Trading ranges and breakouts

[JTrader]

Trading ranges, breakouts and implementation within mechanical trading systems

Hello

I am looking at finding the best way to handle trading ranges/flat periods for programming within my forex mechanical trading system.

In a trading range the instrument cannot establish an uptrend or downtrend. If an instrument is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken. However, developing hard and fast rules to be written into a mechanical trading system within tradestation or esignal is not a simple task.

Here is a rough outline of my plan so far.

I am looking at using EMA's as entry and exit criteria, as well as a 10 pip stop loss. If two trades end by being stopped out in a flat/sideways market, I would stand aside and wait for something like the breaking of the range which has been/is being established........ A few ideas include waiting for a breakout from the high or lows of the 5 minute candles of entry & exit of the previous one or two losing trades........... or waiting for a breakout from the high or low of the 5 minute candle of entry or exit of the previous one or two losing trades........ Three strikes and you’re out! If the system makes three losing trades in a single trading day, the system would not look for further entries.

At this stage I am not sure as to which criteria would be most effective, but at least these examples provide some quantifiable/measurable criteria for a mechanical system that tradestation or esignal can understand.

I am looking for some feedback with regard to my proposed ideas - which, if any do you think may work or be most effective - plus suggested alternative ways that I would perhaps like to consider in my system.

Many thanks

jtrader.

 

[JonnyT]

10 pips is almost certainly too tight for such a system.

EMAs = loads of whipsaws and bad long term results.

Making a profitable system using tradestation is not easy.

I would suggest you backtest your ideas and go from there.

However KISS is very important.

JonnyT

 

[JTrader]

Hi JonnyT

What is KISS?

Thanks

jtrader.

 

[LevII]

[K]eep t imple tupid

 

[TheBramble]

JTrader - my personal position on Breakouts (which I trade a lot) is to wait for a test of the breakout before considering the channel broken. I am only talking about sideways congestion channels. Trending channels are different.

So, if the price breaks out above the top of the sideways channel, wait for a re-test (reaction to) and support at the upper edge of the channel and a subsequent move back up to confirm the break out.

For a breakout below the bottom of a sideways channel, again, wait for the reaction back toward the lower channel level to test for resistance and a subsequent move back down to confirm the breakout.

Adopting these rules will minimise getting into false breakouts, but also reduce the number of breakouts you trade.

You can also wait for a breakout by more than half the width of the channel to act as a confirmed breakout. This is for those 'steamers' that don't bother with the re-test. Again, this minimises getting into false breakouts, but you do miss a part of the move for the real thing.

It's all down to your risk profile - mine is very low.

For trading trending channels - exit on the left - enter on the right (thanks Skim)

 

[sidinuk]

A failed breakout will also very often lead to a breakout in the opposite direction. So look at fading the first breakout with an eye on being on board for the subsequent 'real' breakout in the opposite direction.