The following article by MerryDay posted here on this site, Why Using Different Types of Indicators Is Important To Successful Trading In ThinkOrSwim, provides valuable insight into an important aspect of designing a trading strategy that will get the desired results. At one point, the article states that a good strategy must use two or more of the following different types of indicators:
Using the insight gained from this article I put together a trend-following system for scalping and am providing it here for instructional purposes and to emphasize that if your trading system is not performing the way that you want it to, consider the possibility that it may be mixing col-linear indicators or may not be using the right blend of indicators from the 6 categories listed above. In my case here, my strategy was performing poorly until I revisited the list of indicators above and realized that I had not included anything for Market Strength/Conviction. From there it was straightforward to figure out how to apply one of the many volume indicators out there to accomplish the desired performance. The strategy uses the following indicators:
Trading Rules.
The Super-Trend and Universal Oscillator (UOSC) are used to spot potential trades and the VIP VPA volume indicator is used to pin-point entries and exits with exits being occasionally made when an Relative Volume (RVOL) spike occurs in the opposite direction of the position.
When the Super-Trend (ST) line is red, short trades are preferred. When ST is green, long trades are preferred.
The default entry and exit of the Universal Oscillator (UOSC) is when it crosses its zero line. In other words, by default when used on its own, when the UOSC crosses above zero a long position could be taken and it would not be exited until a take profit goal was met or until it crossed back below the zero line. Short positions would start when it crosses below zero and end then crosses back above zero. To provide more flexibility, a Hull Moving Average (HMA) of the the UOSC having length 34 (the yellow curve) is superimposed on the indicator to provide additional support and resistance for entering/exiting long or short positions when waiting for a zero crossing is not desired. As a result, trades are allowed when the UOSC crosses the HMA too.
However, much better performance is obtained when using this indicator in conjunction with the other indicators, especially the VIP VPA volume indicator and Relative Volume Spikes (arrows drawn on the UOSC curve). If the volume indicator does not show volume aligned with a position then the trade is not taken until there is volume backing it.
For example the UOSC crosses above the HMA around 7:15 at a time when the Super-Trend (ST) is green, allowing long positions to be taken. However the VIP VPA volume indicator's volume bar is red. As a result, no long position is taken. Later at 7:20 the ST is still green and now the volume bar is green and well above the average volume level (cyan line). As a result a long position can be taken. Also note that at 7:20 a bullish RVOL spike occurred (there is a small upward green arrow on the UOSC curve) , indicating a higher probability trade setup. At 7:25 a bearish RVOL spike occurs and simultaneously the volume bar turns red. As a result, the long position is exited, maximizing profit for that position.
This general process of spotting potential trades using the universal oscillator and Super-Trend, then monitoring the volume and volume spike alignment to pin-point entries and exits is repeated throughout the session. Note that the Supply/Demand zones (support resistance lines) shows and red and green zones on the price chart are also monitored for improved situational awareness. For example, if a potential long position is spotted but it is near a red zone (a higher high or lower high) such that the impression is there may not be sufficient room for the price action to move up and make the position worth the risk, the trade is not taken. However, if there is plenty of room then the trade may potentially be a higher probability position to take.
The ThinkOrSwim strategy tester was used to test this strategy using the 5-min chart. The test included trades during the opening hour and the last hour of the day (the power hour, if you will). Trades were not taken in the 1st 5 minutes of the opening session to avoid potentially unmanageable volatility. Furthermore all trading was stopped 3 minutes before the end of the trading day and all open positions closed out. As a result, almost two hours of trading was undertaken per day. The strategy tester back tested across 30 days. The results revealed the strategy has potential for being fairly lucrative. A screenshot of the pertinent portions of the strategy report are provided below :
Table 1: Results of Applying the Strategy to a 5-min chart Across 30 Days:
A small account that can afford 50 shares of the stock would have the potential for making (50 shares)($132.70)(12 months) ~= $80k per year. And that is really significant since before I realized I needed to integrate a market strength indicator into the strategy, it was not making a noticeable or consistent profit.
Given that the chart is a 5-min chart, a careful review of the arrows that identify the start and end of each trade on the price chart reveals that the strategy is not likely going to be overly taxing on the scalper since a good number of trades last 15 to 20 minutes. However, there are a good number of trades that the scalper would need to pay attention to since they only last 5 minutes (ie 1-bar). However, there is always the option of applying the strategy to a 10-min chart if slowing things down is desired to make the process easier to manage. However, the potential profits would likely be less.
A trend-following strategy has been compiled and provided for instructional purposes with test results that demonstrate the strategy has potential for providing a decent income.
Hope this helps.
