Swing Trading %b System

Hey fellow trades,
This year has brought home many painful but important lessons. I started the year trading 3 systems
1. A carry-trade no stop hedging system. It has ended the year -97%
2. A swing system that has been boring, slow with long periods without a signal. It has ended the year +35%
3. A position system that has ended the year +50%

I trade the 3 systems at 3 different brokers, but guess which system was performing the best mid-year? Guess which system I had funneled the most money into? Guess which system was the most emotionally rewarding to trade on a daily basis with a steadily growing account balance?
You guessed it; the carry trade system. The system that blew out with a major loss of capital. The boring stop systems ended the year profitable

Personal Lessons learned (these, of course, suit my personality and may not apply to other personality types)
1. Never trade without a stop, not matter how well the system is performing. The unpredicted, statistic breaking black swan event will happen. It is better to bleed slowly than to lose everything in a short 6 week period.
2. Don't primarily trade for emotional pleasure. Be suspicious of systems that are emotionally appealing, with short term immediate gratification. The slow moving turtle wins the trading marathon.
3. Money management and position sizing is truly the most important part of trading. It means you will survive as a trader or at least, exit the arena head bowed but with something left of your original capital.
4. Take a long term perspective when evaluating trading systems. 3 months is definitely too short, 6 months is a glimmer, 1 year is more reliable, 3 years is building faith, 5+ years is assurance and self-confidence (I am not there yet, having only traded for 3 years)


Anyway, as a way of giving back to the trading universe for the much help I have received from other traders, I am posting my swing trading system. I started with an idea from a index trading system, but I developed my own position-sizing formula, stop and exit, so I feel I can call it my 'own'.
It has a positive expectancy with a 55% win probability. Average win / average loss is >1. (it varies,depending on which exit signal you take, but both are >1). Maximum drawdown this year 17%.
These figures aren't spectacular and won't suit some traders (win probability and drawdown) but I have traded it for the last 2 years and have ended both years with a profit that outshines the performance in my professionally managed superannuation fund.

Hope it helps. I will be available to answer any questions for the next few weeks if required.

P.S I am always looking for other proven swing trading systems.

Cheers
Terry

I had trouble attaching the word document with the trading system rules.
So I will post the rules directly
Obviously you trade this at your own risk, Losses will occur, that is part of trading.



Terry

Chart Setup
Preferred Chart setup with Accucharts (available through a demo account with FXSol)
Daily charts with 200 MA (Exponential)
%b indicator with settings of BB Period 5, Deviation 1
Set horizontal lines on %b chart at 80 & 20. Now known as extremes.
RSI 3 period
Set horizontal lines on RSI at 75 and 25. Now known as extremes
ATR 20 period
Another free daily charting system is Prorealtime.com



Chart setup with Metatrader
Because Metatrader has a Sunday bar the settings are different from other charting programmes
Daily charts with 220 EMA
%b indicator with settings of BB Period 6, Deviation 1
Set horizontal lines on %b chart at 0.80 & 0.20. Now known as extremes.
RSI 3 period
Set horizontal lines on RSI at 75 and 25. Now known as extremes.
ATR 20 period superimposed on %b window

Pairs traded
Majors: AUDUSD, EURUSD,GBPUSD, NZDUSD, USDCAD, USDCHF,USDJPY

Trading Rules
1. If the price is above the MA then look for LONGS, if below MA then look for SHORTS
2. After 3 consecutive closes of the %b at the extreme levels (Long %B < 20, Short %B > 80) enter position size A with STOP at 65% of ATR and TARGET of twice the stop. (If using Metatrader, ignore the Sunday bar) If the target is not hit, close 1/2 position when %b goes to opposite extreme move stop to breakeven. Close remaining 1/2 position when RSI(3) closes at opposite extreme.
3. After 4 consecutive closes of %b at extreme levels and first position has not been stopped out then enter another position at position size A. If previous position was stopped out then enter with position size B. That is the total risk should be 2%. Stop at 65% of ATR and TARGET of twice the stop. If the target is not hit, close 1/2 position when %b goes to opposite extreme move stop to breakeven. Close remaining 1/2 position when RSI(3) closes at opposite extreme.
4. After 5 consecutive closes of %b at extreme levels and first and second position has not been stopped out then enter another position at position size A. If previous position(s) was stopped out then enter with position size C. That is total risk should be 3%. Stop at 65% of ATR and TARGET of twice the stop. If the target is not hit, close 1/2 position when %b goes to opposite extreme move stop to breakeven. Close remaining 1/2 position when RSI(3) closes at opposite extreme.


