Counter trend on big rallies/sell-offs?

Discussion in 'Automated Trading' started by greaterreturn, Jul 29, 2008.

  1. I have a well performing trend model based on S/R. However, a small number of the trades hurt my monthly Sharpe ratio.

    It's because these trade start a big rally/sell-off which establishes a trend position. But then they retrace 100%.

    They usually last 2 to 4 weeks and they're mostly winning or break even trades. So they seem alright, BUT...

    They create 2 problems.

    1. Since these trades usually start in one month and finish in the next, it hurts the monthly Sharpe ratio. (Ratio currently 2.03 but has room to go higher.)

    2. These trades leave 200 to 300 pips on the table!!

    Do you have any ideas to exit more efficiently?

    I will experiment with a momentum setup and low momentum trigger.

    S/R levels are useless since these rallies/sell-offs have already blown through all recent S/R levels.

    That may be why the rallies/sell-offs are so wild--noone knows where the next S/R level might be.

    NOTE: Please avoid replying unless you personally auto-trade. Thanks.

  2. This is probably not the reply you were hoping for but I've found that successful mechanical strategies often have an edge because of some aspect that make it hard to trade physiologically. If you are making entries within an intraday timeframe and exiting in weeks then it sounds like your edge is based on knowing when to wait unusually long within an intraday context. The aspect that makes it hard to trade physiological (waiting weeks to see some trades possibly go to zero) is the very reason why the strategy works so it is pointless to try to get rid of it. I have a similar annoyance in my strategy but I have learned to live with it since I finally realized that annoyance is why it works!

  3. Thanks for your answer.

    However, I found a solution that exits at the most profitable points for short trends. Short trends have big sell-offs when many people who are long panic and have to close out their long positions.

    My short trend strategy now exits after a momentum move of X pips over X number of days. So now it exits and makes hundreds of pips more profit on all the trades where those big sell offs occur. Hooray!!!

    It works great now. So never mind about my earlier question.

  4. dima777


    can you please explain what you mean by momentum move?
  5. Sure, it just means that if the market moves by at least X pips during X days then it will likely reverse.

    Think of it as a ball falling from the sky, it will go faster and faster till it hits bottom and then bounce.

    That's what you see in these wild short trends. The rate of price change increases until theres one HUGE blow off day and then it reverses.

    It takes some measurement, optimization, etc. to select the X pips over X days to measure this.

    I'm using a fixed price change at the moment which works well but I'm going to experiment with a multiple of ATR to see if that's any better.

  6. dima777