

Then of course you need to look at exits which are probably harder to define than entries....

 

[Zombi]

I like those questions, they make me think!
Now let me try to answer them, let me know iof any suggestions you think of.

1. How will you define an uptrend?

I'm defining uptrend as a stock that has been making higher highs and higher lows on daily charts with a trending OBV to support it.

2. Price rarely ever does anything neatly except in hindsight! You'll need to define and refine this a little more, I think.

I havn't invested in trading software/platforms yet because I am worried about information overload.
I dont think it would help me to have 10,000 indicators at my fingertips and no solid plan on how to use them. So for now I look through charts on FinViz.com which can apply chanel lines to the charts. When I said "neatly" I was thinking that a stock that hasn't had a lot of movement outside of the price chanels in the past could be consider to be moving neatly. (comments on this?)

3. Ditto with channels. Will they be hand drawn by you and, if so, how will you decide where to draw them? You'll need to be consistent. There's no point using highs and lows one day and open and closes the next and a combo' of all four the day after! If you're letting your charting software plot them - what settings will you use and how will you arrive at them?

The chanel lines I use are provided by FinViz.com I can't comment on how they set them. There aren't any variables to change on that site when it comes to setting the lines so at least they're consistant, right?

4. How far should price retrace? Does it matter if price closes below the upper channel for one day? What about two days? What about if it never quite reaches the channel - does it matter?

Price can retrace as far as it needs to as long as it does not make a lower low and break the overall trend. If the stock is retracing to the lower chanel I will continue to monitor it until it makes 2 consecutive higher highs on close.
What I was hoping to do was take advange of the mini-trends within the larger trend.(is this asking for disaster?)

5. Low volume being what - below a moving average (if so, what setting), less than X% of the previous day's volume, etc.?

As for the volume question, that is one I struggle with and was hoping someone here might have some insight into. What makes a low volume move, the cumulative volume Up/Down over the past X days or on the first day of a move ect ect.

This is a great help so far when it comes to making a gameplan for these trades.
What i'm looking to do with this thread is to help me understand the principals on how to setup a strategy that can be tweaked and modified with experince.

 

[gabylicious]

Men that is the hardest thing to do, but one of the most important, next to money management. My broker first told me that my biggest problem when trading would always be “ Not Acting on your plan” and they sure were right…

 

[Zombi]

A little update.
Ive been browsing this site all week and after doing some research and playing around with a demo account i'm going to be switching gears to trading FOREX.
I picked up a demo account on MetaTrader and so far so good.
It has eliminated a lot of confusion in picking which stocks to play and will work a lot better with my schedule.

Correct me if i'm wrong but a lot of the principals behind building a stock strategy can be used for building a FX strategy.
Build a hypothesis, backtest and papertrade ect.

Right now i'm working on building a money management strategy, my stock forumla wont work.

 

[mkz160]

Hi guys,
After looking around this forum for a few days I have found some invaluable resources to help me along.
One of them was a post containing a few steps towards getting started.
The first thing that was suggested was to decide what you're going to trade and the intended timeframe.
What I wound up with is this:
Due to current time constraints I'm going to be swing trading based on the days closing price and enter orders using limit orders.
I'm looking to trade US stocks with holds from 2-4+ days depending on momentum.

The next suggestion was to forumlate a hypothesis.
...
Does this look like i'm headed in the right direction? Any suggestions?

Hi Zombi, I like your attitude :clap:
You are definitely on the right track.

The only thing to mention - it could be boring to browse through FinBiz pages and fetch info everyday.
I suggest some automation/script on that :smart: to produce some signals for you, so you have only to place orders with your broker when opportunity arise.
Please keep us posted :clover:

 

[mkz160]

A little update.
Ive been browsing this site all week and after doing some research and playing around with a demo account i'm going to be switching gears to trading FOREX.
I picked up a demo account on MetaTrader and so far so good.
It has eliminated a lot of confusion in picking which stocks to play and will work a lot better with my schedule.

Correct me if i'm wrong but a lot of the principals behind building a stock strategy can be used for building a FX strategy.
Build a hypothesis, backtest and papertrade ect.

Right now i'm working on building a money management strategy, my stock forumla wont work.

Oops :-0 Forex is a different beast. For example there is no volume information, so your supposed strategy can not be used.

Money management is the king for forex (because of high leverage) and you need to know forex in details for that.
Do you know what is the pip price from GBP/JPY for example.

Well, good luck to you

 

[Zombi]

Oops :-0 Forex is a different beast. For example there is no volume information, so your supposed strategy can not be used.

Money management is the king for forex (because of high leverage) and you need to know forex in details for that.
Do you know what is the pip price from GBP/JPY for example.

Well, good luck to you

I've found this quick n dirty formula for basic money management.
S=(e*r) / (p-x)

Where:
S = Size of trade
e = portfolio equity(Cash and holdings)
r = maximum risk percentage per trade
p = entry price on the trade
x = pre-determined stop loss or exit price (based on TA)

That would keep my exposure pretty minimal.
I do have a lot to learn but I think it will be worth it for sure.

 

[Black Swan]

Can I just direct you to this site, it's not for profit (as far as I know other than pin money from Google) and it lists a lot of indicator based strats., some posted up by contributors. Some decent suggestions on MM & discipline too...tbh most of the strats could work, in the right hands and if a particular one suits your psyche go for it...

http://forex-strategies-revealed.com/