How to create winning trading strategies ? - Resources to Help You Become Wealthy Trader

Buying and selling the Forex market is one of the most exciting, fast paced trading decisions you will ever make. Currency prices are well known for swinging wildly in a particular direction by 100 to 200 pips, at a moment's notice, sometimes for no exact reason in particular.

So how do you capitalize on this type of market? How do you ensure that you are following the proper trading ideals - i.e. maximizing profits whilst minimizing losses? We have some solutions which might help to achieve just this.

BUILDING ON WINNING TRADES

There is literally nothing better than buying a particular currency, and then within minutes seeing the pair surge upwards on a wave of optimism. You know that you had the right idea at the right moment, and the decision you took to buy that currency was the right one.

This is where we should mention the "trend". It is a statistical fact that when a currency moves in one direction, it is more likely that at any given point, it will continue to move in that direction rather than reversing. This is why people who try to pick bottoms and tops often fail miserably in their trading.

So - if you are sitting on a winner, what is the logical thing to do? One of the ideas might be to add to your existing position, and hope that the currency continues on the positive course.

Here is an example of how such a trade might pan out:

You buy EUR/USD at 1.3200 and it rises to 1.3300 shortly after the trade.
Instead of closing the trade for a 100 pip profit, you buy another 2 lots of the currency.
Because of the trend, EUR/USD continues to rise to 1.3350.

You close your position at this point.
Your profit is the 150 pips on initial position + 50 pips on both secondary positions.
Here, you have clearly benefited from the prevailing trend in the market and have capitalized on a position where the intuitive feeling may have been to just take the profit at 100 pips.

BUILDING ON LOSING TRADES

It should be noted that building a pyramid strategy for losing trades is absolutely not the same as the above. Staggering your entries should only be used by people who are experts in the field - and for position traders who want to balance and average out their average cost at a "better" price.

Remember, whilst pyramid trading can be hugely beneficial to profits, it also magnifies any losses if the market was to reverse - so careful monitoring needs to be done at all times to ensure that the position is safe and guarded.

THE SUPER COMBO DAY TRADING STRATEGY

So far we have concentrated on longer-term trend-following systems using daily bar analysis. We are now going to work with strategies that deal with intraday bars. Working with intraday bars is the same as working with daily bars. TradeStation doesn’t care what time frame you are working with (tick, minute, daily, or weekly); all built-in indicators and functions work the same. The only time programming gets complex is when you are dealing with more than one time frame at a time. Many systems trade on intraday bars, but use daily bars to calculate their buy and sell signals. The Super Combo strategy falls under this category. This system is designed to day trade the stock indices. We should call this the kitchen sink day trader, because we have thrown a lot of different ideas into this one system. This system is rather complex and, therefore, so is the programming code. 

If you can understand this code, then we doubt there are too many trading ideas that you couldn’t program. We will program a system in a modular format to make it easier to understand. In addition, the program code will be heavily laden with comments to further aid in digestion. Of all of the day trade systems that Futures Truth monitors and ranks, the systems that feature both break out and failed break out technology always tops the list of best performers. Instead of reinventing the wheel, we will borrow this overall concept and use it as a foundation for our own system. First off, let’s discuss the break out component of the Super Combo. If you look at a daily bar on almost any trading instrument, you will notice that the high price is always greater than or equal to the open and close. On non limit days, it is always higher than the low. At some time during the day, there was more demand than there was supply and, therefore, the market moved up above the open. Conversely, when supply was greater than demand, the market moved down. The objective of an open range break out system is to try and capture some of the market movement between the open and high (or close) or the open and low (or close).

The key to successful breakout systems is finding the “sweet spot” above or below the open that foretells further movement in that direction. The worst feeling in the world for a day trader is buying at or near the high and selling at or near the low. Your buy point must be above the high of the day when the market has no direction and at the same time must be well below the high when the market has a strong directional move. Your sellpoint must have the same attributes. You are probably thinking to yourself that this is impossible. You would be right. But we all know that trading is not impossible, difficult yes, but not impossible. 

This is the beauty of the Super Combo; it knows it must stick its neck out and buy/sell breakouts, but it also knows that there is a great likelihood that the initial break out will fail. This is where the failed breakout logic kicks into high gear. Once a certain price level is achieved (upside or downside), the system switches gears and begins to look for failed break out opportunities. How many times have you seen a bar chart where the open is near the high and the close is near the low or just the opposite? These are perfect examples of failed break out opportunities. These concepts are how the Super Combo enters the market. Once a trade has been initiated, the system uses protective, break-even, and trailing stops to manage the position. 

The system also utilizes a protective stop reversal. Sometimes a trade is put on and failure occurs within the next couple of hours. This can occur without the system sensing a failed breakout. So, under certain conditions, we allow the system to reverse its position at the protective stop level, even when a failed break out isn’t signaled. After the system reaches a certain profit level, the protective stop moves to a break-even level. Later in the afternoon, when the likelihood of profit taking and retracements of the overall trend increases, the protective or break-even stops switch to a trailing stop. It may seem to you that the exit techniques are much more complex and thought out than the entry techniques.

Many traders don’t realize that trade management determines the success of the entry technique and, therefore, they spend all their time trying to figure out the best way to get into the market. Research time should be split between entries and exits. If all goes well with our entry, the position will be closed at the end of trading. There is one more important point concerning this system: no trade can be taken within 30 minutes of the open time. This filter (a technique to help pick out good trades) allows the market to digest any reports that come out before and slightly after the stock indices open. If you take a look at the first 30 minutes of a stock index, especially on report days, you will discover an extreme level of volatility. 

