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Using Price Action for Underlying Trend

  • #1
  • First Post: Mar 3, 2010 6:07pm Mar 3, 2010 6:07pm
Hi Folks,

My friend introduce me to this system where you chart an indicator graph purely based on pricing. He used this in the futures market. And I thought that I'll share it with you guys. I manage to backtest this manually back till July 2009. I am looking out for any big losses.

The formula is

(SMA of open-close for last 5 period / SMA of high-low for last 5 period)*40+40

Mark of the 40 and 65 levels and trade long if it touches 65 level and short the on the 40 level. You will be in the market 100% of the time. Stop Loss will be the when the next trade is triggered.

The rational is based on price action alone to discover the underlying trend.

Manual backtest shows it has some potential especially on the major pairs.

Please note that this is a long term strategy. Please see attached chart.

Sorry I did the levels manually on a spreadsheet as I am not an indicator programmer.

Note: I posted this also in Trading Discussion when I should be posting this up here. Is there any way I can delete the other discussion? Sorry for that.
Attached Image (click to enlarge)
Click to Enlarge Name: bb.gif Size: 17 KB
  • #2
  • Mar 5, 2010 10:55pm Mar 5, 2010 10:55pm
Thanks for sharing...can please explain in more detail? Thanks.
  • #3
  • Mar 5, 2010 11:27pm Mar 5, 2010 11:27pm
why *40+40?
  • #4
  • Mar 5, 2010 11:34pm Mar 5, 2010 11:34pm
Hi popeyex

Could you please give an example for the formula

(SMA of open-close for last 5 period / SMA of high-low for last 5 period)*40+40

According to my understanding, the values are SimpleMAs' values which applied to Open, Close,High,Low with period 5?When you take these values? At the daily bar open? and what are 45 and 60 level? I don't see it in your attached image.

Thank you,
Regards,
  • #5
  • Mar 24, 2010 6:03am Mar 24, 2010 6:03am
hi popeyex,

the idea looks interesting, but as you can see, we need more explantation to the calculations.

thank you in advance for a detailed description!
  • #6
  • Mar 29, 2010 7:28am Mar 29, 2010 7:28am
hi all,
sorry for the late reply.

please find the attached spreadsheet to see how the value is calculated. weekly values of EUR/USD.

sorry i cannot show you how it works with the indicator in metatrader as I do not know how to code it mql.

Hopefully with the spreadsheet attached someone can help me with the indicator and I can explain more clearly on how this works.

This system works purely on price action only and you are able to identify the start/end of a trend clearly.
Attached File(s)
File Type: xls EURUSD.xls   57 KB | 526 downloads
  • #7
  • Mar 29, 2010 11:47am Mar 29, 2010 11:47am
Popeye,

Just to let you know, your spreadsheet calculation uses *50+50 instead of *40+40. Did you realize this?

Initially this looks like another method that will do well in trending markets but get hammered in a choppy environment.

Cheers,

Scott
Prices are never too high to begin buying or too low to begin selling.
  • #8
  • Mar 29, 2010 11:53am Mar 29, 2010 11:53am
how can this be used ples elaborate a little. its confusing.
  • #9
  • Mar 29, 2010 12:07pm Mar 29, 2010 12:07pm
Quoting thehenryfam
Popeye,

Just to let you know, your spreadsheet calculation uses *50+50 instead of *40+40. Did you realize this?

Initially this looks like another method that will do well in trending markets but get hammered in a choppy environment.

Cheers,

Scott

Hi Henry,

Thanks for bringing that up, I was playing around with the values and forgot to change it. Please change them to 40.

The idea behind this system is that it will try to ride the trend to a maximum and choppy periods do occur but it is hoped that through this price action calculation the loss during those periods will be kept to a minimum.

For pairs like USD/CHF, there are more choppy periods than trending periods and I am looking at whether those trending periods will make up of those losses and more.
  • #10
  • Mar 29, 2010 12:27pm Mar 29, 2010 12:27pm
It appears that the poster means SMA of (Close(t)-Open(t)), i.e. a SMA of the difference.

Since SMA is linear it is SMA(Close) - SMA(Open).

Then it's dividing by a measure of intra-bar volatility. Overall it's a crude Sharpe ratio, some measure of recent return vs volatility incurred for that return.
  • #11
  • Mar 29, 2010 12:34pm Mar 29, 2010 12:34pm
Ok, I don't do this often, so this may or may not be the most accurate, but I attempted to create an indicator based on your spreadsheet calcs. Just throw this on your MT4 chart (Popeye appears to doing the calcs based on a weekly chart, so that is what I would recommend putting it on). Screenshot also attached. Hope it helps.

