I originally posted this on an 'old' forum, Volatility Based Trading (Fat Tails) but I guess it's dead or hibernating so here goes, a new thread! This is my first futures.io (formerly BMT) posting so I look forward to the feedback and possible ridicule :faint:
I just want to float a simple methodology based on short-term volatility that I have used to enter fast momentum moves with a very tight initial stop (I have other more 'sane' methods but this one works well on fast markets with quick momentum moves like Forex, CL etc.) . I'm interested in the futures.io (formerly BMT)'s feedback as I'm relatively new to this game and hope I can contribute something.
I developed a simple indicator (I'm can't program to save my life but I have used a wizard from ProBuilder.. NT will prove beyond me...) based on a simple concept - Buy & Sell Pressure. I've looked at ATR's and other metrics and decided to use a very simple way of determining an initial stop (just for fast moves) - basing it on the difference in pressure for moves Up minus moves Down... I've enclosed a screenshot of a scenario from last Wednesday (UK morning session) on CL (I didn't take this trade, but just as an example...).
My Stop is based on the 4 period EMA (average over the last hour) of the 15m (I use 15m as my last set-up screen and enter normally on a tick chart) Market Pressure in the opposite direction of the trade (this also assumes that the initial momentum should mean that the negative pressure against the trade is less than the hourly average).
I've used my definition of Market Pressure as Buy Pressure (Close-Low) and Sell Pressure (High-Close). You could use averages/medians or the full High-Low (very conservative) or Close-Open (very aggressive for Buy pressure) but I've used the above as 'typically' in a strong up-move the candle opens, 'squares-off' some of the previous candle, moves to a high, retracts and closes. The reverse is typically true for a strong down move.
I know this is quite aggressive and doesn't look at support/resistance for hiding stops but is based on the following strategy;
1) The market has already done a small (50%)
In the example shown on CL my buy stop would have been set (on the parallel segment) a few ticks from the breakout trend line @ about 10221 (this is a CFD so it's designated in 10,000's). The Stop-Loss would be based on the 'Buy STOP-LOSS Generic' of 4.69 plus 2 x spread of say 2 pips (5+2*2)= 9 Pips (rounding up the S-L figure). The fill would have been about 10223 setting the S-L @ 10214
Conventional 'wisdom' would have put the S-L a few ticks below the last low of 10210 plus spread (2) at about 10207. This would relate to a S-L of 16 pips (more than 75% greater than the original) - A far worse reward/risk ratio (but less risky in terms of a whipsaw)...
I've also manually looked at a combination of the average (Tick BuySellPressure*ATR) .. promising but I can't code this so I gave up! Looking forward to feedback any any ideas for improvement or voices for incarceration! :crazy_pilot: