Building A New System With An Old Indicator

Nov. 27, 2019

We’ve talked before about the advantages of long-term systems (i.e., systems that trade on a Daily chart).

One of those advantages is that we don’t get nickel-and-dimed by idiotic stopouts on chart blips. For example, you have a 20-pip stop on a 15M system and get a stopout because price surged momentarily at 5 pm EST in the Fx market.

As a side note, I’m really interested in long-term charts moving into 2020 because my Fx broker has changed the nature of my accounts 5 times in the past year. And all of those changes have been detrimental in some way to my shorter-term systems.

Needless to say, I’m not happy about that.

A long-term system, like I said, solves the problems of short-term blips due to bigger stops and bigger targets. Each tick is not a big deal when trading this way.

What should we do, then, if we want to start trading a long-term system? How do we build a portfolio from scratch with those characteristics?

First, we need a sensible plan. Jim Simons may trade a few signals that don’t make sense, but he also trades MANY systems that do make logical sense.

So let’s start there.

Question 1: Go with the trend or against the trend?

Answer: Both would be okay. But that’s not an answer. We have to choose one, and we’ll choose going WITH the trend. Countertrend trading is a great way to trade but it can be more chaotic. Being short in a savage uptrend can be quite painful. Going with the trend is usually a pain-free way to trade.

Question 2: What timeframe charts?

Answer: We’ll use Daily charts. The signals are more robust and it’s easy to trade even if we have a full-time job.

Question 3: What markets do we trade?

Answer: If we want big money, we should probably choose Futures or Fx because of the leverage. We could try stocks, but it’s much more complicated to go that route at first because of the daytrading regulations and the thousands of stocks to choose from. We’ll choose Fx because we can use a very small account if we want to and we still get a ton of leverage.

Question 4: What is our systems based on?

Answer: Some people love indicators, some people love to rail against them. However, no one can dispute their simplicity. No guessing at price patterns or wave numbers. Indicators are black and white and that’s a huge advantage. We’ll choose an indicator system for our entries.

Question 5: What is our profit target and stoploss? This is a BIG question. It’s big because this where the danger of curve-fitting comes into play. If we fine-tune our profit amount too much, there’s a chance we could make our system fragile (only works in a specific type of market). So, we won’t use a target or a stop. We’ll let the indicator tell us when it’s logically time to get out. When an indicator goes Oversold, it has run faster and farther than it normally does. It’s logical to get in there. When an indicator goes Overbought, it’s gone up more than normal. It’s logical to end our run there. We’ll let the indicator give us sensible entry and exits.

Question 6: What is our indicator?

Answer: We need something that oscillates and something that’s been around for many years. That leaves us with RSI, Stochastics, and CCI. We’ll choose CCI. Why? It’s easy to read and it’s been used for a long time by traders. The other two are fine. We’ll try CCI.

Question 7: Get in on a breakout or pull-back?

Answer: Breakouts are great but they come with lower win percentages. We’re fragile emotionally, so we’ll use pull-backs and try for a higher win percentage.

Summary of our system:

1. Go with the trend.
2. Daily charts.
3. Trade Fx.
4. Set up trades based on an indicator.
5. Enter and exit on extreme indicator readings (no stops or targets).
6. Use CCI indicator.
7. Get in on a pull-back.

Does this system make logical sense overall? I believe so.

We’re going with the trend and getting in on extreme readings. We’re then getting out when price has run strongly in a profitable direction (or exiting when it’s gone against us but moved our way in one last push).

In our next email, we’ll give exact details on our robust-sounding system and look at some results.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.