Yet another newbie system!

[compro00]

http://members.aon.at/tips/moneyMan.htm

For all...

[compro00]

http://www.traderclub.com/discus/messages/107/1501.html?SaturdayJuly2120010131pm

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A New Exit Strategy - The ATR Ratchet By Chuck LeBeau

Recently I've been doing quite a bit of research on new systems for stock trading. The research is on behalf of a new hedge fund that will be starting later this year. The fund will be managed by Tan LeBeau LLC the company that funded this research project. After some serious internal discussion about the advantages of keeping this new exit strategy a company secret the LLC has graciously given me permission to share this discovery with our System Traders Club members. Here is a bit of background on how the new exit strategy came about.

In the process of testing various exit strategies for our stock trading systems we found that we needed a profit-taking exit that performed somewhat along the lines of the Parabolic SAR but that could be made more flexible easier to code apply. We found that the Parabolic was hard to use because it was often on the opposite side of the market our trades or it was starting a point that was too low for what we wanted. After spending a great deal of time with the Parabolic we decided it was not helpful for the particular systems we were creating. As an alternative to the Parabolic exit we decided to test some new exit ideas based on my extensive work experience with the Average True Range. After a great deal of tinkering experimentation we were pleased to learn that the new exit strategy worked surprisingly well for profit taking had many very useful features applications. I decided to name this new exit strategy the "ATR Ratchet".

The basic idea is quite simple. We first pick a logical starting point then add daily units of ATR to the starting point to produce a trailing stop that moves consistently higher while also adapting to changes in volatility. The advantage of this strategy over the original Parabolic based exit is that when using the ATR Ratchet we have much more control of the starting point the acceleration. We also found that the ATR based exit has a fast appropriate reaction to changes in volatility that will enable us to lock in more profit than most conventional trailing exits.

Here is an example of the strategy: After the trade has reached a profit target of at least one ATR or more we pick a recent low point (such as the lowest low of the last ten days). Then we add some small daily unit of ATR (0.05 ATR for example) to that low point for each day in the trade. If we have been in the trade for 15 days we would multiply 0.05 ATRs by 15 days add the resulting 0.75 ATRs to the starting point. After 20 days in the trade we would now be adding 1.0 ATRs (.05 times 20) to the lowest low of the last ten days. The ATR Ratchet is very simple in its logic but you will quickly discover that there are lots of moving parts that perform a lot of interesting useful functions; much more than we expected.

We particularly like this strategy because unlike the Parabolic the ATR Ratchet can easily be implemented any time we want during the trade. We can start implementing the stop the very first day of the trade or we can wait until some specific event prompts us to implement a profit-taking exit. I would suggest waiting to use the exit until some minimum level of profitability has been reached because as you will see this stop has a way of moving up very rapidly under favorable market conditions.

The ATR Ratchet begins very quietly moves up steadily each day because we are adding one small unit of ATR for each bar in the trade. However the starting point which the stop is being calculated (the 10 day low in our example) also moves up on a regular basis as long as the market is headed in the right direction. So now we have a constantly increasing number of units of ATR being added to a constantly rising ten day low. Each time the 10-day low increases our ATR Ratchet moves higher so we typically have a small but steady increase in the daily stop followed by much larger jumps as the 10 day low moves higher. It is important to emphasize that we are constantly adding our daily acceleration to an upward moving starting point that produces a unique dual acceleration feature for this exit. We have a rising stop that is being accelerated by both time price. In addition the ATR Ratchet will often add substantial additional acceleration in response to increases in volatility during the trade.

The acceleration due to range expansions is an important feature of the ATR Ratchet. Because markets often tend to show wider ranges as the trend accelerates the ATR will tend to exp very rapidly during our best profit runs. In a fast moving market you will typically find many gaps large range bars. Because we are adding multiple units of ATR to our starting point any increase in the size of the underlying ATR causes the stop to suddenly make a very large jump that brings it closer to the high point of the trade. If we have been in the trade for forty days any increase in the ATR will have a forty-fold impact on the cumulative daily acceleration. That is exactly what we want it to do. We found that when a market was making a good profit run the ATR Ratchet moved up surprisingly fast did an excellent job of locking in open profits.

Keep in mind that this exit strategy is a new one (even to us) so our experience observations about it are still very limited. However I am going to discuss a few observations about the variables that might help you to underst apply this exit successfully.

Starting Price: One of the nice features about the ATR Ratchet is that we can start it any place we want. For example we can start it at some significant low point just as the Parabolic does. Or we can start it at a swing low a support level a channel low or at our entry point minus some ATR unit. If we wait until the trade is fly profitable we could start it at the entry point or even somewhere above our entry point. The possible starting points are unlimited; use your imagination your logic to find a starting point that makes sense for your time frame for what you want your system to accomplish. Our idea of starting the Ratchet the x day low makes it move up faster than a fixed starting point (as in the Parabolic) because the starting point rises repeatedly in a strong market. If you prefer you could just as easily start the Ratchet at something like 2 ATRs below the entry price then the starting point would remain fixed. In this case the Ratchet would move up only as the result of accumulating additional time in the trade as the result of possible expansions of the ATR itself.

