Dan: I wonder if you can extend your chart back several days..
OK, here we go:
ttrader.com
What we have here is a plot of the P&L of a Long 4 NQ short 2 ES Relative Strength Trade from 7/18 to today's close (5 minute bars.) I picked this contract ratio just so the whole trade stays in the plus column (easier to read the chart.) I also plotted a 20ema on here, and drew some trendlines. Then, there a few boxes that are what I would call "No Trade Zones", where the ema is flat and the RS is not trending.
So what is interesting is how the Relative Strength does trend for relatively long periods (for a daytrader). Yes, it fluctuates between indexes as far as which is stronger, but it is not constantly in flux - it has strong trends, which means it is usually tradeable. A couple concepts for trading it would be to take the NQ long while this chart is trending up, and stop and reverse when it breaks a trendline and/or crosses over the ema. Stay out of the market when not trending, as denoted by flatlining ema. I like the trendline breaks concept better than the ema cross, because of all the whipsaws over the ema. I tried a 50sma, but that reacts too slowly, so I thought the trendline breaks worked the best.
Also notice that the mid-day doldrums produce reversals or "No Trade Zones" just about every day, which suggests that it is probably wise just to exit the markets between, say 11:30 and 1:30 and then re-enter based on the trend emerging after this period. This will avoid whipsaws and profit deterioration due to changing trend, and, since it is impossible to set stops for this kind of trade, also give you a break and a chance to grab lunch.
I don't have an easy way to chart this in real time (I loaded all the data into Excel to produce this study), so it may not be practical, but then again, when you are in the trade and tracking your P&L you can easily see the trend changing as your P&L starts to deteriorate. The chart helps you figure out when to get out or SAR.
The plot of the P&L for a particular contract ratio may not be the best way to chart the Relative Strength trends, but it is very direct - telling you exactly what the trade would be doing at any time.
Obviously today was the worst day in the series to trade this method, as the RS whipsawed most of the day until starting to trend again the last two hours. But if I had had this chart and this method, I might have gotten out of the second trade (Long ES) earlier and with a profit. I also could have had three swings yesterday, Long ES from the open till about 12:30, then Long NQ from 12:30 - 3:00, then back to ES long into the close. Whereas the ES long trade for the day made about $2500 yesterday, the swing trading could have made probably twice that much.
This approach certainly isn't "couch potato" trading, but it is a lot more relaxed than scalping, and the risk/reward is not bad. You don't really have to worry too much about big spikes blowing you out of the water in a couple minutes because you are always hedged. But there is decent money here, by the looks of it.
Later this weekend I will see if I can get a longer view using 15 minute bars, which should give me about a month's worth of data, to see if the "tradeability" holds.
So, give it some thought and tell me what you think! |
