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Developing a System #4 (Trends and breakouts)

Hi guys! I read quite interesting book lately about stock market trend analysis, and I came up with a strategy that I back tested on many pairs but needs a lot work to minimize risk. So, you are all welcome to try it and send your comments on how to improve it.

This strategy is based on the previous day/week trend. On daily chart, If we had low week (downtrend), we look for the lowest low candle. We use its highest and lowest point as breakout for the next day trading. Every time the price crosses its highest point it's uptrend and vice versa.

For all of you out there, please backtest this trading system, I really find it promising strategy, but I have problem setting up target and stop loss, and big problem with whipsaw. Write me at (amra4isis[at]hotmail.com) if you need more details.

Thanks



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Edward,

Just an idea to get the discussion rolling.

Have a read of Jim Bergs book 'The Share Traders Handbook' or search the net using his name for his stock trading method. In his method, Jim uses a volatility trigger (following a setup) which is 2 ATR(10) from the lowest point of the last 20 days (for FOREX this could be time intervals). The 20 day (or whatever period decided) low is similar to the lowest point in the approach you outlined). In Jim's method a buy setup occurs when the RSI(7) dips deeply into over sold territory (30 or less), and the medium term trend is up. The trigger is when price touches or passes through the price derived by applying the ATR calculation described above. The stop could be a pip below the low being used as the basis of the entry (probably to far for FOREX market) or some amount derived from money management calculations.

I would think the time frame being traded will play a big part in determining risk (to reward). So I would suggest a need to determine what time frame we are looking at - or decide if we are going to use a trailing stop and let the market give us what it will - perhaps a volatility based trailing stop calculated at say 2 (or 3) ATR(10) below current price (maybe less for FOREX trading - but linked to volatility). Jims method also has a take profit point which is (from memory 2.5 ATR(10)) above price, to take advantage of sudden volatility spikes.

I know the above is a share trading approach, but I do see some cross over from where you are comming from with the approach you are outlining.

Cheers and thanks for the great work you do. I enjoy this site a great deal.

Neal.