Position sizing
1. Position size A 1%
Position size B 2%
Position size C 3%

2. Maximum 2 pairs traded at one time。 This is to guard against a major shift in the market. If trading more than 2 pair at one time then adjust the position sizes to maintain the normal risk. Eg if entering 3 positions then make the sizes 2% / 3 ie 0.67% instead of the normal 1% for the first trade.
3. Drawdown Contingency
If drawdown is > 10% reduce position sizing by 10%
If drawdown is > 15% reduce position sizing by 15%
If drawdown is > 20% reduce position sizing by 20%
If drawdown is > 25% reduce position sizing by 25%
If drawdown is > 30%reduce position sizing by 30%
If drawdown is > 35% cease trading!
If you want to tweak the system I suggest that you play with the position sizing formula. I use a 1%, 2%, 3% progression. You can be more or less aggressive depending on your risk profile.
The exit strategy can be adapted to suit your tastes. Some will exit at the first %b signal (opposite extreme). Others may want to use my option to close half with %b signal and the other half with the RSI signal. The most profitable signal, although the most difficult to trade because of the greater number of losses, is to only use the RSI signal. Others may want to use a trailing stop for part of the original position.

If you have trouble finding the %b indicator also a possible template for Metatrader. I have attached. Remember to set the time-frame to 'Daily'

I prefer to use Accucharts or Prorealtime as they don't have the problem of the Sunday bar which annoys me with Metatrader

Terry

%b indicator is now a histogram which is much easier to see the signals

Not all Metatrader brokers have a Sunday bar. IBFX does.
Most do not.

Terturk, I'm not sure if this will be of any help to you ( or others), but if the Sunday bars in metatrader annoy you, there are several options available to side step the problem.
If you go into Tools-History you can edit or delete any bar in your program. When working in Excel, I would always look at the Sunday bars High and Low. This is usually covered by mondays High and Low 70% of the time, in which case the Sunday bar can simply be deleted.
If on the other hand Mondays High/Low does'nt take in all Sundays data, you can Edit mondays bar to include the data and then delete Sundays bar. This way you get to keep all the information for Six days inside Five bars.
The only problem is every time you open Metatrader, the data reverts back to whatever is in your history until the end of the month, then any changes you make remain permanent.

HTH Roy

Does timeframe matter? What timeframe are you using?

Hi Terturk

I have posted a daily chart of Eur Jpy , as we can see the %B closed above 80 for the first two days as indicated by the black lines but on the third day it dropped below 80. Now does that mean that it is a no trade or can we still take the short trade?

Another question- When is the trade executed, is it at the opening of the fourth daily bar or the high or low of the third daily bar?

[quote=Terturk;2439424]I had trouble attaching the word document with the trading system rules.
2. After 3 consecutive closes of the %b at the extreme levels (Long %B < 20, Short %B > 80) enter position size A with STOP at 65% of ATR and TARGET of twice the stop. (If using Metatrader, ignore the Sunday bar) If the target is not hit, close 1/2 position when %b goes to opposite extreme move stop to breakeven. Close remaining 1/2 position when RSI(3) closes at opposite extreme.

I am an EOD trader, so I am using daily charts.

Terry

Okehiedon your question

"I have posted a daily chart of Eur Jpy , as we can see the %B closed above 80 for the first two days as indicated by the black lines but on the third day it dropped below 80. Now does that mean that it is a no trade or can we still take the short trade?
...
Another question- When is the trade executed, is it at the opening of the fourth daily bar or the high or low of the third daily bar?"

Question 1: I wouldn't take that trade as I want 3 days in a row at the extreme (>80 for a short). There was an entry signal on that chart earlier at 2008/09/22 with 1st exit 09/26 and the 2nd exit 09/29. That would have been a nice trade. However EURJPY is not a pair that I trade (haven't back-tested or forward-tested)
My idea is that if a pair is trending (could be a false assumption) and price has been going against the trend for 3 days in a row then it is worth taking a bet that it could reverse and go with the main trend again. If I am wrong and it keeps going against the trend and I get stopped out then I take a slightly bigger bet (a trade) the next day. If I am wrong again then I increase the bet again on the next day (5 consecutive closes at an extreme). If I am still wrong then after 3 trades I lick my wounds and walk away and wait for another trade.
Waiting for 3 consecutive closes at an extreme against the main trend does take paitence but experience has shown that there are enough trades to suit me on a monthly basis (I trade 2 other systems). So far in 2008 I have had 118 trades for the pairs I focus on. So that is, on average, a little over 2 trades per week, with some periods where there are no trades for several weeks. That used to bother me, but not any more. I know the system has a slight edge in the market which I exploit with position sizing. I would rather be out of the market if I am not sure of my edge.