Sesqui
- Trend indicators
- Volatility indicators
- Momentum indicators
- Cycle indicators
- Market strength indicators
- Support and resistance indicators
Using the insight gained from this article I put together a trend-following system for scalping and am providing it here for instructional purposes and to emphasize that if your trading system is not performing the way that you want it to, consider the possibility that it may be mixing col-linear indicators or may not be using the right blend of indicators from the 6 categories listed above. In my case here, my strategy was performing poorly until I revisited the list of indicators above and realized that I had not included anything for Market Strength/Conviction. From there it was straightforward to figure out how to apply one of the many volume indicators out there to accomplish the desired performance. The strategy uses the following indicators:
- Lead indicator: Universal Oscillator (a trend-following indicator). The strategy uses a modified variant that makes it adapt to market volatility. The script for it can be found here Adaptive Universal Oscillator for ThinkOrSwim
- Market Strength: VIP Coulling Volume Price Analysis (VPA) indicator, available to VIP members
- Market Strength: A variant of Relative Volume (RVOL) Spikes provided by this sight here: Relative Volume Spike Buy Sell Chart Setup For ThinkOrSwim
- Trend confirmation: Super-Trend indicator found here: SuperTrend TradingView Look-A-Like For ThinkOrSwim
- Support/Resistance: Supply/Demand Zones found here: Note#3 - Support and Resistance Levels with Breaks [LuxAlgo]
Trading Rules.
The Super-Trend and Universal Oscillator (UOSC) are used to spot potential trades and the VIP VPA volume indicator is used to pin-point entries and exits with exits being occasionally made when an Relative Volume (RVOL) spike occurs in the opposite direction of the position.
When the Super-Trend (ST) line is red, short trades are preferred. When ST is green, long trades are preferred.
The default entry and exit of the Universal Oscillator (UOSC) is when it crosses its zero line. In other words, by default when used on its own, when the UOSC crosses above zero a long position could be taken and it would not be exited until a take profit goal was met or until it crossed back below the zero line. Short positions would start when it crosses below zero and end then crosses back above zero. To provide more flexibility, a Hull Moving Average (HMA) of the the UOSC having length 34 (the yellow curve) is superimposed on the indicator to provide additional support and resistance for entering/exiting long or short positions when waiting for a zero crossing is not desired. As a result, trades are allowed when the UOSC crosses the HMA too.
However, much better performance is obtained when using this indicator in conjunction with the other indicators, especially the VIP VPA volume indicator and Relative Volume Spikes (arrows drawn on the UOSC curve). If the volume indicator does not show volume aligned with a position then the trade is not taken until there is volume backing it.
For example the UOSC crosses above the HMA around 7:15 at a time when the Super-Trend (ST) is green, allowing long positions to be taken. However the VIP VPA volume indicator's volume bar is red. As a result, no long position is taken. Later at 7:20 the ST is still green and now the volume bar is green and well above the average volume level (cyan line). As a result a long position can be taken. Also note that at 7:20 a bullish RVOL spike occurred (there is a small upward green arrow on the UOSC curve) , indicating a higher probability trade setup. At 7:25 a bearish RVOL spike occurs and simultaneously the volume bar turns red. As a result, the long position is exited, maximizing profit for that position.
This general process of spotting potential trades using the universal oscillator and Super-Trend, then monitoring the volume and volume spike alignment to pin-point entries and exits is repeated throughout the session. Note that the Supply/Demand zones (support resistance lines) shows and red and green zones on the price chart are also monitored for improved situational awareness. For example, if a potential long position is spotted but it is near a red zone (a higher high or lower high) such that the impression is there may not be sufficient room for the price action to move up and make the position worth the risk, the trade is not taken. However, if there is plenty of room then the trade may potentially be a higher probability position to take.
The ThinkOrSwim strategy tester was used to test this strategy using the 5-min chart. The test included trades during the opening hour and the last hour of the day (the power hour, if you will). Trades were not taken in the 1st 5 minutes of the opening session to avoid potentially unmanageable volatility. Furthermore all trading was stopped 3 minutes before the end of the trading day and all open positions closed out. As a result, almost two hours of trading was undertaken per day. The strategy tester back tested across 30 days. The results revealed the strategy has potential for being fairly lucrative. A screenshot of the pertinent portions of the strategy report are provided below :
Table 1: Results of Applying the Strategy to a 5-min chart Across 30 Days:
A small account that can afford 50 shares of the stock would have the potential for making (50 shares)($132.70)(12 months) ~= $80k per year. And that is really significant since before I realized I needed to integrate a market strength indicator into the strategy, it was not making a noticeable or consistent profit.
Given that the chart is a 5-min chart, a careful review of the arrows that identify the start and end of each trade on the price chart reveals that the strategy is not likely going to be overly taxing on the scalper since a good number of trades last 15 to 20 minutes. However, there are a good number of trades that the scalper would need to pay attention to since they only last 5 minutes (ie 1-bar). However, there is always the option of applying the strategy to a 10-min chart if slowing things down is desired to make the process easier to manage. However, the potential profits would likely be less.
A trend-following strategy has been compiled and provided for instructional purposes with test results that demonstrate the strategy has potential for providing a decent income.
Hope this helps.
Sesqui
