Trading Systems

Channel Breakout-Pull Back Pattern

The assumptions underlying this system are:
1. The market will begin an uptrend after the consolidation ends, because it has recently made a new 20-day high.
2. The entry during the consolidation is a low-risk entry point.
3. Exits could be placed at the nearby 20-day high, by using trail­ing stops, or by exiting after .r-days in the trade.


define this breakout and pullback long entry rule as follows: the market must make a new 20-day high, and then define a 5-day low in the next 7 days. Once it forms a 5-day low, buy on the open the next trading day.

Input: Xdays (14);
If Highest Bar(High,20)[1] < 7 and Low < Lowest
(Low,5)[l] then buy tomorrow on the open:
If BarsSinceEntry - Xdays then exitlong at the close:


Since we are buying a pullback, it is plausible to assume that the market will retest the recent 20-day high. Hence, we can write an exit signal that buys the pullback and exits the retest of the recent high. Here is how we would write the new system variation in TradeStation™:

If Highest Bar(High.20)[l] < 7 and Low < Lowest
(Low.5)1:1] then buy tomorrow on the open;
Exitlong at highest(h,20)[1] limit;

Another exit strategy involves a trailing stop, but one that will not cut off long trends prematurely. Hence, we will exit at the lowest low of the last 40 days. This will convert CB-PB into a long-term trend-follow­ing system.
If Highest Bar(H1gh,20)[l] < 7 and Low < Lowest
(Low,5)[l] then buy tomorrow on the open;
exitlong at lowestClow. 40)[1] - 1 point stop;

The CB-PB entry rule remains intact. The second line exits on a stop set one tick below the trailing 40-bar (trading days) low. You can see that this will become a trend-following exit. Our initial stop will close out our trade should the market head lower. The trailing stop at the 40-bar low will keep us in the trade through minor consolidations.


A Trend-Antitrend Trading System

For this system, we will use the 18-day ADX to measure market trendiness, and an 18-day SMA of the ADX as the reference. If the ADX is above its own 18-day SMA, then the market is trending, and we will buy new highs, and sell new lows. Conversely, if the ADX is below its 18-day SMA, we will sell new highs, and buy new lows. Since we will be going against the short-term trend, we must use an initial risk control stop, or the losses will be unbearable.

If high > highest (H.25)[1] and ADX(18) < average
(adx(18).18) then sell tomorrow on the open.
If low < lowest (L,25)[1] and ADX(18) < average
(adx(18).18) then buy tomorrow on the open.


Identifying Extraordinary Opportunities   


The definition of an extraordinary opportunity as used here is sim­ple. Use a 50-day SMA and plot a 3-percent trading band around it. Then a 7-day SMA must cross outside the upper or lower band to com­plete the identification of extraordinary markets. Thus, if the 7-day SMA. crosses above the upper 3-percent band, an upside extraordinary situation is declared (see Figure 4.45). A converse definition is applicable for bearish markets. The best scenario is that the market follows through vigorously in the direction of the established trend. The worst scenario is that the market teases you for a day or two before returning into a congestion zone. Then use an initial stop to close out the trade.

The next major challenge is an exit strategy. A simple strategy of exiting on the close of the twentieth day in the trade works well. An­other exit strategy is to close out the trade when the 7-day SMA moves back inside the trading bands. You can imagine several other exit strate­gies, and I encourage you to test them all.

Exerpts from -


Beyond Technical Analysis:
How to Develop and Implement a Winning Trading System
Tushar S. Chande, PhD