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More On Trend Trading

by The MoleNovember 10, 2009

Berk here with some more info on my Trend Trading system.  Y’all saw the preview, and the full system operates of the same premise, only a little amped up.

The system:

  • 4 200EMA Bollingers (0.50, 0.75, 1.00, 1.25) for entires and pyramiding
  • 2 200EMA Bollingers (2.00, 2.40) for exits
  • 30EMA and 200EMA for a filter

You go long on the system when the 30EMA is above the 200EMA, and price begins to push outside the BB.  Sometimes the filter will signal a trade after the first or second entry is missed.  I use discretion here, and either trade with the system adding single units, or will add double units to make up for missed entries.

You go short with the same approach when the 30EMA is below the 200EMA.

You exit trades for a loss or break-even when prices recrosses the entry Bollinger (i.e. 1st entry on 0.50 cross, exit when price is back inside 0.50).  There are three variations on an exit for the system.  1) Exit once price pushes outside the 2.0BB, and closes back inside (same with 2.4).  You will have to repeat this step a couple of times as there will be 4 untis on, and only 2 exit Bollingers.  2)  Exit 2 units on the push outside and back inside of either the 2.0BB or 2.4BB.  3)  Ignore the extreme move BBs (2.0 and 2.4) and wait until price closes back inside of the 1.25BB to begin shedding positions (in the examples with the QQQQ, this approach would have averaged out about 2 points lower on the major trend trade, but would have taken 4 more months).

A couple of charts:

QQQQ from the top

QQQQ from the top

QQQQ on the trend

QQQQ on the trend

QQQQ on this bull-shit rally

QQQQ on this bull-shit rally

As you can see, the extreme exit bands (2.0 and 2.4) come into play on wave 3s, but likely not too much other times.  You can also see that there are a large number of sideways trades (if these were stock, many would be winners, however, with options the majority will likely be B/E or small losses).  The large number of sideways trades is somewhat common in a trend-trading system as the trend is in the process of changing.

I apologize for not being able to find my actual back-testing results, or having the time to even get exact entries on the charts above.  When trading a system like this (with options, like I do) you will carefully have to consider your strike price and, more importantly, your expiration.  You will likely need to buy options with at least 6 months, and possibly more time.  I usually buy my first unit about 6 months out, 2nd and 3rd units about 9 months out, and the final unit 4-6 months out.  This helps me maximize my gains by having a variety of expirations.

A few more examples…

BIDU:

BIDU during the decline

BIDU during the decline

BIDU on the drop.

BIDU on the rally.

BIDU total…  One major trade on the decline averaging about 125 points per unit (+500).  Several modest trades on the rally, toaling around 150 points so far (not counting the first unit that will be stopped out for at least 120 point gain).  That would net us about 770 points worth of move in BIDU.  In total, BIDU has moved about 550 points in that time frame (in total of both directions).  As you can see, the few winners DEFINITELY take care of the numerous sideways losers.

Jing is killing me today, and I am running out of time, so I will post this up and let you guys shower me with questions and thoughts, and will get some more examples up when my comp starts behaving.

Berk out!


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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