Team Aphid, is there a reason why you don't use the 50% fib retrace as well?
- #145
- Jan 17, 2007 3:58pm Jan 17, 2007 3:58pm
- Joined Sep 2006 | Status: ... | 8,112 Posts
TA asked for feedback. Here are my initial thoughts. These are very general in their nature; I haven't done any testing.
I like BAT’s simplicity and precisely defined nature, as it allows for objective usage and automated testing.
IMHO the basic premise is very sound, in that (with trade #1) one is entering a newly emerging trend, while trades #2-4 seek to exploit early retracements in this trend, via secondary entries at a more favorable price. Re timing of entry, some systems seek to enter earlier (for a long position), as a pullback in the prevailing trend is falling back, or has fallen back, into an “oversold” area of prior support, thereby anticipating the bounce, while others enter later, giving the newly emerging move more time to validate itself. I would suggest that BAT’s trade #1 fits the latter category, and is therefore well-suited to a trending market.
Trades #2-4 also act as a kind of hedge, taking profit if the best the market manages to achieve is movement back to the starting point (100.0 line). This is perhaps significant, because these are the only profit-taking points, and any trailing stop method (on trade #1 in BAT’s case) always forfeits profit while waiting for the final retracement to hit the stop. Given that BAT has no explicit “move stoploss to breakeven” rule (not necessarily a bad thing, IMHO some traders do this too prematurely), one must come to terms psychologically with the fact that a trailing stop system occasionally allows a profit to erode itself into a loss (see RandyG67’s post).
For better or worse, with BAT one is constantly “in the market”, as the trailing stop for the current phase simultaneously heralds the entry, in the opposite direction, into the next phase. There is no definition of indeterminacy, nor is there a longer term trend indicator that restricts trading against the prevailing trend.
As I see it, one unnecessarily risky scenario is where the trailing stop (BAT line) lies just outside the 61.8 and (especially) the 38.2 lines, where new trades are being entered, as a small amount of volatility will cause these trades to be stopped out, before they have a chance to blossom. Perhaps the system could benefit from a variation along the lines of trades #2-4 only being entered after price, having retraced to the appropriate Fibo level, has subsequently moved X pips clear of the BAT line. Re volatility, the H1 chart is sufficiently short time frame to be buffeted by news announcements, and the spread costs are relatively higher to profit potential, compared with longer time frames (H4, D1, etc).
I note that TA allows a second lot to be opened initially (potentially making 5 trades). Extending this idea, I would suggest that in a “trending” market, it is preferable to weight the initial trade, by adding lot(s) at this point, since, the stronger the trend, (1) the less likely deep early retracements are to occur, and (2) in a strongly trending market, one wants to have as many lots on as possible (some traders even go as far as pyramiding), because this is where the longest moves, and hence high-pip profits, are most likely to eventuate.
Conversely, in a “ranging” market (in an H1 context), I would look to weight trades #2-4 more heavily, because trade #1 becomes a more risky proposition, in that (as a later type entry – see my earlier comment) it is more likely to lie nearer to the “wrong” extreme of the range.
Of course all of this presupposes that we’re somehow able to anticipate when the market is going to move in and out of trending and ranging phases, which is not necessarily an easy task!
The other key variable that could be experimented with is the “Factor”, but in attempting to optimize this, one must consider the caveats involved with “curve fitting”. (I note that the Factor does not have be an integer value.) Anyway, for whatever it’s worth, increasing the Factor allows a wider trailing stop, giving the trades more initial breathing space, but the drawbacks being that (1) losses will be greater, in a losing situation; (2) more profit is being forfeited when the BAT line finally gets hit, in a winning situation, and (3) this also means that the subsequent trade, on the phase change, is entered later (i.e. on balance, at a less favorable entry price). Decreasing the Factor would achieve the converse of all this. Attempting to optimize any system invariably results in these types of compromise, i.e. one can’t have one’s cake and eat it too!
Having not done any testing, the following is just a gut feel, but I might look to use a lower Factor value in a trending market, where one can arguably get away with setting tighter stops, and a higher Factor value in a ranging market, where positions stopped out prematurely have a higher probability of bouncing back.
However, and again a gut feel, my preference would lie with re-weighting the entries, rather than tinkering with the Factor.
RandyG67’s post underlines the possibility of taking some profit, perhaps a partial closure at the 161.8 line? Of course this would reduce overall profit when the market happens to subsequently trend in prolonged fashion; another delicate compromise as we are decreasing both potential risk and return. This also revisits the possibility of a lower Factor which would tighten the BAT line stop, locking in profit more quickly. Or even (but this would undermine the simplicity of the system) a twin-stoploss system, with half of the profit being saved by a “move secondary stop to breakeven” at some tactical point, and the other half allowed to “ride” on the BAT line.
This is probably only of academic interest, but increasing the “ATRperiod” value means that a greater number of historical bars are being averaged, generally resulting in a smoother moving BAT line (but weighting its value less heavily on the most recent data).
A couple of parting thoughts. One final addition would perhaps be some kind of longer term trend indicator, with the proviso that one trades only in the direction of this prevailing trend. And perhaps some special conditions involving the handling of potentially high-impact news announcements (but this would mean moving away from a mechanical, technically-based system).
Hope this gives some ideas to ponder. Comments and criticism most welcome!
