22 May Going Hard With The Trend
Going Hard With The Trend
May 22, 2019
This is most extreme trend trading system I’ve tested.
I’m sure there are others creeping around in the internet netherworld, but as far as a published system that’s testable, I haven’t found anything that attempts to go with the trend quite like this one.
It’s one thing to trade a system that just “goes with the trend.”
To do that, we can simply eyeball the chart (“It’s slanting upward–the trend is up!”) or we can add a filter.
A simple filter is a moving average. If price is above the MA, the trend is up.
Or we can use an indicator. If MACD is above the zero line, the trend is up. Or if the Momentum indicator has a positive reading, we can consider the trend to be up.
Or we could use price action. Maybe price formed a doji and now price has risen above the high of the doji. It would be fair to once again say the trend is up.
And, of course, the opposite would be true in all those cases for a down-trending market.
But the system this week stacks filters in a way that waits for only a very powerful trend. (By the way, we talked about this system once before back in November 2018).
First, price must be above the 100-period exponential moving average (EMA). But not just that.
Price has to be above the 100 EMA for an extended period of time. But not just that.
Price can’t have come down and touched the EMA. And if it has, price must have barely touched it or barely pierced below it. But not just that.
The slope of the 100 EMA must be pointing up. If all other conditions are satisfied but the EMA happens to be pointing down, then no trade is taken.
That is asking a lot on a lot of different levels. Luckily, Stocks & Commodities magazine offered a free ELD of the strategy, so I downloaded that onto Tradestation.
Here are the details.
- System: Trading the Trend With the Stiffness Indicator
- Philosophy Behind It: If we trade with a super strong trend, we’re trading at the best possible time.
- Need Special Indicators? Yes. You need his Stiffness indicator (this can be found starting on p. 48 of Stocks & Commodities November 2018 issue).
- Chart: Daily
- Instrument: SPY (S&P 500 ETF)
- Long or Short? Long Only
- Entry parameters: 1) Market must be above the EMA; 2) Stiffness reading must be 90; 3) Enter at Open of next bar
- Entry: Stiffness length set to 60, Buy threshold at 90
- Exit: Timed exit at 83 bars; 2) Or when Stiffness reading drops below 50
- Hypothetical Profit: $5,635
- Hypothetical Max drawdown: -$2,043
- Trade size: $10,000 of stock each trade
- Hypothetical account size: $10,000
- Test Period: 1999-2018
- Number of Trades: 19
Let’s break down what’s happening here a little more closely.
First, we look back at the past 60 bars and see if price is above the 100 EMA. That’s the “Stiffness Length”.
Then we see how many times price has touched or pierced the 100 EMA. If it doesn’t touch the EMA at all, then the reading is 100. If it barely touched it at all, the reading would be 90 or above. It price is not very far above the EMA and it constantly reversing down and touching it, then the score would drop down to probably 50 or less. There’s a formula to calculate this in the magazine article.
In summary, we need price to be above and barely touch the EMA, so when we get a reading of 90 or greater, we enter at the Open of the next bar.
When we finally decide to enter, we’ve waited for the strongest trend possible. It’s rising, hardly ever falling, and the EMA is rising too. That’s a lot to ask but it seems to give us an entry into the best possible environment.
As far as exits, we hold until price starts losing steam (breaking down below the EMA) or we wait about four months, which, for us, is 83 bars. If the trend hasn’t faltered, we get out after 83 bars no matter what.
It’s hard to think of any system that’s more opposite of countertrend trading. Last week’s system and this week’s system are at completely different ends of the spectrum.
But reviewing the results, waiting for a super strong trend doesn’t mean we make more money. Yes, the numbers above beat buy-and-holding the market when you evaluate on a Return on Account basis (which I do), but the above results do not beat our countertrend systems from last week.
Granted, we talked about Forex then and we’re talking about an ETF now. So maybe that’s not fair.
But the initial takeaway is that hard-core trend trading is not significantly better than countertrend trading.
It might not be better at all.
in our emails to come, we’ll take a look this system again so we can compare apples-to-apples, and we’ll also see if trading this way on an intra-day basis works better.
Talk to you soon.
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