Last Updated on November 28, 2022 by Mark Ursell
In this article, I describe the Gator Oscillator and how you can use it as part of a pyramid entry trading system.
I show the results of a Gator trading strategy on the S&P500 Index from 2000-2015.
Pyramid Entry Systems
It is tough to find good trades. In most markets, at most times there will only be a few outstanding trades.
One way that traders can increase their profitability is by increasing the position size when conditions are favourable. A pyramid entry system uses this approach by adding to a winning position.
The advantage of using a pyramid entry system is that we do not have to risk everything on the initial trade entry. We can watch our trade, and if it meets specific criteria, we can add another position.
For most people, adding to a winning position is hard. When a trade moves in our favour, we instinctively want to take our profits. Pyramiding forces us to be disciplined in our search for excellent trades and ensure that we make a substantial profit when we do find a good trade.
The Gator Oscillator
The Gator Oscillator was developed by Bill Williams. I am a big fan of Bill Williams’ technical indicators, and I like his thinking about trading the financial markets. If you are interested in learning more, you can check out my previous post on the Awesome Oscillator and Acceleration Indicator.
The Gator Oscillator is shown here on the S&P 500 stock index.
The Gator expands when the market trend is strengthening (green bars) and contracts when the trend is weakening (red bars). Both long and short trades can be identified using the Gator Oscillator.
If you would like to discover more about the Gator and learn how to calculate it, I have an eBook 21 More Technical Indicators available in the Amazon Kindle Store.
One of the most interesting things about the Gator indicator is that it provides a system for increasing the size of our position.
The Backtest System
I tested the strategy using a Tradinformed Excel Model. This model has been specifically set up to test a pyramid entry trading system. If you are interested in backtesting your trading strategies, have a look at the latest models in the Tradinformed Shop.
The Gator Pyramid Entry System
In this simple trading strategy, I am using the Gator Oscillator to enter trading positions. The Gator does not give us a directional bias, so I am using a moving average as a direction filter. In this example, I am only taking long trades.
The rules are:
- Trade Long when the Gator shows double green (green above and below the 0 line) and the price is above the 200 EMA.
- Add another position if the Gator shows another double green and the price is still above the 200 EMA. Up to a maximum of 3 positions.
In this example, the Gator is above the 200 EMA, and the first position opens when the indicator switches from red to double green.
The second and third positions are added on the following 2 bars.
I have recorded a YouTube video about this trading strategy. In the video, I show how to alter the number of positions and other variables and how they affect the profitability of the trading strategy.
Results of the Trading Strategy
In these results, I have backtested the strategy using an ATR based profit target, stop-loss and trailing stop. The profit target is 10 * ATR; the stop-loss and trailing stop are 5 * ATR.
Each position risks a maximum of 5% of the capital. If three positions are added this represents a maximum risk of 15%.
|Gross Winning Trades||$439,809|
|Gross Losing Trades||$-244,086|
|Largest Winning Trade||$72,878|
|Largest Losing Trade||$-31,686|
|Underlying Market Profit||40.8%|
The results from the strategy described above are encouraging. They show that the Gator trading strategy delivered a much higher return than buy and hold (which returned 40.8%). Also, the Gator strategy had a much lower drawdown. Check out the video above for more discussion of the strategy results.
If you are interested in trading strategies and backtesting have a look at my page on Trading Strategies.