finding the trend with Aroon’s oscillator

Aroon’s oscillator quickly detects the change from price directional trend to flat trading range by measuring the number of time periods within a defined moving time window of n-periods that have passed since the most recent n-period high and n-period low.

My Tradestation implementation of this indicator enables you to plot both Aroon Up, Aroon Down, and the Aroon Oscillator which is the difference between Up and Down.

 ELD: Aroon’s Indicator

Interpretation

• If price makes a new high –> Aroon Up = 100 (bullish trend).  Vice versa if a price makes a new low –> Aroon Down = 100.
• When price has not made a new high for n periods –> Aroon Up = 0 (loss of bullish momentum).  The same is true for Aroon Down when the price has not made a new low in n periods.
• If 70 < Aroon Up < 100 while 0 < Aroon Down < 30, and this persistently, then it indicates a strong uptrend.  Vice versa a strong down trend is indicated when 70 < Aroon Down < 100 while 0 < Aroon Up < 30.

Basic Strategy

• Based on historical data, Aroon’s Oscillator seems to work better for long positions
• Go Long when Aroon Up (n) > Aroon Down (n), where n is the number of periods
• Sell when Aroon Down(n) > Aroon Up(n)
• Otherwise stated, using the oscillator, go long when the oscillator is > 0, sell then it is < 0.

I tried the strategy on a daily MSFT chart going back to ‘06.  Over this period the strategy was 45% profitable but only generated 9 trades.

wolf or sheep, which one are we?

To the neverending question of whether markets are efficient, random, chaotic or dare I say “manipulated”, here is the sarcastic Cramer answer:

And from down under, this is Tom William’s version.

This whole discussion on “Smart Money” interventions and not following the herd got me thinking about a technique called “Volume Spread Analysis”. I am going to research it and may post about it in a few days.

@er2 trade

Another little @er2 trade today based on a convergence of the squeeze indicator (green dot), MACD (>0 and break of upper Bollinger Band), and bullish symmetric triangle breakout.  I went long at 692.5 and exited the position at 695.7 for a profit of 3 points.  The triple entry confirmation is shown by the three circles.  The exit was justified by resistance at yesterday’s close (695.8) and a decrease in momentum at that level (see darker blue histogram bar on squeeze indicator).

I completely missed the ealier Squeeze signal that occured around 11:18.  At the time I was using a 5′ bar timeframe in which this setup wasn’t apparent.  It is only when I switched to a 512 tick bar timeframe that both the previous squeeze (the one that I missed) and my actual trade setup became obvious.  It is hard for me to tell which timeframe is better suited to my daytrading style for ER2.  For the time being I may just stick with the 512 tick bar, they are fast enough not to be boring, and slow enough to let the patterns develop and avoid noise trading.

another freebie for journaling and knowledge sharing

Since a picture is worth a thousand words, then maybe a video is worth a thousand pictures.  You can now record your own videos for free with a tool called CamStudio (http://camstudio.org/).  This software will not only record a section of your screen (or even the whole screen if that’s what you would like to do) but it will also record your audio commentary and produce an .avi file that you can then feature on your blog or distribute via services such as YouTube and/or Google Video (just keep in mind that posting your video on those services will significantly alter the quality of the recording to the point that a chart with indicators will be barely readable).  This little utility could be used for journaling your trades (as a complement or even a substitute for your current journal) for instance.  If you would like something that is a bit more feature-rich then you could purchase Camtasia but that’s going to set you back about $299.

Happy Recording!

@er2 trade

Simple trade on @er2 today off of a 128 tick chart.  I spotted the descending triangle that formed up to about 10:19 this morning.  It broke out to the downside around 10:23 and briefly pulled back to the triangle base before plunging further down.  I entered on the tracement (B) going short with a fill @ 645.7.  My stop was placed inside the triangle @ 647 and I set my target to the pre-market pivot point (A) at about 642.4.  I exited the trade @ 642.71 (C), walking away with close to 3 points.  In this trade it paid off to stick to the initial target (pivot low) as following a roll-over of the Heiken-Ashi (from red to blue) would have costed me close to one point.  My Bollinger studies on MACD and MOM didn’t do much other than confirming the bullish move during the trade.  Interestingly later that morning, we start seeing a squeeze in both studies (between 10:55 and 11:09) indicating a potential subequent breakout.  The breakout happened around 11:10 with the MACD and MOM both breaking their upper Bollinger band. 

