SAT2021-20 Moderate 1-Bar 1

Several weeks ago, I presented a scalping idea: SAT2021-12 Moderate Scalp 2.  That idea was to take a trade in the depending on whether the bar closed up or down, and where the Kaufman’s Adaptive Moving Average (KAMA) is within the body of the bar: upper quartile, lower quartile, and middle two quartiles.  Body is defined as the area between the open and close, inclusive.

This week’s idea is a variation of that idea, with one exception: we exit on close of the bar rather than at a profit target.

  • Firstly, the KAMA must be between the open and close of a bar, or within the body of the candlestick (Open to Close), if you are using that style chart.  
  • Secondly, we determine if it is an up or down bar. 
  • Finally, we look to see where the KAMA is within the body of the candle: Upper 25%, Middle 50%, or Lower 25%.   

We take these three conditions to decide whether to go long (buy) or go short (sell short). 

The Moderate Scalp 2 worked, to my surprise, so I figured this would be an interesting variation to explore.  Here we go.

Phase 1: Plan & Design

1. Trading Idea

I believe that when the KAMA moves to within the open and the close of a bar, or the candlestick body, we are reaching price equilibrium and could expect some price oscillation (I hope).   We need a few pieces of information to guide our entry decision:

  • KAMA: Between Open and Close
  • Direction: Did the bar close Up or Down? (we will not trade a flat bar)
  • KAMA Location: top, bottom, or middle of the candlestick body?

Long entries:

  1. Direction down and KAMA in the middle (MidLong)
    1. The idea here is that we are ranging and expect the price to move in the opposite direction (contrarian)
  2. Direction up and KAMA in the bottom quartile (BottomLong)
    1. Go in the direction of the trend
  3. Direction up and KAMA in the upper quartile (TopLong)
    1. Go in the direction of the trend

Short entries:

  1. Direction up and KAMA in the middle (MidShort)
    1. We are ranging, so go in the opposite direction
  2. Direction down and KAMA in the bottom quartile (BottomShort)
    1. Go in the direction of the trend 
  3. Direction down and KAMA in the upper quartile (TopShort)
    1. Go in the direction of the trend

I will use market orders for both entry and exit.

2. System Definition

Position Sizing:

  • Futures: 1 contract

Stop:  

  • Long position: Stop is set 3 points below the low of our confirming bar
  • Short position: Stop is set 3 points above the high of our confirming bar

Confirming bar: the bar which triggered the entry signal

Exit(s): 

Exit on the close of the entry bar.

Profit Target:

  None

Input Parameters:

No inputs for this system.

Variables:

VariableData TypeDefaultCalculation
KAMADouble0Kaufman’s Adaptive Moving Average, with Efficiency Ratio = 10, Fast Length = 2, Slow Length = 10
DirectionInteger0If Open > Close, Direction = -1 (short); if Open = Close, Direction = 0 (flat) ; If Open < Close, Direction = 1 (long)
TopBarDouble0The top of the candlestick body
BottomBarDouble0The bottom of the candlestick body
QuarterBarDouble025% of the bar body, used to calculate Top25 and Bottom25
Top25Double025% below TopBar
Bottom25Double025% above BottomBar

Challenges:

  • None.    

3. Performance Objectives

The system will meet the following objectives:

ObjectiveGoalAchieved via Testing?
System Type (trend, mean-reversion, day, swing, etc.)Swing 
Risk of Ruin0% 
Profit Factor> 1.5 
Win Percent> 50% 
Max Drawdown %< 35% 
Profit/Drawdown Ratio> 2.0 
Ready Date2021/6/18 

This idea is S.M.A.R.T.: Specific, Measurable, Achievable, Realistic, Time-bound

4. Market Selection

Sectors:

EnergiesCurrenciesFixed IncomeAgricultureMetalsSoftsIndexesEquities
XXXXXX

Instruments:

I am just trying a large select of futures to see what works.

Market GroupInstrumentSymbolComments
EnergiesHeating Oil, RBOB Gasoline, Crude Light, Natural GasHO, RB, CL, NG 
Currencies-FuturesFutures: Euro FX, Australian Dollars, Canadian Dollars, Japanese Yen, British PoundEC, AD, CD, JY, BP 
Fixed Income10-Year U.S. Treasuries, 30-Year U.S. BondsTY, US 
AgricultureSoft Red Wheat, Oats, Lean Hogs, Soybeans, CornW, O, LH, S, C 
MetalsGold, Silver, CopperGC, SI, HG 
Currencies-ForexEuro FX futuresEC 
Index FuturesE-minis: S&P, Dow, Russell 2000, Nasdaq    ES, YM, RTY, NQ 

Chart Type, Timeframe, Session, Time Zone:

AttributeValueComments
Chart TypeRegular CandlestickCharting is only useful for validating entry and exit signals
Timeframe / Interval(s)Daily 
SessionRegular 
Time ZoneExchange 

Phase 2: Build

5. Manual Test

I looked at gasoline futures (RB) on a daily chart for my manual test and it looks like it could work.

6. Build

Process Diagram

Comments:

The build was easy since I was simply repurposing other code. 

7. Unit Test

This was easy to test and validate.

Complete?

Note: Unit Test verifies that the system is executing the trading rules correctly.  It is, essentially, quality control.

Phase 3: Test

8. Optimization

The original idea was optimized for profit target and stop loss.  Since we are using neither, no optimization is required. 

9. Walk-Forward Analysis

I don’t know about you, but I am getting tired of systems failing at this point.  Yes, most system ideas fail, but I need a glimmer of hope to keep me motivated.

Okay, so I admit, this was a bad idea.  Here is the net loss over the entire set of instruments:

Just for fun, here is how each instrument’s equity curve looks compared to the others:

10. Monte Carlo Simulation

We did not make it this far. 

11. Incubation

We did not make it this far. 

Phase 4: Deploy

Nope.

Trading System Result: FAIL

Notes and Commentary

Modifying a scalping system, which is opportunistic by nature, into a swing strategy, which goes with the ebb and flow of the market, was probably a bad idea.  The opportunity afforded by the scalping entry obviously exhausts itself by the end of the bar period.  I honestly had no expectations for this idea.  I only wanted to see what would happen if I held onto the trade.

Why did it fail?  It was a coin flip if I am being honest here.  KAMA did not seem to make a difference nor give us an edge or advantage. 

There are at least a hundred ways to explore variations of this.  For now, I will shelve this idea and reserve my brainpower for planning my next idea.

Next week I will be retrying one of my favorite ideas, inspired by one of my subscribers, Tan: fractals.  Fractals are a lot of fun.  I do not know exactly which approach I will use, as they many different uses for traders.  Check back next Friday

Thank you so much for reading.  If you have any comments, suggestions, or just want to say ‘hi!’, please leave a comment below or reach us through the Contact form.  You can follow me on LinkedIn or Twitter (top of the page) and if you have not subscribed to our weekly (no more, no less) newsletter, you can do so below (keep scrolling, it is down there somewhere).

Sources/References

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