EMA Crosses.... ?

[mazdaq100]

One thought, could be rubbish, but you could wait until the price has reached 4ATR above buy point before the first addition to your position. Then add to your position again at 2ATR or maybe 1ATR intervals. This should avoid adding to your position in most rangebound markets while meaning you still add to your position on major trends.

Edit - just noticed you've mentioned this already in an earlier post. Sorry!!

 

[tomorton]

One thought, could be rubbish, but you could wait until the price has reached 4ATR above buy point before the first addition to your position. Then add to your position again at 2ATR or maybe 1ATR intervals. This should avoid adding to your position in most rangebound markets while meaning you still add to your position on major trends.

Not rubbish - some sort od price action confirmation of signal is not rubbish. I don't use EMA crosses due to their inherent drawbacks as very lucidly set out above. But I have been tracking price/14EMA crossovers, also on other markets, basically looking to enter long/short on second consecutive close above/below 14EMA. It signals about every 2 weeks on the FTSE. Only profitable if you ignore the prevailing trend, stay in a good trend once triggered and use a good stop-loss for all the false entries. Liam's idea of pyramiding could be another good way to maximise the wins.

 

[mazdaq100]

What about using Bollinger Bands - standard deviation set to 1. If the bands are moving sideways and all the price action is within the bands, then the market is rangebound and you don't trade it??

 

[LiamH]

What about using Bollinger Bands - standard deviation set to 1. If the bands are moving sideways and all the price action is within the bands, then the market is rangebound and you don't trade it??

I'll take a look at this, it's something I've not considered because I don't know anything about Bollinger Bands.

The one problem I see here is, in my view, the ma cross gets you in to a trend relatively early - often before a break out of the range. Now, this obviously has it's inherent drawbacks because it gets you in whilst market is still ranging and so will provide false signals.

Bollinger Bands used as you suggested will obviously stop us getting in to a range-bound market but will also give us a much later entry because we're waiting for a full breakout which could be a while after the MA cross depending on the size of the range.

It's a balancing act - I will defo take a look though... Could be the last confirmatory tool needed.

 

[mazdaq100]

Yes I agree, that's the one draw back it seems. I'll keep looking for anything better.

One thing I've just noticed with Bollingers is that the bands occassionally become extremely tight, after which a usually breakout occurs.

I guess the more you study the markets, the easier it will become to spot a ranging market and you can then act accordingly.

 

[RandomOne]

Erm, yeah but it's all relative to the TF (=Timeframe)

Thanks for that, another abbreviation learnt.

To catch up with the current topic, do Bollingers indicate the difference between a trending and ranging market? I had the impression that they indicate the current statistic range of prior price movements and therefore you could get wide bands because of previous ranging or trending behavour.

 

[mazdaq100]

They don't explicitly show the difference between a trending and ranging market but I think they could help. They're calculated by adding/subtracting a SD (standard deviation) to/from a moving average so they are based on past prices.

It's certainly not a perfect tool, but from looking at them today, when they're moving sideways then this is a sign that it's ranging. Granted, once the market turns up/down then the MAs would probably give a quicker indication than Bollinger. One thing I had noticed is that while moving sideways, the bands sometimes get very close together which is a sign the market is consolidating. Often there will be a breakout after a period of consolidation so the bands could prepare you for a breakout in this instance.

 

[LiamH]

Just some quick thoughts after looking at daily GBP\USD with:

5 ema
10 ema
Bollinger bands: 20 period and 1 SD

MA cross gives initial signal
Next candle must close outside of Bollinger range
Place order to trade the break of previous candle high\low
Trailing Stop on other side of the Bollinger band

Just looking at it as an idea, Stops\trade mgmt\exits need work. In theory it should work well for safe entries into trends, I see what you were getting at Mazdaq...

 

[mazdaq100]

Just some quick thoughts after looking at daily GBP\USD with:

5 ema
10 ema
Bollinger bands: 20 period and 1 SD

MA cross gives initial signal
Next candle must close outside of Bollinger range
Place order to trade the break of previous candle high\low
Trailing Stop on other side of the Bollinger band

Just looking at it as an idea, Stops\trade mgmt\exits need work. In theory it should work well for safe entries into trends, I see what you were getting at Mazdaq...

Problem with this set of rules is while it may keep you out of some ranging trades, you also miss out on some of the major trends. Take for example the EMAs crossing at the end of September 2008 - the next candle didn't close outside of the Bollinger range so you would miss out on a huge trend down from 1.81 to about 1.51!

I definitely think you're on the right track though. Maybe we can find a better indicator than Bollingers...

 

[LiamH]

Problem with this set of rules is while it may keep you out of some ranging trades, you also miss out on some of the major trends. Take for example the EMAs crossing at the end of September 2008 - the next candle didn't close outside of the Bollinger range so you would miss out on a huge trend down from 1.81 to about 1.51!

I definitely think you're on the right track though. Maybe we can find a better indicator than Bollingers...

You're right, I spotted this last night but was too tired to post anything else...

Came up with a quick set of rules that I put in note pad...

Discretion and observation of price action is required as in a period of tight consolidation (4+ candles within the bollinger bands) the break can be within the confines of the Bollinger Bands. We can consider that a break of recent highs\lows, even within the bands after tight consolidation a signal to enter. We simply trade the break of the bar that broke out of the range.

This strategy doesn't cope well when the market is particularly choppy.

Market conditions need to be taken into account so I will come up with some questions that need to be answered before a trade is placed..

 

[LiamH]

It's moving away from being a simple ma cross strategy and starting to morph into something that might actually work without positions being pyramided!

