(published in the VantagePoint Strategies Newsletter)

I am often asked by readers of this Newsletter if the trading strategies I describe here can be successfully applied to markets other than the ones I discuss and demonstrate.  My answer to that question has 2 parts:  “Basically, Yes;  and specifically, No, be careful”.  In this Article I will explain what I mean, and show a quick example in a market I haven’t discussed here previously.

What I Mean

First, ‘the answer’.   What I mean by saying “Basically, Yes” is that the logic behind the methods are sound and ‘should’ hold true in any market that is tradeable.  For example, the Predicted Neural Index has been tested across many markets and demonstrated to be consistently accurate around 80% of the time, give or take a few percentage points.  So, any trading strategy utilizing this indicator should be reliable.  “Basically, Yes”. 

What I mean by the “…and specifically, No, be careful” part is really a restatement of the familiar saying “The Devil is in the details”.  For example, backtesting showed that for the USDJPY forex pair, setting a stop loss 20 pips below the analysis day’s low when entering a long trade is generally sufficient to avoid being prematurely stopped out.  And setting a profit target 100 pips from the entry was a realistic target.  However, if applying the same methodology to a more volatile pair, such as the GBPUSD for example, a larger stop loss and/or profit target may be more appropriate.  It is also possible that the volatility of a market of interest may mean a different set of moving averages should be used, or that confirmation signals should rely on price action crossing fewer or different moving averages as well.  Or other indicators may behave differently for whatever reasons and should be reacted to differently.  

The Devil really is in the details.  And the only way to ferret out ‘what is best’ – is by observing, backtesting, and ‘tweaking’ when needed.  Don’t get me wrong, ‘the big things’, like longer term moving average crossovers for example ‘still work’; but some of the more sensitive ‘needles on the dial’ (VantagePoint indicators) may need to be ignored, added, or interpreted differently in a different market.  “Specifically, No, be careful”.   Enough said.

An Example     

Regular readers of this Newsletter will recall the “PNI+3EMA” method I have described and demonstrated for trading the USDJPY forex pair.  I have discussed this trading approach several times here over the past 15 months.  In a nutshell, the trading rules for this method were:

Go Long When

(1)    the Predicted Neural Indicator (PNI) changes from 0 to 1 and

(2)    price closes above all 3 moving averages in VantagePoint’s Triple Predicted EMA set on the same day or the day following the PNI change;

Set a stop loss 20 pips below the analysis day’s low price, and a profit target 100 pips above the analysis day’s closing price.  Remain in the trade until either the stop loss is hit, the profit target is hit, or a profitable daily closing price is achieved.  These rules are ‘reversed’ appropriately for entering short trades.

As shown in the chart below, I am looking at the results of applying this method to trading the S&P 500  EMini.  For this market, I used the same ‘trigger’ (i.e., the PNI change), ‘confirmation’ (i.e., price closing on the same side of the Triple EMA set as the indicated PNI direction), and exit rules.  What needs to change, obviously, are the stop loss and profit target values.  For the level of volatility we are currently experiencing in this market, a profit target of 15 points from the analysis day’s closing price and a stop loss of 30 points below the analysis day’s closing price for long trades or 30 points above the analysis day’s closing price for short trades look reasonable.  More extensive backtesting could further refine these. 

Some would argue the ‘risk to reward ratio’ is totally wrong, since the stop is twice the size of the profit target.  However, my idea and practice on stop losses is that I set them ‘where I do not expect the market to go’ – meaning if my stop gets hit, the trade was most definitely a bad call, not just a quick jab or head fake against me.  If the win rate is high enough, the fact that it takes 2 winning trades to make up for 1 losing trade will come out just fine ‘in the wash’.

Anyway, onward to the chart.  As you can see, this chart is for the 1 month period of January 2010.   The blue arrows show the indicated trade direction (long or short) and the colored ellipses indicate the trade results – green for ‘win’, red for ‘loss’.   In this month, 5 trades were signaled, and 4 were winners.

  I reviewed the performance of this method thus far in 2010 (thru June 29), and observed a total of 20 trades, with 17 winners and 3 losses, which is a win rate of 85%.  A net total of over 75 points resulted, which would equate to a gain of over $3,700 per contract traded.  Not too shabby for an easy ‘quick strike’ end-of-day method.  Clearly, the ‘Basically, Yes’ thing is working.  :>)

Next Steps

In my next article, I will take a look at ways we can possibly improve these results, by adding some additional predictive VantagePoint indicators to the analysis.  Avoiding even 1 of those 3 losses would make a big difference to the bottom line, if we can also continue to get entered on the winners – so, we’re motivated!

Cheers All, Good Trading.