Newsflash: Indicators Work Best

Sept. 21, 2022

I’m angry at the United States.

Its moronic FIFO rules are stupid and hurtful and should be thrown in the toilet.

If I could trade the strategies I want to trade in the same account, I wouldn’t have a single problem in the world.

And that is in no way childish.

I’m also angry that I chose poorly. I have several strategies doing extremely well this year, and I haven’t been trading them. It feels like lost money.

A lot of lost money.

Is there anything that could have been done? Yes! We could throw FIFO in the sewer!

Or we could use the tiny diversified portfolio mentioned in last week’s Newsletters.

But let’s go deeper than we did last week. To start, let’s divide the strategies up into categories.

Until research shows otherwise, trend following is the most universal, most profitable style of trading. Not surprisingly, all of these methodologies are looking to follow the trend, and all have tested out very well over the past 18+ years.

Category #1: Breakouts Above Yesterday’s Price. This is very simple trend following. If the price is higher than it was yesterday, there could be a breakout brewing. It’s an easy, up-to-the-moment way to get in on a trend. If you add a filter that determines strong trends, even better.

And there’s one more interesting thing about this Forex strategy. If you’re trading breakouts compared to yesterday, trading it before noon ET is better than later in the day. The later you go, the worse the breakout. If it doesn’t go higher (or lower) than yesterday when the U.S. stock market opens-ish, it’s not a “good” breakout. So these trade breakouts fairly early in the day. Additionally, this strategy immediately stops and reverses on a breakout in a different direction.

The robot for this style: Dragonfly

Category #2: Breakouts That Use Indicators. These can trade anytime of day and they don’t care about what happened yesterday or if price is at a new high. They only care when the Indicator is Overbought or Oversold. When an indicator goes extreme, that might be the start of a trend. This strategy never stops and reverses. It stays in a trade until it’s over.

Of course, people think indicators are for amateurs and are stupid, lagging tools.

The robot for this style: Master Trend

Category #3: Breakouts Purely Based on Price. This is a breakout that is higher than the previous high or previous low of a certain # of bars back. It’s how the famous Turtles traded. We get in on breakouts, go for big targets, and keep stops small. Sometimes we use time exits to get out. Time exits work well in Forex. This does not stop and reverse.

The robot for this style: The Turtle Robot

Category #4: Breakouts Purely Based on an Indicator Crosses. This type of breakout trading only relies on an indicator (specifically moving averages) to get in and get out. When the averages are lined up, we get in. When the averages are no longer lined up, we get up. We don’t care about new highs or new lows. We just try to ride momentum using a momentum indicator. This does not stop and reverse.

The robot for this style: Old 3 MA Cross

So, assuming you don’t read titles of Newsletters, what style should have done the best in 2022?

Well, what was 2022 like? This year has been filled with:

• Millions of panicked traders who downloaded apps in 2020 and made YouTube success videos in the never-ending bull market.
• Interest rate policy that changed constantly and mimicked the draconian policies of the Dot-Com crash and other debacles.
• Inflation rates that are out of control, and a Russian war with Ukraine.
• Supply chain issues worldwide and coming to grips with Covid.

In that environment, what would work?

You guessed it: Indicators!

No one would guess that.

Does it make sense that a strategy based on a stupid, rigid indicator that doesn’t “ride the market” as it twists and turns would do well?

Then you’re smarter than me.

The Master Trend strategies have done extremely well this year. Of the 14 strategies I tested for this week’s Newsletters, 6 of them used Master Trend. Here’s how a portfolio of those 6 would have hypothetically performed:

On a sample $30k account, they would have produced a 100% return with a 27% drawdown:

(By the way, want to know what style finished 2nd? The Turtle strategy. The most volatile strategy has been amazing this year. It was neck-and-neck with Master Trend.)

In last place was the Dragonfly. Stopping and reversing has not worked well in 2022. Staying with the position has done much better. The portfolio was hypothetically profitable, but way more drawdown than the others and is just slightly positive for the year.)

We’ll talk about the winning Master Trend portfolio in our next Newsletter.

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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.