When to Start: We can very easily initiate the exit strategy based on time rather than price or combine the two ideas. For example we can start the exit only after the trade has been open for at least 10 days is profitable by more than one ATR. My general impression at this point is that it is best to implement the ATR Ratchet only after a fly large profit objective has been reached. The ATR Ratchet looks like a very good profit taking exit but I suspect it will kick you out of a trade much too soon if you start it before the trade is profitable.

As I mentioned one of the things I like best about the ATR Ratchet is its flexibility adaptability. Here is another idea on how to start it. We can start it after fifteen bars but we don't necessarily have to add fifteen ratchets. The logic for the coding would be to start the Ratchet after 15 bars in the trade but multiply the ATR units by the number of bars in the trade minus ten or divide the number of days in the trade by some constant before multiplying the ATR units. This procedure will reduce the number of ratchets particularly at the beginning of the trade when the exit is first implemented. Play around with the ATR Ratchet see what creative ideas you can come up with.

Daily Ratchet Amount: After testing it the daily Ratchet amount we chose when we were first doing our research turned out to be much too large for our intended application. The large Ratchet amount (percentage of ATR) moved the stop up too fast for the time frame we wanted to trade. After some trial error we found that a Ratchet amount in the neighborhood of 0.05 or 0.10 (5% or 10% of one 20-day average true range) multiplied by the number of bars the trade has been open will move the stop up much faster than you might expect.

As a variation on this strategy the very small initial Ratchet can always be increased later in the trade once the profits are very high. We could start with a small Ratchet then after a large amount of profit we could use a larger daily Ratchet increment. There are all sorts of interesting possibilities.

ATR Length: As we have learned in our previous uses of ATR the length that we use to average the ranges can be very important. If we want the ATR to be highly responsive to short term variations in the size of the range we should use a short length for the average (4 or 5 bars). If we want a smoother ATR with less reaction to one or two days of unusual volatility we should use a longer average (20 to 50 bars). For most of my work with the ATR I use 20 days for the average unless I have a good reason to make it more or less sensitive.

Summary: We have just scratched the surface on our understing of the possibilities variations of the ATR Ratchet as a profit taking tool. We particularly like the flexibility it offers we suspect that each trader will wind up using a slightly different variation. As you can see there are many important variables to tinker with. Be sure to code the Ratchet so it gets plotted on a chart when your are first learning experimenting with it. The ATR Ratchet is full of pleasant surprises the plot on the chart will quickly teach you a great deal about its unusual characteristics.

Be sure to let us know if you come up with any exciting ideas on how to apply it.

Good luck good trading.

[sr2]

Thank you for the posts compro00. Interesting reads.

SR2

[compro00]

any update..?

[sr2]

Originally Posted by compro00

any update..?

Hi compro00

I am still forward testing. Here are the results so far for this month:

Closed Trades
2005.02.02 13:33 buy 1.00 eurchf 1.5530 1.5575 1.5630 2005.02.07 18:04 1.5621 0.00 7.31 743.95
2005.02.07 21:42 sell 1.00 eurjpy 133.79 134.79 132.79 2005.02.08 11:04 134.79 0.00 -4.53 -946.52
2005.02.09 22:40 buy 1.00 gbpjpy 196.26 195.24 197.24 2005.02.10 12:56 197.24 0.00 4.97 924.09
2005.02.11 07:01 buy 1.00 gbpusd 1.8678 1.8578 1.8778 2005.02.14 02:33 1.8778 0.00 1.75 1000.00

Open Trades:
2005.02.11 07:00 buy 1.00 audusd 0.7815 0.7715 0.7915 0.7852 0.00 1.75 370.00

So I have a virtual profit of 1719.65 an open trade which currently sts at +37. Again I bailed out early on the first trade. 9 pips short of target. I just got a feeling it was about to go down that is exactly what happened. So strictly speaking I cannot count the first trade as profit (but it would still be open.) So the actual profit so far I suppose it just under 1000. The other 3 closed at TP or SL.

I will post full results at the end of the month.

[compro00]

any changes to the basic rules till now ??

[sr2]

Originally Posted by compro00

any changes to the basic rules till now ??

Not at this stage no. I will however try a few things when this month is through specifically:

1) EMA instead of WMA as suggested by tim_nn
2) ATR for closing trades as suggested by you

If this month closes positive I will start live trading with this system.

SR2

[tim_nn]

Originally Posted by sr2

1) EMA instead of WMA as suggested by tim_nn

I suspect this isn't significant at all maybe not worth bothering with. I was more "curious" than anything else.

Originally Posted by sr2

2) ATR for closing trades as suggested by you

I strongly support this suggestion.