Fading Indicators (Attenuation, etc.)

Discussion in 'Strategy Development' started by FaderTrader, Dec 29, 2005.

  1. Hi,

    As you can tell my forum name, my key trading strategy is fading. I've found this to be quite fruitful in that it has freed me from the chains of not-knowing-everything-about-the-world that characterized my first 3-4 years of trading.

    I tend to trade stocks that display a strong fading opportunity/pattern. An example would be AHC vs. VLO. AHC will trade at extremes almost everyday, giving a fade trader a couple great entry points - a buy around 10am and a sell between 11 and 2. Whereas VLO rarely does this and seems to me to exhibit an entirely random price pattern.

    I also trade FX more than 70% of the time because I feel it offers great opportunities to fade high volatility moves.

    I'm not a technician nor do I particularly appreciate technical analysis, but I'm looking for feedback on the following:

    Does anyone have a reccomendation as to which indicator (preferable 1 [max 2]) are helpful for knowing when to exit a position that one has faded into? Lately, I've been leaving a lot on the table. While I don't like to let p/l move against me, I also don't feel as though I'm taking full advantage of the great entry points that I am pretty adept at targeting.

    Thanks in advance.
  2. Hamlet


    If you are sucessfully using your feel for entries I'm not sure why you would want to turn to an indicator for exits. It would seem to me that the best thing would be to continue developing your feel for exits and accept that you cannot catch all of any move. No indicator will come close to or be as self-adjusting to the myriad of circumstances present in retracements as your own feel based on experience.
  3. dac8555


    it seems to me an overbought, oversold indicator would work best if that is what you like.

    Bollinger, stochastics, RSI.

    you should backtest the particular security, and play with the sensitivities and testing before jumping in.

    I personally have a list of everything i trade, and the settings of which tend to work the best.

    Let me play with bloomberg a bit and find something good for you.
  4. I like to fade the overbought/oversold indicators. My favorite (most profitable) play is to fade the Larry Williams Percent R indicator. When it says "overbought", I buy. When it says "oversold", I sell.

    Try a bunch of combinations in your computer and see which ones you like the best. I like em this way:

    If(todays value of indicator is "very overbought") AND (yesterdays value of indicator was "even more overbought than today") then go long tomorrow at market on the open

    If(todays value of indicator is "very oversold") AND (yesterdays value of indacator was "even more oversold than today") then exit long tomorrow (i.e. sell) at market on the open
  5. I use the following 3 indictors as one to confirm a halt to a move:

    Ultimate Oscillator

    When all 3 are in agreement.... i have never, ever, seen a move not come to a halt and reverse.... even on the most powerful trends... you will see a small back off untill they are no longer oversold/overbought.
  6. horribilicus,

    By fading I mean taking the OPPOSITE side of a move underway, which I feel is attenuating in order to get a safe entry poin (ie, a reversal).

    Thanks for the feedback, though!
  7. dac8555


    played with bloomberg..niether one of them seemed very tradeable to me..but i swing trade.

    you make money with those???
  8. dac8555,

    Fading into an instrument (FX, equities) works best for me because of the following:

    Equities. I use Hammertrade. I look for expensive stocks that display clear peaks and troughs, day in and day out (AHC is a great example - generally sells off at the open and peaks before noon. I'm generally short it all afternoon; or vice versa if the trend is strong) and I use the Open Book to get in where I see safety. Obviously, this depends on the stock and who is trading it (example: fading did not work well for me trading PD because of all the fake bids and offers coming into the book).

    FX. There is no order flow, so looking for safety isn't possible. Even if using Currenex or Hotspot, which I do use, the order flow is little more than anecdotal in an OTC market such as FX. So, I like to see sharp rallies or sell-offs and I'll get in with a wide stop and allow for a reversal. The problem with such a high-probability trade is that it only presents itself maybe 1 or 2 times per week, but I'm content with that if I can get into big size when the opportunity is there.

    But, back to my original question. I like to scale out of a long into the heart of a rally, leaving SOME on the table so that I can get a perspective for when that rally is attenuating - at which point I'll then get short it. I have diffuculty simply reversing - my judgement is skewed. But lately, I've been getting out way too early and leaving a lot on the table and I'm just trying to figure out some metric which might act as a sign post that the trade is losing direction.

    RSI - I quit using this a long time ago because of the false signals it generates in the short-term (intra-day time frames). I would find myself getting involved in still markets because the RSI was showing a buy or sell, but it was little more than the mathematics of the thing flattening out because of a lack of movement.