Weekend Musings

I’ve been slinging code all weekend as I’m in the process of turning Ivan’s price pattern rules into an automated trading system. Scott the Convict has been instrumental in dissecting those rules for me and together we are making slow but steady process. His experience trading it hands-on for years has been invaluable as he’s able to spot problems within seconds. The final system will be running on the FX and futures side – most likely on 360-minute charts at the get-go. A little later we plan to produce a volatility adjusted version for 60-minute charts.

What convinced me to embark on this project in the first place is that Ivan’s basic ruleset has truly withstood the test of time. Ivan goes way back and he originally developed them back in the 1980s whilst trading the futures. We are talking clearly defined price patterns during a time when computer based trading was still in its infancy. Even today he continues to trade an evolving set of about a dozen entry rules manually. He combines it with a very clever risk exposure rule he calls Project R which reminds me a bit of how I calculate my exposure when trading options. Quite frankly I love it and I’m starting to use it in my own discretionary trading.

The system turns out to be a lot more complex as I would have anticipated  – and after 25 years of hands-on experience I’m not a light weight when it comes to implementing complex rules. The devil always hides in the details and once Scott threw in those Protect R rules things got pretty hairy fast. But what I don’t offer in raw coding talent I make up with stubbornness. The project coming along and I think we’ll be able to run an alpha version live by the end of this month. The chart above shows you a Retest Variation Sell setup on the AUD/CAD. It’s actually taking a second entry once it exits and that’s something I need to fix this afternoon. No double dips! Yes, it would have worked out but the rules are the rules 😉

Scott has been trading this very system for about ten years now and very successfully so if I may add. He continues to refine and forward test all the rules and something we’re learning is that the current edge of 100R per year may be improved if we filter for volatility. In case you wonder – volatile markets seem to benefit this system the most. What kills it is low volatility sideways tape. If you have followed Scott’s posts then you have seen some of the rules in action – the inside period, the retest, the retest variation, the fakeout, etc.

If there is sufficient interest I may consider turning the system into a subscription product via my email/SMS alerts. Since it’ll run on a 360-min chart not much attention will be needed, one basically spends about 15 minutes a day if that much. Of course with FX or the futures it’ll run all day and night and thus you’ll have the luxury to trade it all waking hours (but make sure you always set that stop before you go to bed). The edge of this system has been well established and I don’t expect it to change anytime soon. Of course trading a black box is not for everyone – it takes discipline and commitment. But in the end what really matters is whether or not you bank coin.

I have a handful of charts worth sharing this weekend. Here’s an updated version of my long term SPX trend chart. The way I’m measuring the ongoing trend is that I permit only one single down month in order to continue the count. If we get two consecutive months lower that effectively starts the trend in the opposite direction. As you can see between 2009 and early 2010 we went up to a count of 14 until we finally saw a meaningful correction. It didn’t last long and after two down candles we added 10 more to the upside.

The first meaningful sell off was in early 2011 and got us to a count of 5. QE2 launched a buying frenzy that was only interrupted by two months to the downside. The current count has now reached a whole dozen which was only interrupted by one single month closing lower. That along should tell you something about the strength of the ongoing trend. In the past year, had you bought the SPX on the 1st of each month, you would have been in the plus by the end of that month 11 out of 12 times.

When we’ll embark on our next correction is anyone’s guess. Here’s my SPXA200R chart – it shows us the percentage of SPX symbols above their 200-day SMA. We’ve been pretty much embedded near the 90% since early this year and if you look back then you see that these types of conditions can maintain themselves for a long time. We are most likely nearing the end phase of the current run higher but timing the top is extremely difficult. Once we start seeing divergences across the momo/participation front I’ll let you know but as of right now all the red lights on my console remain dark.

It's not too late - learn how to consistently trade without worrying about the news, the clickbait, the daily drama and misinformation. If you are interested in becoming a subscriber then don't waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Please login or subscribe here to see the remainder of this post.

Alright see you guys tomorrow morning, bright eyed and bushy tailed 😉

Cheers,