Perhaps this is the most important post of all: as you can see in my blog over the past 4 years I have “translated” in ProRealTime code all the newest proposed indicators of Stocks & Commodities, magazine “leader” in technical analysis.
Why only the “Indicators” (with the concerning section of S & C)?
1 Because are the quickest and rational (ie quantifiable) device to analyze a market
2 Because the so-called “figures” are always subject to the discretion and human interpretation (unless massive simplifications that can be misleading)
3 Because, therefore, money management can be managed in a rational manner since it’s written in formula.
I have developed a trading system, periodically updated, in order to “capture” the beginning of a trend and to “stay” in position until the end, maximizing profits and minimizing errors in input and output, as well as any false signals.
The result was certainly a good system … but suitable for “secondary” daily trends (non-primary), as well as non-adaptable (at least easily) to automated trading.
Instead, the use of classic indicators, in particular for the Italian market (but also for the German and American one), led to the construction of a simple trading system, especially shared by operators since it refers to the indicators known to the public (MACD and SAR).
My job was simply to adapt the parameters of these indicators to the target market.
The logic is the following (very simple):
– Open position (long or short) when prices (usually, closing) crosses the SAR (under the constraint that prices are above / below the 20-period moving average)
– Close (and reverse) position if prices cross the SAR or the moving average or if the lines of the MACD cross
Usually the authors of technical analysis follow a contrary rule, using the indicators MACD for open positions and SAR as stop loss, but so it distorts the logic with which it was born the Parabolic SAR.
A more “dynamic”system – in the course of testing (with good anticipations) – consists in opening positions on the basis of the histogram of the MACD (and not on the basis of its lines as before) when they reach the points of maximum and local minimum.
In detail, long positions should be opened as soon as the MACD histogram retraces from the minimum (ie, begins to grow), even if the prices are below the SAR or the MMA20.
Vice-versa for short positions.
The closure and the reversal of portfolio follow the same rule, in reverse.
This technique is based on the local maxima / minima of the MACD can generate false signals on the 1st retracing (so … be careful!) but it is infallible on 2nd tracing, that is, you are “armored” when you see the so-called figure of the (double) camel hump.
The standard parameters are as follows:
– SAR: 0.01, 0.01, 0.1 with a best version (best) with acceleration factor 0.02 or 0.03 (for inputs and outputs a bit ‘more’ tempestive2)
– MACD: 9,15,10 but also in the classic version (12,26,9) or 11,3,5 (for fast trading) or 11,15,9
[see DAX and FTSEMIB charts]
In conclusion, it is sufficient to set the parameters of SAR and MACD and the game is done (for all markets and all time frames): we have much lighter trading system, – I repeat – “shared” and no substantial differences in profit.
Why this result? Because the environment (domain) in which we operate, ie the data provided by the market and then to the brokers and finally to individuals, it is – as you know – very “poor”: O, H, L, C and volume, but nothing more.
Even the linear treatment through the various indicators of these numbers can not offer, therefore, so “different” results or offer “quantum leaps” in the analysis.
OPERATIONAL NOTES
In the next posts I will indicate some formulations of trading system:
– A suggestion (and sometimes necessity) is to create by yourself formulas for a single line of MACD or its histogram (in order to recall them in the trading system without errors).
– The points of local maximum and minimum can be found with the inverse cotangent (see previous post), function unfortunately not supported in ProRealTime.
The adaptation of the system of “camel humps”, as described above, also using functions that calculate the differences of the MACD histogram, can not find a faithful representation in automated trading system, but it must be implemented only through manual trading .