Scott
Attached Image (click to enlarge)
Click to Enlarge Name: popeye-indi.gif Size: 16 KB
Attached File(s)
File Type: ex4 Popeye.ex4   3 KB | 563 downloads
Prices are never too high to begin buying or too low to begin selling.
  • #12
  • Mar 29, 2010 11:28pm Mar 29, 2010 11:28pm
Quoting mbkennel
It appears that the poster means SMA of (Close(t)-Open(t)), i.e. a SMA of the difference.

Since SMA is linear it is SMA(Close) - SMA(Open).

Then it's dividing by a measure of intra-bar volatility. Overall it's a crude Sharpe ratio, some measure of recent return vs volatility incurred for that return.
yes, yes that is what my friend told me its a certain measure of some return vs. some volatility but i didn't that they called it some sort of a Sharpe ratio.

he says this calculation is also a good indication of a pin-bar setup, not sure sure exactly how but im trying to find out now
  • #13
  • Mar 29, 2010 11:34pm Mar 29, 2010 11:34pm
Quoting thehenryfam
Ok, I don't do this often, so this may or may not be the most accurate, but I attempted to create an indicator based on your spreadsheet calcs. Just throw this on your MT4 chart (Popeye appears to doing the calcs based on a weekly chart, so that is what I would recommend putting it on). Screenshot also attached. Hope it helps.

Scott
hi henry,

thank you for the indicator. i think it looks somewhat similar with the one I have on the spreadsheet. i was told people may use this on charts 4 hrs and above.

i am not totally sure of exactly to go about this but from what i was told and what mbkennel says i can deduded that:

1) it is some sort of measure for return vs volatilty
2) a good indication of a pin bar setup (not sure if i see any pin bar here but from the chart attached we can find out the possible highs and lows from the indicator)
3) the trending periods will hopefully come up with profits that will cover losses on the whipsaw periods
4) this system will try to ride the trend for as long as possible.
  • #14
  • Mar 30, 2010 12:00am Mar 30, 2010 12:00am
the 60 level is a good place to start longs and the 45 level is a good place to start shorts. the 60 and 45 levels acts as a buffer.

please note that i use the weekly charts and i am more of a long term trader, for lower timeframes you will have to test it on your own and I appreciate if you could share the results.

please also note that signals don't come often and the time from opening a trade to closing it will take years but the thing is you WILL RIDE THE TREND!

For Longs:
1) Open Trade when hit 60 level and close it when it hit 45 level.
2) Stop loss is the same. when it hits the 45 level

That is it.
Attached Image (click to enlarge)
Click to Enlarge Name: 1.gif Size: 34 KB
  • #15
  • Mar 30, 2010 12:02am Mar 30, 2010 12:02am
henry, is there anyway i can contact you?
  • #16
  • Mar 30, 2010 1:05am Mar 30, 2010 1:05am
You can send me a private message through the forum and/or we can exchange email addresses there.

By the way, in your last message, you mentioned the levels were 45 and 60. In the first post, you said they were 40 and 65. Thus I used the first post's levels in the indicator.

Scott
Prices are never too high to begin buying or too low to begin selling.
  • #17
  • Mar 30, 2010 1:30am Mar 30, 2010 1:30am
Quoting thehenryfam
You can send me a private message through the forum and/or we can exchange email addresses there.

By the way, in your last message, you mentioned the levels were 45 and 60. In the first post, you said they were 40 and 65. Thus I used the first post's levels in the indicator.

Scott
Sorry about that, I was testing the 45 and 60 levels. The chart I attached was the 45 and 60. Either way, both of them captures the trend

Below is the chart for 40/65 levels.
Attached Image (click to enlarge)
Click to Enlarge Name: 1.gif Size: 36 KB
  • #18
  • Mar 30, 2010 3:10pm Mar 30, 2010 3:10pm
The formula is

(SMA of open-close for last 5 period / SMA of high-low for last 5 period)*40+40

what do you mean by SMA? SMA is simple moving average, but in your excel file i see you use Sum of open-close. So this is different things.
Maybe the right formula should be (SUM of open-close for last 5 period / SUM of high-low for last 5 period)*40+40

what exact formula your friend gave you? Are you sure we have to use open-close? maybe close-open?
  • #19
  • Mar 30, 2010 3:33pm Mar 30, 2010 3:33pm
maybe use rsi...
  • #20
  • Mar 30, 2010 10:28pm Mar 30, 2010 10:28pm
Quoting Dezil
The formula is

(SMA of open-close for last 5 period / SMA of high-low for last 5 period)*40+40

what do you mean by SMA? SMA is simple moving average, but in your excel file i see you use Sum of open-close. So this is different things.
Maybe the right formula should be (SUM of open-close for last 5 period / SUM of high-low for last 5 period)*40+40

what exact formula your friend gave you? Are you sure we have to use open-close? maybe close-open?
i don't know what you might call the sum of those periods however the calculations in the spreadsheet is right according to my friend and it is open-close.
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