Hi to all.
Just read a book titled"FINANCIAL MARKETS FORECASTING"by Tony Plummer,which looks good for new & small traders like me.Mr.Plummer has proposed a System based on Hourly time frame.I am sharing the system below and need your valuable suggestions/opinions.I also think it will be better to read the book,if you can.Author used this strategy in Forex Trading.
THE SYSTEM STRUCTURE
The first task is to calculate two arithmetical moving averages namely, a 26-hour moving average of the hourly closing prices and the hourly equivalent of a 21-day moving average of such prices (that is,21 times the trading hours in a day). The shorter average highlights the short-term trend and the longer one relates to the longer-term, moreslow-moving, trend. Both averages are used to determine whether the current price is bullish or bearish within a particular time frame. A current price above a moving average will be bullish; a price below the moving average will be bearish.
Although it is unnecessary in a simple system such as this, the moving averages can be supplemented by an average directional
indicator (ADX).The ADX gives an indication as to whether or not the market is actually trending.The second task is to calculate a momentum indicator that will give you both an indication of reversals in momentum and a tool to
recognize non-confirmations. The most popular momentum indicator
in modern markets is the moving average convergencedivergence
(MACD) line,This indicator measures the difference between two moving
averages. When plotted as a graph, the line oscillates slowly up and
down as the two averages first diverge from each other, then converge
on each other and finally cross over one another. The original version
uses exponential moving averages, so that more weight can be given
to recent time periods than to older ones. However, quite acceptable
results can be obtained by using simple arithmetical averages. The
recommended time periods for the two moving averages are 13-hour
and 34-hour.When the MACD indicator is rising, the implications are positive
for prices: if the indicator is less than zero (that is, the 13-hour average
is still below the 34-hour average), then the market is only potentially
bullish; if the indicator is greater than zero (that is, the 13-hour
average is above the 34-hour average), then the market is actually
bullish. The converse holds true if the MACD indicator is falling: if
the indicator is above zero, then the market is potentially bearish; if
the indicator is less than zero, then the market is actually bearish.
The third task is to calculate an indicator known as the signal line.
This indicator is a moving average of the MACD line. Again, the best
type of average for this purpose is an exponential average, but
acceptable results can be obtained by using an ordinary arithmetical
average. The recommended period for this average is eight hours.In
principle, a definite recommendation to enter a trade is generated
whenever the MACD line crosses the signal line.Once the mechanics for calculating these averages have been established, all that is necessary is to set out a basic set of entry and exit rules, then use them. These rules are obviously variable, but one particularly useful set of rules is given below.
THE ENTRY RULE
A position is opened when the MACD line breaks the signal line and one of the following supplementary (or confirming) signals occurs:
>>momentum has not confirmed the recent price low (in the case of a
buy signal) or high (in the case of a sell signal);
>>the last price crosses the 26-hour moving average in the same
direction as the momentum signal;
>>the last price signals a break-out from a valid price pattern;
>> the price is reversing away from a golden ratio objective.
THE EXIT RULES
Half of the trading position should be closed when the price hits a
target calculated from golden ratio expansions or contractions, and if
one of the following criteria is also met:
>> the golden ratio target is also at a support/resistance level;
>> momentum is diverging from the movement in absolute prices;
>>momentum is at an extreme and the ADX is not rising.
All (remaining) open positions should then be closed if either a pre-determined stop loss is triggered or if the MACD line breaks the signal
line in the opposite direction to the trade.
OPENING POSITIONS
We shall now discuss the signals themselves in a little more detail.
The entry rules essentially rely on a reversal in momentum (the MACD line) to establish the basic signal. However, it is still possible that the reversal will be too short-term to provide a profitable trading opportunity hence the use of supplementary or confirming signals.The first signal relies on the concept of non-confirmation. If the primary momentum signal is beinggiven on a reversal from a price extreme, and there has been a non-confirming divergence between the price extreme and the MACDline, then the signal has a greater chance of being valid.The second supplementary signal relies on the argument that themoving average approximates the trend in the market, and that a penetration of the moving average therefore indicates a change in trend.However, the signal has a greater chance of being valid if the moving
average itself is in the process of reversingThe use of a moving
average in this way is particularly useful when the primary
momentum signal has been generated under very choppy trading
conditions.The third signal allows for the break out from congestion areas,
holding patterns, recognizable reversal patterns and trend lines. These
patterns are the basis of much traditional technical analysis. In a sense,
they are late signals because prices will already have moved some
way before the signal is given. Nevertheless, such signals may
constitute the last piece of information in the movement away from an area of very volatile price action.The fourth signal covers those cases where the price has reached avalid price objective and is reversing away from it. First, the price may have achieved a retracement objective of 38.2 per cent or 61.8per cent of the previous move, and may be moving back into the main
trend. An MACD entry signal should catch such a renewed trend.