Question 2: I enter orders at the close of the daily bar This is the close of the US session. I use Accucharts and the daily bar closes at 22.00 GMT which is early morning where I presently live. A convenient time if you live in the US as it is early evening. I think Metatrader has a similar daily close time

I hope that answers your questions

Cheers
Terry

PS Does anyone know how to change this Metatrader %b indicator from a line chart to a bar chart. It would make it easier to see the entry criteria?? Accucharts have it as a bar chart.

In the MQL file you'll have a line that says something like
SetIndexStyle(0, DRAW_LINE);

You could try changing it to
SetIndexStyle(0, DRAW_HISTOGRAM);

I usually centre %b around 0 with 1 indicating a touch of the upper band, and -1 indicating a touch of the lower band, so you might need to mess around with the indicator (for example subtracting 50) if you want the histogram to plot around a centreline

Thanks Razzle.

I have adjusted the indicator from a line to a histogram and posted above, also changed the template. Much easier to see for this system.
I am a newbie with this Metatrader code stuff.

Terry

,A picture is worth a 1000 words. I have attached a chart of recent GBP trades to illustrate the process of typical trades and the mindset needed for this type of swing trading.
The arrows are the entries and the 'x's are the exit.
Trade 1: 11/26, stopped out -1%
Trade 2: 11/27 +2.5%
Trade 3: 11/28 +2.9%
Trade 4 12/12 -1%
Trade 5 12/15 -2%
Trade 6 12/16 +5.5%

3 losses, 3 wins, result +6.9%
The win probability doesn't make much difference to me, it is the size of your positions that produces profitability.

I trade a position trading system that has a win probability for 2008 of only 42% (ie it loses more than it wins) and yet because of position sizing it has returned +50% for the ytd.

As I said above, slow, boring, low stress, little time involved but if you consistently day after day, week after week stick to the rules and take every trade, it seems to work out at the end of the year.

Anyway I'm no expert, just a struggling trader who is beginning to see some results are after a few years.

Terry

Terturk,

Looks like a nice swing trading strat., and look forward to learning your strat. I also lost a little on my carry trading strat. this year, but doing well with my mid-term trend trading strat. I will keep an eye on your thread and hopefully chime in here and there.

TimeFreedom

What are the extreme levels on %b histogram?
Are they +0.80 and -0.80?

Thanks for the question Howard.
The extremes on the %b are 0.80 and 0.20

The %b indicator is simply a study of the position of price in relation to the bollinger bands. The gap between the upper and lower band is 1.0. So 0.20 on the %b means that price is in the lower 20% of the distance between the bands. Likewise a reading of 0.80 means that price is at 80% of the distance between the bands.

A digression on indicators
I don't look at any indicator as magic because they are usually about 50% wrong in indicating future price. That is okay so long as the rest of the trading plan is complete with a winning position sizing formula. I just find that an indicator makes trading easy for me as it allows me to make a mechanical decision whether to enter a trade or not. That way I don't blame myself when a trade is unprofitable, if I have kept my rules I have done my part. I am working on a more discretionary approach to trading following price action alone. This system works find, it's easy to trade and makes a healthy return on an annual basis; so why fix it if it ain't broke.

Terry

Was it Kantor method?


Anyway...

Sonic

Thanks for the reply.
Please have a look at my chart attached here, the entry should be at the close of the bar with an arrow on top and first half exit at close of the bar shown with an X and second half exit with at close of the bar with X below; is this correct and is it what you mean?

Loading the chart again, arrow was not showing

Hi Howard
You have got it right.
Of course this arrow was the 5th consecutive close of the %b at the extreme (counter to the main trend). I took the two previous trades on the 3rd and 4th consecutive closes as well, which were all stopped out. However my 3% trade was successful.

Terry

Thanks Terry

On my chart it is the 3rd consecutive which would be the 1st entry.
Different brokers, of course it is without Sunday bar so I have used the settings of your accuchart.