This trading strategy was designed by Dr. Glen Brown and is considered as one of our Global Long-Term Trend Following Trading strategies that is configured and executed by our Proprietary Global Algorithmic Trading Software(GATSM240) which trade in the direction of the Monthly Time Bars(MTB) with a Trailing Stop Loss given by sixteen(16) times the Average True Range(ATR) using period 200. We also have the option of applying a normal trailing stop of 350 points or 35 pips.
We have three risk model to chose from namely: Conservative, Moderate and Aggressive. For the Conservative we risk 0.06% of free equity per trade, 0.6% for Moderate and 6% for Aggressive.
Our reward to risk ratio is 3:1 by designed and this provide us with an edge in the market.
Let’s dive deeper into each of the main items above:
Trading Strategy: A trading strategy is a set of rules and guidelines that a trader follows to enter and exit positions in the financial markets. It’s based on a combination of technical and fundamental analysis and helps traders to make informed trading decisions. The effectiveness of a trading strategy depends on various factors such as market conditions, risk management, and the trader’s skill and experience.
Micro-Trend: A micro-trend is a short-term trend that lasts for a few days to a few weeks. These trends are usually driven by market fluctuations, news events, and other short-term factors. Micro-trends can be profitable for traders who can identify and capitalize on them using a suitable trading strategy.
Trailing Stop Loss: A trailing stop loss is a type of stop loss order that is set at a specific distance away from the current market price. The distance is usually calculated based on a fixed percentage or a fixed number of pips. As the price moves in the trader’s favor, the trailing stop loss also moves accordingly, keeping a fixed distance from the market price. This helps traders to lock in profits and limit potential losses.
Average True Range (ATR) using period 200: The Average True Range is a technical indicator that measures the volatility of an asset over a specific period. It’s calculated by taking the average of the true range of price movement over a specified period. The true range is the highest of the following: the current high minus the current low, the absolute value of the current high minus the previous close, and the absolute value of the current low minus the previous close. ATR using period 200 refers to using the ATR calculated over 200 periods, which can provide a more significant picture of the asset’s volatility over a more extended period.
Risk Model: A risk model is a framework used to manage and control the risk associated with trading. It determines the amount of risk that a trader is willing to take on each trade and helps to manage the portfolio’s overall risk exposure. The risk model usually involves setting limits on the amount of capital that can be allocated to each trade and using risk management tools such as stop-loss orders and position sizing. The risk model can vary depending on the trader’s risk tolerance, investment objectives, and trading style.
Global Algorithmic Trading Strategy (GATS240) #6 is a trend following strategy in nature.
Trend following is a popular trading strategy that seeks to capitalize on sustained price movements in a particular direction. The goal of trend following is to identify a trend in the market and then follow it as long as it persists, with the hope of making a profit.
Trend following strategies are based on the premise that markets tend to move in long-term trends, and that these trends can be identified and exploited for profit. This is because trends are often caused by fundamental factors that can drive prices in one direction for an extended period. Examples of such factors include changes in economic conditions, changes in supply and demand, and geopolitical events.
To implement a trend following strategy, traders use technical analysis tools to identify trends in the market. They look for patterns in price movements that suggest a trend is forming and use indicators such as moving averages, trendlines, and support and resistance levels to confirm the trend.
Once a trend is identified, trend following traders enter a position in the direction of the trend and hold it until the trend reverses or shows signs of weakening. This means that trend following traders may hold positions for a few days to several weeks or even months, depending on the strength and duration of the trend.
One of the key advantages of trend following strategies is that they can be used in any market, including stocks, bonds, commodities, and currencies. This allows traders to diversify their portfolio and reduce their overall risk exposure.
However, trend following strategies are not foolproof and can be subject to market volatility and sudden reversals. Therefore, it’s important to use risk management tools such as stop-loss orders and position sizing to control risk and limit potential losses.
Overall, trend following can be an effective trading strategy for traders who are patient, disciplined, and have a good understanding of technical analysis.
We have indicated that the reward to risk ratio is 3:1.
A reward to risk ratio of 3:1 means that for every dollar you risk, you aim to make three dollars in profit. This ratio is designed to provide a positive expectancy, which means that over time, the profits from winning trades are expected to outweigh the losses from losing trades, resulting in a net profit.
The advantage of having a high reward to risk ratio is that it allows traders to make a profit even if they have a relatively low win rate. For example, if a trader has a win rate of 40% and a reward to risk ratio of 3:1, they can still make a profit because the profits from the 40% winning trades will be higher than the losses from the 60% losing trades.