 

[mazdaq100]

It's moving away from being a simple ma cross strategy and starting to morph into something that might actually work without positions being pyramided!

I agree that it would be great to do it without pyramiding - obviously, on the major trends, pyramiding is a great advantage but on the smaller trends you could pyramid too late and wipe out a lot of your gains on a pull back. The key is obviously to identify which are the major trends and which aren't, or to not pyramid at all.

I see what you're saying about using discretion when the market is trading within the bollinger bands - the only problem with this is that it brings human emotion and perception into the trade, and you may see a trade a lot differently on one day than you do on another day.

I haven't traded much at all yet, but I've read quite a few books on the subject recently, so my comments above are based purely on what I've read. What seems to crop up time and time again is that systems should be kept as simple as possible with clear rules to follow so you know exactly when to enter and exit a trade, and that you shouldn't let emotions get involved in your trading.

I would have thought though that the more you watch a market and the more experience you gain, then discretion will be able to be applied with greater accuracy.

 

[LiamH]

I agree that it would be great to do it without pyramiding - obviously, on the major trends, pyramiding is a great advantage but on the smaller trends you could pyramid too late and wipe out a lot of your gains on a pull back. The key is obviously to identify which are the major trends and which aren't, or to not pyramid at all.

I see what you're saying about using discretion when the market is trading within the bollinger bands - the only problem with this is that it brings human emotion and perception into the trade, and you may see a trade a lot differently on one day than you do on another day.

I haven't traded much at all yet, but I've read quite a few books on the subject recently, so my comments above are based purely on what I've read. What seems to crop up time and time again is that systems should be kept as simple as possible with clear rules to follow so you know exactly when to enter and exit a trade, and that you shouldn't let emotions get involved in your trading.

I would have thought though that the more you watch a market and the more experience you gain, then discretion will be able to be applied with greater accuracy.

Yeah, of course, what you say is right to a certain extent but I think it's difficult to find a profitable strategy that doesn't involve a certain degree of discretion.

This thread started out with me looking for just that, a completely mechanical strategy but the more I look back at the charts the more I realise this is a massively difficult thing to do.

For instance, in a choppy market the bollinger bands and ma's look a complete mess and offer false signals all over the place. Discretion is required here just to spot the choppy market.

I think we can use basic price action along with S/R's to verify our trades provided clear questions and rules are decided before hand.

If we have a rule that states exactly what we consider a choppy market to be or what a range bound market is and how it looks we can simply tick some boxes before the trade is entered.

 

[RandomOne]

As observed before, looking at the past years it seems that even a simple approach such as MA crossings will make money so long as there are well defined and decent sized trends. It losses money when either of these is not present, i.e. the market is ranging or there are no decent sized movements. Maybe to be successful it is necessary to use a bit of fundamental analysis and decide beforehand whether the markets are likely to be stable, uncertain, or are likely to adjust to macro-economic pressures. The greatest chance of profitability will be in the last situation. My opinion is that after a period of just such movements 2008 to mid 2010 the markets have quieted down to become currently uncertain and therefore have increased volatility. In the near future they are likely to move again as the support of low interest rates and printing money can not go on for ever.

As end of day data looks less volatile than the shorter term times I had been investigating, does anyone know where you can get free long term daily forex historic data, say 10 years? I have looked, but can only find past 500 days easily.

Compared to shorter term trading, it seems that you can not afford to risk as much of your total capital as the swings are proportionally bigger and you will be in the trades longer. Won't that mean it will take longer to build up any profits unless you actually do the stake increasing discussed earlier? What I am saying is that you need to adjust the stake in order to take advantage of compounding even without an increased probability of a successful deal remaining so. As an example if you opened a position (bet) at £10/pip and gained 1000 pips over 100 days you would have 10K profit. However if you had gained the same total number of pips in 10 day intervals (100 pips each time) you would have more provided that you raised the stake to reflect your increasing assets.

 

[mazdaq100]

I found this the other day, it goes back at least 10 years I think:

http://www.tradingblox.com/tradingblox/free-historical-data.htm

 

[RandomOne]

I found this the other day, it goes back at least 10 years I think:

http://www.tradingblox.com/tradingblox/free-historical-data.htm

Thanks for that, it goes back ~16 years on gbpusd and seems to be updated regularly.

 

[RandomOne]

The basic question is whether having made a profit there is a greater chance of making further profit compared to the initial position, i.e is the subsequent yield better on average than the initial yield. Even if so, the question then arises as to whether it would be better to wait until this condition arises before taking a position with an increased stake.

The answers to these question are not easily determined as they depend upon the nature of the market, such as what percentage of deals that reach the first stop go on the reach the second and of those that don't, how many pips on average do they make.

Update:

I have now done the analysis for a simple moving average crossing strategy and if anything it makes the results worse as it amplifies both the winnings and losses. Fundamentally the problem seems to be that increasing the stake after some profit results in larger losses when the price then goes against you. You then reduce the stake in response, but this means that you get lower profit if it comes back. Just like the crossing strategy itself, it is the ups and downs that causes the problem.

Overall the chance of subsequent profit did not seem to vary until you get to big profits when it starts to fall, presumably because there is often some fall back just before exiting as this triggers the crossing criteria. The one exception to this was for bad years when there was an initial improvement in probability which presumably indicates that increasing the threshold for crossing would improve the hit rate. However, that would then impact on the profit in good years as you would miss out on more initial movement.

Clearly there will be better approaches and algorithms than I have used that may give different results, but thought I would share my observations in the meantime.

Best I could suggest with this approach is stick to fixed stake unless you are confident that the market is trending say as the result of major economic movements such as the Quantitative Easing cookie jar suddenly becoming empty.