Indeed, it is particularly powerful for the 61.8 per cent retracement,
where the market has re-tested the previous high or low. Second, the
price may have reached a golden ratio objective for an impulse move
and may be reversing into a new trend. The MACD entry signal
should allow you to catch the beginnings of this new trend, too.
CLOSING POSITIONS
It is all very well entering trades successfully, but it is obviously also
important to ensure that subsequent profits are not allowed to erode
unnecessarily and that any losses are kept to an absolute minimum. To
this end, the need to follow strict rules about closing positions cannot
be emphasized enough.there are psychological influences that
encourage traders to take profits too early and realize losses too late.
There is also the related problem of identifying with trading positions
so that self-esteem becomes dependent on the outcome of the trade.
Both of these sets of problems can be reduced, or even eliminated, by
adopting rigid exit criteria.
MONEY MANAGEMENT
Whichever approach is suitable for you, there are two cardinal money
management rules that need to be obeyed5. The first is that no trade
should allow you to lose more than 10 per cent of your capital. If you are trading equities, bonds or currencies, a stop loss should be triggered well before the 10 per cent limit is hit. Suitable adjustments should be made for leveraged futures positions. In options markets, no more than 10 per cent of your capital should beplaced on a single trade because there is a chance that the option may expire worthless. The 10 per cent rule should also be applied to recovery situations where the company has been facing severe
financial difficulties, but is now considered to be over the worst.The second money management rule is that no more than 20 percent of your capital should be placed in a single investment. This will ensure that, if you are spreading your risk across markets or stocks,you should be able to hold at least five positions.If these rules are adhered to, then it will be possible to weather stormy times and still be able to take maximum advantage of prof-
itable trading opportunities when they present themselves.
CLOSING AND REVERSING POSITIONS
If the current price is above the (hourly equivalent of the) 21-day moving average, then closing a short position automatically implies opening a long position. Thus, if the current price is below the 21-day moving average, then closing a long position implies opening a short position. Otherwise, the normal entry/exit rules apply.It is also worth emphasizing that reversals away from the goldenratio objectives can be used to anticipate this effect.
FINAL EXIT
Exit rules based on the golden ratio objectives will be very effective
for a large number of or even on most occasions. However, once
the market begins to reverse away from a target, then (whether or not
any of the supportive conditions have been met) open positions should
be closed when the MACD line cuts the signal line. No other factors
need to be taken into account.
CLOSING OLD POSITIONS AND OPENING NEW ONES
There are two possible problems with these exit rules. First, if there
has been some uncertainty over the level of the price pulse being
traded, there may be occasions when positions are, in effect, closed
prematurely. If the dealing rules are followed consistently, then this
should not actually matter too much as a re-entry signal will inevitably
be generated when the underlying trend re-asserts itself.
Second, there are occasions when the short-term trading system
does not immediately show whether or not the closing of an old
position should be accompanied by the opening of a new one in the
opposite direction. In order to circumvent this uncertainty, it is a good
idea to use a much longer moving average to define the background
trend of the market. Without doubt, one of the best averages for this
purpose is a simple arithmetical 21-day moving average. If hourly
charts are being used, then it is a simple matter to convert the 21-day
average into the corresponding hourly average. The market trend is
then defined by the current price in relation to the moving average:
1. if the price is above the average, and the average is rising, then the
trend is bullish;
2. if the price is below the average, and the average is falling, then the
trend is bearish.
The rule for opening and closing positions is then quite simple:
1. if the market trend is bullish, then closing shorts implies opening
new longs;
2. if the trend is bearish, then closing longs implies opening new
shorts.
Considerations:
1. Different analysts use different time periods for the calculation of the exponential moving averages. The original ones recommended by Gerald Appel
were 12-period and 26-period averages respectively. Plummer's researches suggest that 13-period and 34-period averages may give better
results.
2. Many analysts use nine-period averages.
3. This particular trading system has been used by the author and is one that has been refined over a long period of time.
4. These rules are for general guidance only. In modern, highly leveraged markets,great care needs to be taken with risk control. One of the best books on the subject is Elder, Dr Alexander (2002) Come Into My Trading Room, John Wiley, New York.
6. The moving average signal is unlikely to be correct if it is generated when the moving average is still moving sharply against the direction indicated by the signal.