David
I like BAT’s simplicity and precisely defined nature, as it allows for objective usage and automated testing.
IMHO the basic premise is very sound, in that (with trade #1) one is entering a newly emerging trend, while trades #2-4 seek to exploit early retracements in this trend, via secondary entries at a more favorable price. Re timing of entry, some systems seek to enter earlier (for a long position), as a pullback in the prevailing trend is falling back, or has fallen back, into an “oversold” area of prior support, thereby anticipating the bounce, while others enter later, giving the newly emerging move more time to validate itself. I would suggest that BAT’s trade #1 fits the latter category, and is therefore well-suited to a trending market.
Trades #2-4 also act as a kind of hedge, taking profit if the best the market manages to achieve is movement back to the starting point (100.0 line). This is perhaps significant, because these are the only profit-taking points, and any trailing stop method (on trade #1 in BAT’s case) always forfeits profit while waiting for the final retracement to hit the stop. Given that BAT has no explicit “move stoploss to breakeven” rule (not necessarily a bad thing, IMHO some traders do this too prematurely), one must come to terms psychologically with the fact that a trailing stop system occasionally allows a profit to erode itself into a loss (see RandyG67’s post).
For better or worse, with BAT one is constantly “in the market”, as the trailing stop for the current phase simultaneously heralds the entry, in the opposite direction, into the next phase. There is no definition of indeterminacy, nor is there a longer term trend indicator that restricts trading against the prevailing trend.
As I see it, one unnecessarily risky scenario is where the trailing stop (BAT line) lies just outside the 61.8 and (especially) the 38.2 lines, where new trades are being entered, as a small amount of volatility will cause these trades to be stopped out, before they have a chance to blossom. Perhaps the system could benefit from a variation along the lines of trades #2-4 only being entered after price, having retraced to the appropriate Fibo level, has subsequently moved X pips clear of the BAT line. Re volatility, the H1 chart is sufficiently short time frame to be buffeted by news announcements, and the spread costs are relatively higher to profit potential, compared with longer time frames (H4, D1, etc).
I note that TA allows a second lot to be opened initially (potentially making 5 trades). Extending this idea, I would suggest that in a “trending” market, it is preferable to weight the initial trade, by adding lot(s) at this point, since, the stronger the trend, (1) the less likely deep early retracements are to occur, and (2) in a strongly trending market, one wants to have as many lots on as possible (some traders even go as far as pyramiding), because this is where the longest moves, and hence high-pip profits, are most likely to eventuate.
Conversely, in a “ranging” market (in an H1 context), I would look to weight trades #2-4 more heavily, because trade #1 becomes a more risky proposition, in that (as a later type entry – see my earlier comment) it is more likely to lie nearer to the “wrong” extreme of the range.
Of course all of this presupposes that we’re somehow able to anticipate when the market is going to move in and out of trending and ranging phases, which is not necessarily an easy task!
The other key variable that could be experimented with is the “Factor”, but in attempting to optimize this, one must consider the caveats involved with “curve fitting”. (I note that the Factor does not have be an integer value.) Anyway, for whatever it’s worth, increasing the Factor allows a wider trailing stop, giving the trades more initial breathing space, but the drawbacks being that (1) losses will be greater, in a losing situation; (2) more profit is being forfeited when the BAT line finally gets hit, in a winning situation, and (3) this also means that the subsequent trade, on the phase change, is entered later (i.e. on balance, at a less favorable entry price). Decreasing the Factor would achieve the converse of all this. Attempting to optimize any system invariably results in these types of compromise, i.e. one can’t have one’s cake and eat it too!
Having not done any testing, the following is just a gut feel, but I might look to use a lower Factor value in a trending market, where one can arguably get away with setting tighter stops, and a higher Factor value in a ranging market, where positions stopped out prematurely have a higher probability of bouncing back.
However, and again a gut feel, my preference would lie with re-weighting the entries, rather than tinkering with the Factor.
RandyG67’s post underlines the possibility of taking some profit, perhaps a partial closure at the 161.8 line? Of course this would reduce overall profit when the market happens to subsequently trend in prolonged fashion; another delicate compromise as we are decreasing both potential risk and return. This also revisits the possibility of a lower Factor which would tighten the BAT line stop, locking in profit more quickly. Or even (but this would undermine the simplicity of the system) a twin-stoploss system, with half of the profit being saved by a “move secondary stop to breakeven” at some tactical point, and the other half allowed to “ride” on the BAT line.
This is probably only of academic interest, but increasing the “ATRperiod” value means that a greater number of historical bars are being averaged, generally resulting in a smoother moving BAT line (but weighting its value less heavily on the most recent data).
A couple of parting thoughts. One final addition would perhaps be some kind of longer term trend indicator, with the proviso that one trades only in the direction of this prevailing trend. And perhaps some special conditions involving the handling of potentially high-impact news announcements (but this would mean moving away from a mechanical, technically-based system).
Hope this gives some ideas to ponder. Comments and criticism most welcome!
David
- #148
- Jan 17, 2007 4:56pm Jan 17, 2007 4:56pm
- | Joined Feb 2006 | Status: adjust your sails to the wind | 1,354 Posts
- #150
- Edited 5:21pm Jan 17, 2007 5:03pm | Edited 5:21pm
- | Joined May 2006 | Status: Only one user name... | 1,367 Posts
Old Benjamin was right
