First of all, after several years of trying to make a prefect trading model, I finally realized, at least with my current knowledge, it’s a mission impossible, after all, trading is an art, so cannot be simply replaced by a simple program. Therefore the current system for sure will never be the final version, I’ll continue working on it while my knowledge increases year over year and new idea sparks from time to time.
I’m fully aware that any system is based on the past data therefore I can simply “fit the curve” making the system work prefectly IN THE PAST, but chances are, such a system cannot stand for a reality test. With this concept in mind, I’ve made sure the system uses a simple concept – the 1-2-3 Trend Change pattern as the core trading idea so we human can verify each trading signals the program generated with our brain that if the program really caught the right 1-2-3 Trend Change pattern. Or vise versa, the system can filter out smallish moves, say only mini 5% pullback counts, with a few simple program generated tips, it’d help us finding the correct SCALE of 1-2-3 Trend Change pattern which might be neglected due to lots of smallish move. Also to avoid “fit the curve”, I’ve made sure the system uses only 5 parameters and hopefully won’t need add more parameters in the future.
The system is optimized in the end of course, because this is program is all about, the major optimizing goal is max net profit with profit factor at least above 2. Winning rate is never a big concern as the profit factor above 2 automatically implies the system is trying to catch a big fish in one shot while tolerating more losers with just small fishes.
THE BASIC IDEA:
The basic idea is you Earth people always like to try twice on the current direction, only when the 2nd time fails to make a decisive new high/low, you would then try the opposite direction. Based on this theory, the system always skips the very first pullback/rebound, waits until the first pullback/rebound ends, the price rebound/pullback back to the previous high/low (so called the 2nd test). The sell/buy signal is issued only when the 2nd test fails to make a decisive new high/low. The chart below illustrated what I mean to catch the 2nd failed test.
THE UNRESOLVED ISSUE:
The chart below illustrated the successful case, the failed case and the unresolved issue. The problem in the reality trading is, you never know how deep the retracement is enough to be regarded as the 2nd test, whether Fib 38.2% or Fib 68.1% or Fib 100%, so sometimes you may have missed the retracement because you’re waiting at a deeper retracement level. In this case you may end up chasing the price at a very uncomfortable level. The program I wrote is no smarter than human therefore has the same problem. For the current version, my solution is to chase when the price goes beyond certain point. Obviously it is not a good solution, it’s actually the major damage to the overall performance. Well, if you have a better solution, I’m all ears...
A FEW THINGS TO KNOW BEFORE USING THE MODEL:
- The usage is simple. The signal line rises means buy, you then long while close any short you have. The signal line drops means sell, you then short while close any long you have. So basically, you either long or short at anytime, you always have position at any time and no stop loss is used.
- The system uses no stop loss but still it’s absolutely necessary to understand the concept of POSITION SIZING, putting everything into one basket is very very dangerous.
- It is a trend following system, so the winning rate for some ETFs is only around 50%, it relies on catching a big trend to make money. Say, caught a big trend, earned $10 per share, then lost 5 trades in a row thereafter, each trade however, lost only $1 per share, so overall, still made $5 per share. To make sure the “catch big trend” idea really work, for each ETF trading systems, the profit factor must be at least larger than 2.
- The system by far works the best with SPY because I based my design on SPY first before applying to other ETFs.
WHERE TO FIND THE TRADING SIGNAL?
The trading signal can be found in the daily Trading Signals report.
THE SUMMARY OF PERFORMANCE FOR EACH ETFS: (Will keep updating this part as I continue working on improving the performance)