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Just read a book titled"FINANCIAL MARKETS FORECASTING"by Tony Plummer,which looks good for new & small traders like me.Mr.Plummer has proposed a System based on Hourly time frame.I am sharing the system below and need your valuable suggestions/opinions.I also think it will be better to read the book,if you can.Author used this strategy in Forex Trading.
THE SYSTEM STRUCTURE
The first task is to calculate two arithmetical moving averages namely, a 26-hour moving average of the hourly closing prices and the hourly equivalent of a 21-day moving average of such prices (that is,21 times the trading hours in a day). The shorter average highlights the short-term trend and the longer one relates to the longer-term, moreslow-moving, trend. Both averages are used to determine whether the current price is bullish or bearish within a particular time frame. A current price above a moving average will be bullish; a price below the moving average will be bearish.
Although it is unnecessary in a simple system such as this, the moving averages can be supplemented by an average directional
indicator (ADX).The ADX gives an indication as to whether or not the market is actually trending.The second task is to calculate a momentum indicator that will give you both an indication of reversals in momentum and a tool to
recognize non-confirmations. The most popular momentum indicator
in modern markets is the moving average convergencedivergence
(MACD) line,This indicator measures the difference between two moving
averages. When plotted as a graph, the line oscillates slowly up and
down as the two averages first diverge from each other, then converge
on each other and finally cross over one another. The original version
uses exponential moving averages, so that more weight can be given
to recent time periods than to older ones. However, quite acceptable
results can be obtained by using simple arithmetical averages. The
recommended time periods for the two moving averages are 13-hour
and 34-hour.When the MACD indicator is rising, the implications are positive
for prices: if the indicator is less than zero (that is, the 13-hour average
is still below the 34-hour average), then the market is only potentially
bullish; if the indicator is greater than zero (that is, the 13-hour
average is above the 34-hour average), then the market is actually
bullish. The converse holds true if the MACD indicator is falling: if
the indicator is above zero, then the market is potentially bearish; if
the indicator is less than zero, then the market is actually bearish.
The third task is to calculate an indicator known as the signal line.
This indicator is a moving average of the MACD line. Again, the best
type of average for this purpose is an exponential average, but
acceptable results can be obtained by using an ordinary arithmetical
average. The recommended period for this average is eight hours.In
principle, a definite recommendation to enter a trade is generated
whenever the MACD line crosses the signal line.Once the mechanics for calculating these averages have been established, all that is necessary is to set out a basic set of entry and exit rules, then use them. These rules are obviously variable, but one particularly useful set of rules is given below.
THE ENTRY RULE
A position is opened when the MACD line breaks the signal line and one of the following supplementary (or confirming) signals occurs:
>>momentum has not confirmed the recent price low (in the case of a
buy signal) or high (in the case of a sell signal);
>>the last price crosses the 26-hour moving average in the same
direction as the momentum signal;
>>the last price signals a break-out from a valid price pattern;
>> the price is reversing away from a golden ratio objective.
THE EXIT RULES
Half of the trading position should be closed when the price hits a
target calculated from golden ratio expansions or contractions, and if
one of the following criteria is also met:
>> the golden ratio target is also at a support/resistance level;
>> momentum is diverging from the movement in absolute prices;
>>momentum is at an extreme and the ADX is not rising.
All (remaining) open positions should then be closed if either a pre-determined stop loss is triggered or if the MACD line breaks the signal
line in the opposite direction to the trade.
OPENING POSITIONS
We shall now discuss the signals themselves in a little more detail.
The entry rules essentially rely on a reversal in momentum (the MACD line) to establish the basic signal. However, it is still possible that the reversal will be too short-term to provide a profitable trading opportunity hence the use of supplementary or confirming signals.The first signal relies on the concept of non-confirmation. If the primary momentum signal is beinggiven on a reversal from a price extreme, and there has been a non-confirming divergence between the price extreme and the MACDline, then the signal has a greater chance of being valid.The second supplementary signal relies on the argument that themoving average approximates the trend in the market, and that a penetration of the moving average therefore indicates a change in trend.However, the signal has a greater chance of being valid if the moving
average itself is in the process of reversingThe use of a moving
average in this way is particularly useful when the primary
momentum signal has been generated under very choppy trading
conditions.The third signal allows for the break out from congestion areas,
holding patterns, recognizable reversal patterns and trend lines. These
patterns are the basis of much traditional technical analysis. In a sense,
they are late signals because prices will already have moved some
way before the signal is given. Nevertheless, such signals may
constitute the last piece of information in the movement away from an area of very volatile price action.The fourth signal covers those cases where the price has reached avalid price objective and is reversing away from it. First, the price may have achieved a retracement objective of 38.2 per cent or 61.8per cent of the previous move, and may be moving back into the main
trend. An MACD entry signal should catch such a renewed trend.