With a daily range of about 38 points today, capturing 3 points, is nothing to write a home about as this trade only captured 8% of the range.

another tool to add to your arsenal

I am sure that you are already heard of or maybe even attended online Webinars.  Trading system vendors, coaches, and self-proclaimed gurus have become very fond of these solutions as a way to distribute content to the masses.  This afternoon I found a service called Yugma (www.yugma.com) that now provides this capability for free for an unlimited period of time.  It allows you to share your desktop with up to 10 attendees and provides a teleconference number for all to call.  A Skype version also exists that replaces the teleconference number with IP telephony over the Skype network.  By simply creating a free account on their site you can now hold on your own webinars or at least collaborate with fellow traders everywhere for FREE.  Enjoy!

remote control

Over the last few weeks I have been experimenting with two remote access solutions: LogMeIn (www.logmein.com) and GoToMyPC (www.gotomypc.com).  My interest in these applications stemmed from my need to be able to access my trading workstation from work and for other locations as the workstation is a desktop and is therefore not mobile.  Also while my corporate firewall blocks TradeStation, it supports those remote access applications and therefore allows me to run TS remotely.  Obviously you are going to experience a certain degree of network latency and while it is noticeable, I found it to be very acceptable.

Interestingly enough in the last edition of Active Trader Magazine, there was an article on the two applications and their conclusions was that LogMeIn was the better product.  I completely agree with this recommendation.  From a functional point of view the two products are fairly similar (although I seemed to experience slightly less network latency with GoToMyPC) but the free version of LogMeIn which is sufficiently feature-rich for most applications makes that choice hard to beat.

You can try it for yourself at https://secure.logmein.com/products/free/register.asp

market wizards

During my daily commute I have been listening to a 12 audio CD series on Market Wizards by Jack Schwager.  The series is basically an audio version of the book of the same name.  It features interviews with some of classic big names in trading, such as Ed Seykota, Bruce Kovner, Van Tharp, Larry Hite, and others.  Although maybe a bit dated (as most of those names made their fortunes in the sixties, seventies, or eighties) and at times monotone, it offers valuable lessons in trading that are still very applicable today. 

On a recent road trip to Michigan I listened to several of those CDs and it turned a boring trip into a productive and educational one.  This morning I was listening to Larry Hite’s interview and something that he said stuck with me: “You can’t win if you don’t bet, and you can’t bet if you don’t have any chips left”.  Actually if anything Larry Hites echoes some of the best practices in risk management, practices that he seems to follow to the letter in his trading practice.  While some of these lessons can sound basic or plain obvious, I have come to realize that very few traders actually follow them.  Driven by desires to get rich quick, or by focusing more on making money than on minimizing losses, many traders take trades that are either too large (as a percentage of their equity) or not properly protected (poor risk management).  As an other great man once said: “Common sense is not that common after all”.

Here are some other pearls on risk management from that series:

“I advise you to always use stops. I mean actually put them in, because that commits you to get out at a certain point. Another thing is that if a position doesn’t feel right as soon as you put it on, don’t be embarrassed to change your mind and get right out.”  – Michael Marcus

“Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose” – Bruce Kovner

“The most important rule of investing is to play great defense, not great offense. Every day I assume every position I have is wrong. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. Always maintain your sense of confidence, but keep it in check.” – Paul Tudor Jones

“I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities. The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you follow these three rules, you may have a chance” – Ed Seykota

a reliable paper trading solution for TS users

I have been pleased with the data feed, order execution quality, and paper trading capabilities of the NinjaTrader(NT)/Zen-Fire combination.  I run it in parallel with my TS system for paper trading on futures.  I had originally tried to use NT in direct combination with TS via what NT calls an external data feed (which would allow me to use the TS data feed through NT, NT’s role being relegated to a trade simulator).  However after many hours spent with TS and NT technical support it still didn’t not work reliably on my workstation, consequently I gave up and looked for another solution.  The NT/Zen-Fire solution seems to work well for discretionary paper trading and it is stable, although the concurrent running with TS ends up being quite demanding on system resources (issue that could be addressed by running TS and NT on separate PCs).

Eventually my goal is to connect TS to NT via the NT DLL interface for automated trade execution.  This will enable me to run my trading strategies on TS and pass them to NT/Zen-Fire via the DLL interface.  This could be used for both forward-testing of strategies as well as for live trading.

You can open a demo account for NT/Zen-Fire at http://www.mirusfutures.com/onlinefuturestrading_demoaccount.htm

good reference

Good references are sometimes difficult to come by and ‘free’ is perhaps the rarest four-letter word in trading, but here is a site that provides both: http://www.trading-naked.com/Articles_and_Reprints.htm