Monday, November 09, 2009

Ménage à trois Trading System

This chart looks a little different then what normally gets posted here. The idea is to make this trading system as simple and understandable as is practicable, so BWT, FBS and EW were removed, leaving the only two inputs necessary, the hourly TZA candles with their ATR line.



Please click on the image above in a new window or an adjoining tab, so that you can cleary examine the nature of the beast and get a feel for what will be going on going forward.

Once you have taken a good close look at this chart, then do the exact same exercise with the chart below:



This is the exact same set-up, only on three different time frames, 240, 60 and 15 minutes. In other words, the middle chart is in fact the same chart that was presented first above. The larger the time frame, the fewer the signals, i.e. less sensitive triggering of signals which can be either good or bad depending on the character of current market conditions. The 15 minute time frame will trade more often then the 60 minute and the 60 minute will trade more often then the 240 minute.

In the long run, no one time frame should net significantly more then another time frame. So why not just stick with one time frame to be consistent with the simplicty theme?

(1) Those who like clean simple systems can still pick one time frame and ignore the rest;

(2) But this way those who like to anticipate signals, trigger happy types, can use a smaller time frame as a kind of foreplay;

(3) Or, do 1/3 of the trade in the smaller time frame, add 1/3 as the next time frame triggers and throw in the final 1/3 when all time frames are in sync, our Ménage à trois.


After doing a cursory look-back over several months, I would expect about a 65% win ratio, but with much larger wins then losses. In fact, an average trade, including all wins and all losses, should come in about 2.5%, with about 1.3 trades per day. If you do the math, you come up with an insane average monthly return, so this methodology probably isn't nearly as good as it seems and even if it were, why would some guy just give it away on the Internet?

Which brings me to my final observation. I will be trading this with my own personal funds, because it is easy and appears very lucrative. In addition, I'll do my best to post the Ménage à trois in a timely manner throughout the day. But, I can get bored, or irresponsible, or pissed about a Red Wing game, or I can just screw-up in unimaginable ways, so as it is said, be careful what you ask for.

Finally, lets make this a collaborative effort. If you have an idea that might improve the results or implementation of the system, post it for all to see. I'll be running the system in a back test and looking for red flags or nuances that may be helpful, but if a dozen of us ran the numbers and analysis, its all the more likely that something good this way comes.


A


15 comments:

Anonymous said...

Well, I guess today seals it. It's a bull market after all.

Insert live savings here, pull lever, receive winnings if fruit lines up.

This is a bitter profession.

Anonymous said...

Yeah, I'm bitter too. I wish the market would crash for good and finally make all money worthless.

Then my large cache of firearms will allow me to invade the wealthy neighborhoods and take all their gold, diamonds, and delicious gourmet foods...yum!

Darryl in Vermont

Anonymous said...

Great idea Alan on a simple system to follow TZA. The only reservation I have is the bear funds would have made us fabulously wealthy if we just shorted them and stayed short since March. What I would love to know if the markets were to retrace down to the March lows, would these bear funds then go back to where they were in March? I think not. Which means they are stacked against anyone on the long side.

- cramar

Allan said...

cramer: look at it from another perspective, please. this is a trade to trade system. each trade must be considered on its own. each trade will average between 2-3%. yes, they reset the leverage daily. we are not looking to buy and hold, where resetting leverage works against the shareholder. we are looking only at this trade, this day. tomorrow, just like the fund, we start anew.

Anonymous said...

Allan

Thanks for all your post, this is a wonderful blog.

I always have a question on your trading system. The signal is only generated at the end of the bar, and I assume your entry point is the open of next bar right? If that is the case, many of the trades are losing trades or trades with very little profit even if it looks very profitable on the chart. So what is your entry point on your system? Thanks a lot

T said...

...Looking at the one hour chart from last week, if you take nov.5 and nov.6,it looks like the system triggered a short after waiting for the market open to complete its initial direction and any correction...when the price made a lower high in the second hour, the trade triggered.... and continued thru the day to the opening hour of nov.6 where it closed at the bottom end of the first hour.
a nice trade.
then.... waited for the hour's retrace back up, to the next hour ,where it waited for another lower high,and then triggered a short,which looks to be still ongoing having opened monday lower,and hanging there at monday close.

My guess is that on shorter time frames , like the 15 minute, you could see some triangle,or key s/r point from where the trigger was signaled.

much of the details of the system that Ive seen like this,appear to be the very basic stuff (that works) like failure to make a new high,(low) ,reversal at pivot points and key s/r points, key fib levels, etc... works on any time frame. probably adding those other indicators, the elliott wave signals after a 5 wave completes, the FBS does its thing,while Allan searches for more girls to post. its a complete system.

Anonymous said...

Allan,

Since you like to post songs, heres
a line from a song for you perma-bears.

"time to eat all your words,swallow
your pride, open your eyes."

Tears for Fears
Sowing the Seeds of Love

Anonymous said...

I think some folks are missing the main idea of this blog. its not about having any bear bias or bull bias.
its about 'short term' Trading,and making winning trades.regardless of market direction.
did I get that right?

Anonymous said...

Cramer..anyone?

What are you talking about?

If we reverse back to bear market, do not the ETF ultra shorts, held long, go back to what it was bought?

I mean, do they not just keep going up?

Anonymous said...

s/b instead called: "orgie gaie dans la région de repos" trading system.

So far has only been good for taking it in the shorts.

Robert said...

Allan,

ATR stops have two components, the length of the moving average and the multiplying factor. Using different values can significantly affect the calculated stop. What values do you use for yours? I have written a routine that calculates these for my charting package and I can never seem to duplicate your results.

Thanks,

Bob

PS Sorry if this posts twice, the first time I tried to post it, it didn't seem to go through.

Allan said...

Re: Signal entries

If you look for the bars that touch the trigger line then pull back and do not end up making the trade, they exist but in few numbers. These are whipsaws. Look at enough of these charts and the preferred action is obvious, take every touch.

Allan said...

Re: Main purpose of Blog

Lament about my love life. Good news, things have taken a turn for the better, the two have been reduced to one and that one is wonderful, wonderful.

Secondary purpose: learn how to make money trading.

Allan said...

Bob: 7 & 1.5

Hamilton said...

Allan, you wrote:

"Re: Main purpose of Blog

Lament about my love life. Good news, things have taken a turn for the better, the two have been reduced to one and that one is wonderful, wonderful.

Secondary purpose: learn how to make money trading."



I assume you are joking.

I was under the impression this was a serious trading blog.

HVBVI