Indeed, it is particularly powerful for the 61.8 per cent retracement,
where the market has re-tested the previous high or low. Second, the
price may have reached a golden ratio objective for an impulse move
and may be reversing into a new trend. The MACD entry signal
should allow you to catch the beginnings of this new trend, too.
CLOSING POSITIONS
It is all very well entering trades successfully, but it is obviously also
important to ensure that subsequent profits are not allowed to erode
unnecessarily and that any losses are kept to an absolute minimum. To
this end, the need to follow strict rules about closing positions cannot
be emphasized enough.there are psychological influences that
encourage traders to take profits too early and realize losses too late.
There is also the related problem of identifying with trading positions
so that self-esteem becomes dependent on the outcome of the trade.
Both of these sets of problems can be reduced, or even eliminated, by
adopting rigid exit criteria.
MONEY MANAGEMENT
Whichever approach is suitable for you, there are two cardinal money
management rules that need to be obeyed5. The first is that no trade
should allow you to lose more than 10 per cent of your capital. If you are trading equities, bonds or currencies, a stop loss should be triggered well before the 10 per cent limit is hit. Suitable adjustments should be made for leveraged futures positions. In options markets, no more than 10 per cent of your capital should beplaced on a single trade because there is a chance that the option may expire worthless. The 10 per cent rule should also be applied to recovery situations where the company has been facing severe
financial difficulties, but is now considered to be over the worst.The second money management rule is that no more than 20 percent of your capital should be placed in a single investment. This will ensure that, if you are spreading your risk across markets or stocks,you should be able to hold at least five positions.If these rules are adhered to, then it will be possible to weather stormy times and still be able to take maximum advantage of prof-
itable trading opportunities when they present themselves.
CLOSING AND REVERSING POSITIONS
If the current price is above the (hourly equivalent of the) 21-day moving average, then closing a short position automatically implies opening a long position. Thus, if the current price is below the 21-day moving average, then closing a long position implies opening a short position. Otherwise, the normal entry/exit rules apply.It is also worth emphasizing that reversals away from the goldenratio objectives can be used to anticipate this effect.
FINAL EXIT
Exit rules based on the golden ratio objectives will be very effective
for a large number of or even on most occasions. However, once
the market begins to reverse away from a target, then (whether or not
any of the supportive conditions have been met) open positions should
be closed when the MACD line cuts the signal line. No other factors
need to be taken into account.
CLOSING OLD POSITIONS AND OPENING NEW ONES
There are two possible problems with these exit rules. First, if there
has been some uncertainty over the level of the price pulse being
traded, there may be occasions when positions are, in effect, closed
prematurely. If the dealing rules are followed consistently, then this
should not actually matter too much as a re-entry signal will inevitably
be generated when the underlying trend re-asserts itself.
Second, there are occasions when the short-term trading system
does not immediately show whether or not the closing of an old
position should be accompanied by the opening of a new one in the
opposite direction. In order to circumvent this uncertainty, it is a good
idea to use a much longer moving average to define the background
trend of the market. Without doubt, one of the best averages for this
purpose is a simple arithmetical 21-day moving average. If hourly
charts are being used, then it is a simple matter to convert the 21-day
average into the corresponding hourly average. The market trend is
then defined by the current price in relation to the moving average:
1. if the price is above the average, and the average is rising, then the
trend is bullish;
2. if the price is below the average, and the average is falling, then the
trend is bearish.
The rule for opening and closing positions is then quite simple:
1. if the market trend is bullish, then closing shorts implies opening
new longs;
2. if the trend is bearish, then closing longs implies opening new
shorts.
Considerations:
1. Different analysts use different time periods for the calculation of the exponential moving averages. The original ones recommended by Gerald Appel
were 12-period and 26-period averages respectively. Plummer's researches suggest that 13-period and 34-period averages may give better
results.
2. Many analysts use nine-period averages.
3. This particular trading system has been used by the author and is one that has been refined over a long period of time.
4. These rules are for general guidance only. In modern, highly leveraged markets,great care needs to be taken with risk control. One of the best books on the subject is Elder, Dr Alexander (2002) Come Into My Trading Room, John Wiley, New York.
6. The moving average signal is unlikely to be correct if it is generated when the moving average is still moving sharply against the direction indicated by the signal.
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