At the end of my first post about systematic trading, I have posted the result of one of my trading system. I will re-post and explain about how to examine the result later. Finally, I will start writing about the strategy, high level development process and other details of the trading system which my audiences long awaiting for. Although I will touch some of the technical terms and development processes but this post (and generally this blog) is intended for any experienced traders without any programming experience who are interested to know more about system trading. So don't worry if you are not interested in developing your own system or you are not programmer, I will try to be concise and less emphasize on technical in this post. I believe it should make sense for any experience traders. However, if you are really interested in developing your own system, I don't think the information I provide here is enough for you to start. Please feel free to leave a comment or contact me so that I could provide more details and help you to start.
I call this strategy volume spike strategy. We know that share market is supply and demand market, more demand than supply will drive up the price.
Volume is a good indicator about demand of a share. In this strategy I will focus on volume increased which indicates that demand is pouring in to a share and also the share is getting notice by investors. Usually, a sudden volume increased also indicates that institutional investors are buying.
Ok, let me go straight to the point and show you the setup of this strategy. The setup and rules below have been implemented as custom formula in Amibroker except placing the buy/sell orders.
The Setup
- Select shares which are in uptrend
- short term moving average of close price (close) is greater than long term moving average of close price
- Example: 10 days moving average of close is greater than 200 days moving average of close
- Identify volume spike
- volume is greater than n times of moving average of volume - n is a parameter
- spike volume is greater than m - m is a parameter
- price is up when volume spike
- After pullback(consolidation), generate buy signal
- the following are the conditions of pullback
- close is lower than previous close
- close shouldn't be lower than short term moving average of close
Entry Rules
- After receiving buy signal, on next day, check the stock price at around 10 minutes before market close, buy at market price if price is up from previous close, but only up for less than 10% (turn green)
Exit Rules
- Generate sell signal based on the following conditions
- 10% trailing stop from highest close since buying OR
- 10% initial stop loss from high of the buy day OR
- Close price drops below short term moving average
- Sell on next day open after receiving sell signal
In next post, I will explain about one of the most interesting and challenging process in trading system development - how to back test the strategy.
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