P1: PIC/PIC c02
August 18, 2008
Printer: Yet to come
HIGH PROBABILITY TRADING STRATEGIES FOR ANY MARKET AND ANY TIME FRAME
the historical data. Are these settings going to continue to be useful in the future?” The answer to that is “Usually.” I wish I could say “Always.” Some trading educators claim there is one best set of settings for an indicator that you use all of the time. These guys have probably never actually traded, because I can guarantee there will be periods when market volatility and momentum cycles change and the indicator settings you have been using will be much less useful. So here’s how it works. Look at a series of data for any market and any time frame. Test out a few lookback periods for your favorite indicator over two or three different periods of time for the data and choose the most useful settings. Assume that these settings will continue to be useful. That’s the best you can do, and don’t let anyone tell you otherwise. You’re not Nostradamus. You can’t see into the future. You can never know if the volatility and momentum cycles will change in the future. You have to assume they will continue. If a market changes trend speed and volatility in the future and the best settings you have found in the past are no longer optimal after a few momentum cycles, you may need to shorten or increase the lookback period. Figure 2.22 shows the data for several months following the examples I used previously. The same settings that were found to be useful for the earlier few months continued to be useful for months after. Near the end of the data shown in Figure 2.22, it looks like the bull trend became stronger and the corrections smaller in time and price so the indicator did not reach the oversold zone on the corrections. That doesn’t mean the indicator was not valuable, because if the larger time frame trend is bullish, any smaller time frame momentum bullish reversal below the OB zone is a setup for a long trade. If the indicator made a couple more oscillations without reaching the OS zone on the corrections, we would probably change to a shorter lookback period. It is a quick and easy process to find the best indicator settings for any indicator and any market or time frame, as I have described. You are not looking for perfection. It doesn’t exist. You are looking for the best fit, and that is as good as it is ever going to get. If you are ever taught by a book or course that there is one indicator and one setting that will consistently make reversals at price highs and lows, drop the book or walk away from the classroom. You are not being taught the truth by an experienced and successful trader. Trading is like any other business. You have to use the information available, study, gain experience, and make decisions. I wish we had room in the book to put a hundred more examples of Dual Time Frame Momentum Strategy setups, indicators, and their settings. But this is just one chapter and just one part of the trading plan. It is much more important to understand the principles, concepts, and applications than to see lots of repetitive examples. If you understand the concepts and applications, you will be able to use this information with any indicator, any market, and any time frame.