Algorithmic and Mechanical Forex Strategies | OneStepRemoved

Optimizing Slow Stochastics Crossovers

by 3 Comments

Since price on the historical Daily and 4 hour charts of this AUDNZD pair are making lower highs and lower lows and are trading below the 200 SMA as well, we are only looking for opportunities to short the pair…we want to optimize our strategy.

website-optimization

When using Slow Stochastics in a downtrend, as we have on the chart below, the optimum sell signal given by the indicator occurs when the two moving averages comprising the indicator have been above 80 and then move below 80.

ss1

Conversely, when using Slow Stochastics in an uptrend, the optimum buy signal given by the indicator occurs when the two moving averages comprising the indicator have been below 20 and then move above 20.  This condition can be seen on the historical 4 hour chart of the USDCAD pair below…

ss2

Since the above signals are the optimum signals, not as much attention is paid to the crossovers that occur between the levels of 20 and 80.  How should a trader react to those?

While “mid-level” crossovers are valid technical trading signals, in my opinion, they do not offer as much “pip-potential” as do crossovers occurring at the 80 or 20 levels.

ss3

Allow me to create an analogy…

Think of the lines (moving averages) that comprise Slow Stochastics as a string on a bow that is used to shoot an arrow.  The farther that the bowstring is pulled back, the more power it has behind it and the farther the arrow will go.  With this in mind, look at the optimum Sell Signal on the chart above and compare it to the Mid-Level Crossover.  The crossover that takes place above 80 will have more downside momentum associated with it than will the mid-level crossover that takes place between 20 and 80.  The bowstring is not pulled back nearly as far.

While both are valid signals to short the pair, the signal with the most pip potential behind it is the one that had the greater amount of momentum.  In this case the pullback to above the 80 level would present the trade with the greater pip potential.  While it is not an absolute and will not prove to be true each and every time the condition presents itself, it does represent a “trading edge” that I believe is worth taking.

For the above reason, I generally do not take mid-level crossovers as entry signals in my own trading. Rather, I exercise patience and discipline and wait for the higher probability signal to set up.

Good trading,

Richard Krivo

RKrivoFX@gmail.com

@RKrivoFX

Buying Dips and Selling Rallies: Putting the Odds in Our Favor

by Leave a Comment

After a strong counter trend move, as long as the longer term trend remains intact, looking for opportunities to “buy the dip” and “sell the rally” can be a solid trading strategy.

When identifying a pair that is in an uptrend, the concept of buying the dip can be put to good use.  The idea is that as the pair continues to move higher, invariably there will be pullbacks/retracements/dips that occur.  When those take place, the trader is presented with an opportunity to enter the trade – buy on a dip – in the direction of the trend at a more favorable price.

Take a look at the historical 4 hour chart of the AUDUSD below for a visual on this concept…

Buying the Dip in an Uptrend

buying dips

 

To time our entry into the trade, an oscillator can be used so we can enter when bearish (downside) momentum shifts to bullish (upside) momentum.  In this case we chose Slow Stochastics.  (Note the timing of the entry with the Slow Stochastics crossover to the upside in the circles.)  When the buying on dips a stop can be placed below the lowest candle or wick that occurred during the retracement or dip.  In this case, we also have a valid ascending trendline (black line) that can be used for stop placement below the trendline.

dice

In a downtrend, the process would be reversed.  Take a look at the historical 1 hour chart of the USDCAD below…

Selling the Rally in a Downtrend

selling rallies

 

To time our entry into this trade, we can enter when bullish (upside) momentum shifts to bearish (downside) momentum.  Again we chose Slow Stochastics.  (Note the timing of the entry with the Slow Stochastics crossover to the downside in the circles.)  When selling on rallies a stop can be placed above the highest candle or wick that occurred during the retracement or rally.  In this case we again have a valid descending trendline that can be used for stop placement above the trendline.

