SCOTT WELSH TRADING BLOG

Introducing The Stiffness Indicator

Introducing The Stiffness Indicator

November 14th, 2018

As readers of the Newsletter, you know that I love indicators.

If someone shows me a new indicator, I’m immediately all in.

This week we’re going to talk about the Stiffness Indicator, which was created by Markos Katsanos and is featured in the November 2018 issue of Technical Analysis of Stocks & Commodities magazine.

The philosophy behind this indicator is that we all should trade when the trend is at its strongest point. When the trend is at its stiffest, that’s the time to get in.

As Katsanos explains, the longer an instrument remains above the 100 EMA (Exponential Moving Average), the more powerful the trend becomes. Furthermore, the less times an instrument penetrates the EMA the better.

In short, we’re looking for times when our instrument is trending hard above the EMA and has no desire to come down and touch the EMA or break through it. When that happens, we go Long and ride it until the stiffness of the trend diminishes. That makes sense.

But does it work?

Here are the system details:

  • System: Trading the Stiffness Indicator
  • Philosophy Behind It: If we trade with a stiff 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: AMZN
  • 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 set to 60, Buy threshold at 90
  • Exit: Timed exit at 84 bars; 2) Or when Stiffness reading drops below 50 (screenshot of settings here)
  • Hypothetical Profit: $28,590
  • Hypothetical Max drawdown: -$7,686
  • Trade size: $10,000 of stock each trade
  • Hypothetical account size: $10,000
  • Test Period: 1999-2018
  • Number of Trades: 16

There are a few takeaways.

One, you can see that it only trades about once a year. Obviously, if we wait for a trend to get very strong, we’re not going to get many trades. We just have to trust the methodology. Keep in mind, I did no optimizing. I only used the parameters from the article.

Two, this indicator is designed for stocks. We need trends in one direction (upward bias) because we want to ride that stiff trend. An instrument that twitches up and down would not be a good instrument for this strategy.

Three, it looks promising. But we probably should see if it’s profitable on other things.

We’ll do that in our next email (if you’re on the email list, you’ll get that information and you can get on the list here).

To see the weekly YouTube video on this system, go here.

 

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.