This volatility will play havoc with any break out-based trading strategy. So, let’s just skip it. Now that we know the overall approach of the Super Combo, let’s get a little more specific. The open range break out shouldn’t be foreign to you because we described it in the Thermostat strategy. Nor should the buy easier day and sell easier day concept be unfamiliar. The Super Combo system utilizes both ideas to calculate the entry points for the break out component. The first step is to see if we can even take a trade today. 

We have spent many hours researching the consequences of wide range and small range bars and have drawn the conclusion that small range bars usually give a hint to a subsequent wide range bar. So, if yesterday was a small range bar, then we can attempt a trade today; or else we simply skip today and look for something else to do. We consider a bar to be a small range bar (SRB) by comparing the absolute value of the Open – Close of yesterday’s bar to the average of the absolute values of the past ten days’ Open – Close values. If the bars’ Open to Close range is less than 85 percent of the ten-day average open to close range, then it is considered an SRB. Once we find out that we can trade, we must then determine if today is a buy or sell easier day. A buy easier day occurs when the close is less than or equal to the previous day’s close. 

A sell easier day is simply the converse; today’s close is greater than the previous day’s close. (Note: We give a slight bias to the buy easier day in case the close of today and yesterday are exactly the same.) Remember, we are making it easier to buy or sell; we are not ruling out a potential buy or sell. Prior to the bear market of 2000, you would be surprised at the number of systems that only bought or made it difficult to sell. If today is a buy easier day, we can buy at the open of today plus 30 percent of the ten-day average true range, and sell at the Open of today minus 60 percent of the ten-day average range (don’t use true ranges). On the other hand, if today is a sell easier day, we can sell at the open of today minus 30 percent of the ten-day average range, and buy at the open of today plus 60 percent of the ten-day average range. Now that we understand the break out component of the Super Combo, let’s delve into the failed break out methods. In terms of our system, the following

Three scenarios define a failed upside break out:

• 1. The market gaps above yesterday’s high a certain amount and then trades below it a certain amount.
• 2. The market opens below and moves above yesterday’s high a certain amount and then trades below it a certain amount.
• 3. A long position is initiated and failure occurs before 12:00 P.M. central time (CT). Failure is defined as being stopped out. 

We take advantage of this if failure doesn’t happen too quickly.

The opposite is true for a failed break out to the downside. We look to get in the market when any of these three scenarios occur. This type of entry can be defined as counter trend; a position is being entered against the prevailing trend. When we enter a trade from a break out method, we use a protective stop equal to 25 percent of the average range or three full points, whichever is greater. By using a percentage-based protective stop, we are adapting our protection to the current market condition. If a market is exhibiting high volatility, then a tight fixed stop will get you stopped out with a loss on most trades.

On the flipside of the coin, if the market is exhibiting low volatility, then a large fixed stop will risk more than the potential reward and eventually net failure. Adaptive parameters or stops must have boundaries so they won’t take on ridiculous values, hence the three-point floor. In today’s volatile markets, a protective stop of less than three-points is a disaster waiting to happen. We use the same protective stop on the failed break out entry with one exception. If we enter a position at a stop loss level, we use 15 percent instead of 25 percent of the average range or three full points. The reason behind the different protective stop level for this entry is that there is a chance the market may not have any direction for the entire day. The market proved indecisive by stopping our initial position out. We will nibble on what the market is offering, but we will use a tight stop in case the market performs a double whammies.

 If the market is looking kindly on us and provides a profit equal to 50 percent of the 10-day average range, then we pull our protective stop up to a break-even point. In doing so, we achieve a free trade minus slippage and commission. Later in the afternoon, specifically after 2:30 P.M. CT, we trail our protective stop below/above the low/high of the prior 3 five minute bars. Again, through extensive studies, we have discovered that the market will more times than not, fade the overall daily trend in the last 30 to 45 minutes of trading. Losing all of the day’s profit in the last fifteen minutes is almost as heartbreaking as buying the high and selling the low. Since we are not trying to scalp the market, we will only test the waters twice on a daily basis. 

In other words, we will only initiate one long position and/or one short position during the day. Once we have entered the market twice, we stop looking for another entry. That’s it. Finite. We have just about given you everything except the kitchen sink. There should be enough ideas in this one system to build a whole slew of different strategies. The Super Combo sounds rather complicated, doesn’t it? If you think it sounds complicated, wait until we try to program it. The best way to attack this monster is one modular block at a time. First, let’s pseudo code all of the calculations that deal with daily bars.

This may be a good time to introduce Trade Station's capabilities that deal with multiple data streams and time frames. With Trade Station and Easy Language, you can analyze up to five different data and/or time frames. In the case of the Super Combo, we will deal with two different time frames: five minute and daily. We will use the daily bar data to feed our calculations and the five-minute data to actually enter our trades. Why five-minute bars instead of fifteen-minute or any other time interval bars? you may ask. If at all possible, it is always best to test your trading ideas on the smallest bar increment that you can. If we had the computer power and time, we would have tested on individual tick bars. The higher the time resolution, the more accurate your testing will be.

We will let the online Calculating Orders on Historical Data Time-based bars include the Open, High, Low, and Close for the specified time period. When you work with historical data, Tradestation doesn’t know the chronological order of the transactions that make up the bar. The only transactions for which the chronology is known are the Open, which occurred first, and the Close, which occurred last. With time-based bars based on historical data there is no way to know whether the market opened and then went down, or the market opened and then went up. However, because the order of ticks can be important, two general rules were established about price movement and the chronological ordering which ticks occur.

The smaller the time increment that you are dealing with the less there is a chance for error. A fifteen-minute bar is made up of three 5-minute bars. Inside the fifteen-minute bar there may be a price that was never traded; a gap between the high or low and the subsequent open price on a five-minute bar.