 

All the best and good trading,

Richard Krivo

 

RKrivoFX@gmail.com

@RKrivoFX

Scalper EA Other Pairs

by Leave a Comment

A number of readers are using the scalper EA in live accounts. The number one issue that many of them cited is that my research focused solely on the EURUSD. Does it work on other forex pairs?

Absolutely. However, it doesn’t work on all of them. It’s important to follow the same logical process that explained why the expert advisor works so well on the EURUSD.

Analyze the scalper EA in Excel charts

We must dive back into Excel to evaluate the original hypothesis. My expectation was that the strategy should work on charts where the distance of the price from the 200 SMA forms a nice inflection midway through the curve.

GPBUSD price & SMA 200 distance frequency for the scalper EA

The frequency of various distances of the price from the 200 SMA on GBPUSD.

The area right around the 0.5% marks the inflection point. As a reminder, you can think of the curve as being composed of two parts. There’s the steep part, which is where the price is highly likely move. Then there is the flat part. That means the price drifts instead of moves.

Think of slope as rate of change. A steep slope means a fast rate of change. The price is likely to be anywhere but here on the next bar.

Flat slopes make for slow rates of change. The price is in fact very likely to remain a similar distance from the SMA in future bars.

Slope of frequency of price and SMA 200 distances.

The graph contains 2 slopes. A steep slope and a flat slope. Both are marked in red.

The strategy only works when price is likely to stay in the same spot. We are, after all, scalping. The opportunity only exists when the expert advisor can trade in the chop. The chop only exists when the slope of the frequency line is flat.

I used my experience on the EURUSD to infer that 0.75% would make for a natural starting point to evaluate for the moving average envelope. It’s far away enough from the inflection point to overcome spread costs, but close enough to yield a solid number of trading opportunities.

The initial results came out even better than the EURUSD. These results do not include slippage, commissions or spread costs.

GBPUSD Results

Results for 2011 for the scalper EA on GBPUSD

Results for 2011 for the scalper EA on GBPUSD

The results are very much in line with the original idea. Percent accuracy stayed in the same ballpark, coming out to 81%. The profit factor jumped very nicely to 2.99, which is substantially better than the EURUSD performance of 2.16. The sample size consists of 113 trades, which is enough to infer a reasonable expectation of performance.

Equity curve of the scalper EA on GBPUSD for 2011.

Equity curve of the scalper EA on GBPUSD for 2011.

The final test is “does it make money when including trading costs?” The answer is yes. On a 2.5 pip spread, the total trading costs of standard lots on 113 trades is $25/lot * 113 lots (trades) = $2,825. That number is substantially less than the raw profit of $5,360. It makes sense to trade this strategy.

The final step of walking forward unfortunately doesn’t offer enough data points to draw a conclusion. It only placed 13 trades for the entire year. It broke even.

USDCAD scalping stats

EA scalper, USDCAD, 0.9% banwidth

Performance for USDCAD 2011 with a band of 0.9%.

Equity curve of USDCAD for 2011, EA Scalper

Equity curve of USDCAD for 2011

USDJPY is a bad idea

The frequency graph for the USDJPY looks much, much different than the other currencies. Instead of being steep and mostly flat, it’s more like free falling and perfectly flat. The massive size of the tail and the severe contrast between the steep and flat portions led me to believe, correctly, that trading USDJPY would not be a good idea.

The frequency of various distances of the price from the 200 SMA on USDJPY.

The frequency of various distances of the price from the 200 SMA on USDJPY.

Although the areas near the inflection point are indeed the most profitable, the profit factor for USDJPY plummets to slightly above 1.0. When trading costs are factored in, it doesn’t make sense to trade.

Scalper EA USDJPY 2011

Trade performance for the scalper EA for USDJPY in 2011

Related

Have you read the article explaining how and why the scalper EA works?

If you have any suggestions on how to make the rules apply to more currency pairs or instruments, then please share in the comments section below.