Central to your success as a trader is the ability to verify a strategy’s profitability. With countless trading ideas on the horizon, how do you determine which ones have merit? You could manually trade each strategy and record your results. If you’re a part-time retail trader on the higher timeframes, you’ll probably take a few months […]
A trailing stop is a dynamic stop loss that moves in tandem with prices to protect your floating profits. If you’re in a long trade, the trailing stop moves upward as profits accrue. If prices move against you, however, the stop does not move. The chart below shows a 100-pip trailing stop applied to a […]
The Money Flow Index (MFI) is a lesser-known relative of the RSI that incorporates the use of both price and volume. I’ve previously discussed how tick volume can be used to improve signal reliability. Can the use of volume help the MFI outperform other momentum indicators? Here I’ll build a trend following strategy using both […]
The Moving Average Convergence/Divergence (MACD) is a household name in the world of technical trading. Developed by Gerald Appel in the 1970s, it measures momentum by plotting the difference between two exponential moving averages (EMA). MACD Calculations I’ll use MT4’s default MACD from here on out. It consists of two lines: The main line and […]
If you’ve ever used a technical indicator, you’ll understand the perennial conflict between lag and reliability. You want your indicator to respond quickly to prices, while minimizing the number of false signals. In his book Cybernetic Analysis for Stocks and Futures, John Ehlers developed the Laguerre RSI as a way to minimize both the noise […]
The CCI indicator was invented by Donald Lambert in 1980 to detect cyclical turns in commodities, and has since become one of the most popular momentum indicators. In essence, it measures the current price relative to an average price over a given lookback period. Unlike most indicators, the CCI uses typical price instead of closing price. Some […]
Bollinger Bands are one of the marvels of technical trading. They consist of a simple moving average surrounded by a pair of upper and lower bands. These bands are placed at a certain standard deviation multiple above and below the moving average. Bollinger Bands are typically defined by two parameters – the moving average lookback […]
As algorithmic traders, identifying support and resistance levels can be a challenge. Market structures that are easily discernable by the human eye are sometimes tedious to program. Fortunately, pivot points provide a simple mathematical definition of support and resistance levels. In this post, I’ll explain how pivot points are calculated, and how you can combine […]
Robustness is a big deal in trading strategy development. A robust strategy is insensitive to variations in price behaviour, meaning it will continue to perform well when market conditions change. To quantify a strategy’s robustness, traders often include out-of-sample tests during development. This usually involves backtesting the strategy on a different market or timeframe. But […]
Moving averages are among the most common technical indicators in the trading world. In general, they produce reliable entry signals in trending markets, but struggle during periods of consolidation. What if we could have a moving average that adapts to the market? Kaufman to the Rescue In 1972, legendary trader Perry Kaufman started developing the […]
Quantifying a strategy’s performance is a challenge that every trader faces. In a previous post, I discussed MT4’s default backtest performance metrics. At the minimum, I recommend using the return/maximum drawdown ratio to get a measure of your strategy’s risk-adjusted performance. The System Quality Number (SQN) is another popular metric that could help with your […]
I was reading The Art of Currency Trading by Brent Donnelly, where he lists his 25 rules of forex trading. In particular, rule #14 states: There is a time and a place to go big. The idea is to increase your position sizing when you come across very high probability trades, thus increasing your number […]
Traders have long used volume to gain insights into the markets. For exchange-traded assets like stocks, volume refers to the number of shares that changed hands over that period. It is usually plotted below prices, and gives a good indication of the level of participation in the market. Why is Volume Useful? Volume primarily serves […]
The Money Flow Index (MFI) is a lesser-known relative of the RSI that incorporates the use of both price and volume. I’ve previously discussed how tick volume can be used to improve signal reliability. Can the use of volume help the MFI outperform other momentum indicators? Here I’ll build a trend following strategy using both […]