A Volatility Retracement Trading Strategy

In this video I am introducing a trading strategy that goes with the trend it

trades long and short it has a great reward to risk ratio and it performs

well during bull and bear markets this is Mark from Tradinformed.com and

welcome to this video this video is all about the volatility retracement

strategy the idea behind this strategy is when markets are trending higher and we

have low volatility it must be trading long but when things

have changed around and we have a short trend developing we also have high

volatility this is the opportunity to trade short in this video I will show

you how you can trade this strategy the way that I have set it up but I would

also show you the tools that you can use to do this yourself to develop and test

and optimize your own trading strategies so let’s have a look at the rules for

this trading strategy now firstly we need to identify volatility and I’m

using the standard deviation of the daily price change next we need to

identify the trend so we need to know whether the long-term trend is in an uptrend

or a downtrend and I am using a 50 period EMA and a 200 period EMA whenever

the 50 is above the 200 we only take long trades and when the 50 is below the

200 we will only take short trades so we have got the volatility and we have got

the trend now we need to identify the retracement and I’m using a simple

percentage measured by close to close and

retracement of course is against the direction of the dominant trend which

gives us an opportunity to enter at a slightly better price now let’s have a

look at some of the inputs into the trading strategy on the screen at the

moment is a tradinformed backtest model now this model is built in Excel and it

is a way for you to develop and test your trading strategies I have used this

to develop this particular strategy over here on the left we have inputs and

variables that you can use to optimize the strategy for different markets over

here on the right we have the results and the output including the capital

graph for this strategy if you’re not currently testing and optimizing your

trading strategies this is a system that could be of interest to you

so check out the link on the screen if you want more information about this

testing and optimizing your strategies is essential in my view for every trader

if you want to actually hit your trading goals to eventually make all

your trading easier and to be able to relax and know that you have historical

evidence that your strategy actually works in the markets ok so let’s have a

look over here at some of the assumptions and inputs a key one for me

is how we’ve got quite a tight stop loss but using a percentage based stop-loss

and I’m using 0.75% stop and this means we are going to get as a consequence fairly

low number of percentage winning trades this is inevitable whenever we have a

tight stop loss you have a low number of winning a high number of losing

trades however this is more than compensated by the fact that we have a

much higher average winning trade we’re using a profit

target again set by a percentage and we’re using a trailing stop as well to

lock in the profits so the net upshot of is this is we have a high reward to risk

ratio and you are protecting your capital with a short stop loss I’ve got

potential reward and maximum risk per trade setting the volatility maximum

risk at one point three five percent here the long trades and the same value

for short trades but you can change these numbers this is the key thing

about using a model to test your strategies you can play around with

these numbers and see how it works for the markets that you are interested in

I’m using some strength closes here I’m using a Bollinger Band close, so if the

price closes beyond the Bollinger Band we’re saying that this is a exuberant

market so we’re going to take our profits this is in addition to the

profit target I’ve also got a strength close so if we have we have three days with each

day exceeding one point two five percent of gain we’re going to take our profits

as well let’s have a quick look here at some of the results setting list back to

the original value you can see that we have compounded annual growth rate

fourteen point four percent over this time period which is from approximately

2000 and year 2000 up to 2019 current time but a good profit factor and that

tells us that our gross winning trades is more than twice as many more than

twice as much as our gross losing trades so our largest winning trade and

our largest losing trade all of which are a function of our starting capital

which you can also adjust in this model, the market I’m

testing here is the S&P; 500 index we can see that maximum drawdown which is one

of my very favorite metrics is low 11.7% compared to the maximum drawdown

at 56.8% close to close which happened during the 2008 2009 financial crisis I

hope you found this video useful remember if you want your strategy and

development tools you want to hit to your training goals and think you’re

trading easier and you want more information about trading the financial markets

Please go to www.tradinformed.com