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
Hi Mark, am currently going through your strategy here, and trying to backtest it myself.
Just one qn to clarify, for short trades you say: “Closed higher than the previous low by at least a fixed percentage.”
Is that correct?
or is it “Closed higher than the previous *high* by at least a fixed percentage.”