In addition, a high reward to risk ratio can also help to offset transaction costs such as spreads, commissions, and slippage, which can eat into profits. This is because a trader only needs to have a few winning trades to cover the cost of multiple losing trades.
However, it’s important to note that a high reward to risk ratio is not the only factor that determines the success of a trading strategy. Other factors such as market conditions, risk management, and the trader’s skill and experience also play a significant role. Therefore, it’s essential to have a well-rounded trading strategy that takes into account all of these factors to maximize your chances of success in the market.
Positive expectancy is a statistical measure that determines whether a trading strategy is likely to generate profits over a large number of trades. It is calculated by taking the average profit or loss per trade and multiplying it by the win rate.
A trading strategy that has a positive expectancy is expected to generate profits over time, while a strategy with a negative expectancy is expected to generate losses. For example, if a trading strategy has an average profit of $100 per trade and a win rate of 60%, its expectancy can be calculated as follows:
Positive Expectancy = (Average Profit x Win Rate) – (Average Loss x Loss Rate)
= ($100 x 60%) – ($50 x 40%)
= $60 – $20
This means that for every trade taken using this strategy, the trader can expect to make an average profit of $40.
Positive expectancy is an essential concept in trading because it helps traders to assess the potential profitability of a trading strategy over a large number of trades. It allows traders to determine whether a strategy is worth pursuing and helps them to set realistic profit targets.
However, it’s important to note that positive expectancy is not a guarantee of future profits, as market conditions can change and impact the performance of a trading strategy. Therefore, traders should always monitor the performance of their strategy and adjust their risk management approach accordingly to maximize their chances of success in the market.
There are several performance metrics that traders can use to monitor their trading strategy. Here are some of the key ones:
Win rate: The win rate is the percentage of winning trades out of the total number of trades taken. A high win rate indicates that the trading strategy is profitable and can generate consistent returns. However, a high win rate alone is not sufficient, as the average profit per trade and the average loss per trade also play a crucial role.
Average profit/loss per trade: The average profit or loss per trade is the total profit or loss generated by the strategy divided by the total number of trades taken. This metric helps traders to determine whether the strategy is generating profits or losses on average. A high average profit per trade and a low average loss per trade are desirable.
Risk-to-reward ratio: The risk-to-reward ratio is the ratio of the average profit per trade to the average loss per trade. This metric helps traders to assess whether the strategy has a positive expectancy or not. A high risk-to-reward ratio indicates that the strategy is likely to generate profits over time.
Sharpe ratio: The Sharpe ratio is a measure of risk-adjusted return that takes into account the volatility of returns. A high Sharpe ratio indicates that the strategy is generating good returns relative to the amount of risk taken.
Maximum drawdown: The maximum drawdown is the maximum peak-to-trough decline in the equity curve of the trading strategy. This metric helps traders to assess the risk of the strategy and determine the maximum loss that they could potentially incur.
Profit factor: The profit factor is the ratio of the total profit generated by the strategy to the total loss incurred. A profit factor greater than 1 indicates that the strategy is profitable, while a profit factor less than 1 indicates that the strategy is generating losses.
By monitoring these performance metrics, traders can get a better understanding of the effectiveness of their trading strategy and make informed decisions about adjusting their risk management approach or making other changes to improve their results.
MAE and MFE are two other performance metrics that traders can use to monitor their trading strategy. Here’s what they stand for and how they work:
Maximum Adverse Excursion (MAE): MAE is the maximum unrealized loss that occurs while a trade is open. In other words, it measures the largest amount of money a trader would have lost if they had closed the trade at the worst possible time during its life cycle. MAE can help traders to assess the level of risk associated with a trading strategy and can be used to set stop-loss levels.
Maximum Favorable Excursion (MFE): MFE is the maximum unrealized profit that occurs while a trade is open. It measures the largest amount of money a trader would have made if they had closed the trade at the best possible time during its life cycle. MFE can help traders to assess the potential profit of a trading strategy and can be used to set profit targets.
By monitoring both MAE and MFE, traders can determine the ratio of MFE to MAE, which is a measure of the potential profitability of a trading strategy relative to its risk. If the MFE/MAE ratio is greater than 1, it indicates that the strategy has the potential to generate profits that are larger than the losses incurred, which is a positive sign.
Overall, MAE and MFE can provide valuable insights into the performance of a trading strategy and can help traders to adjust their risk management approach and set profit targets. However, it’s important to note that these metrics should not be the sole basis for making trading decisions, and should be used in conjunction with other performance metrics to assess the overall effectiveness of a trading strategy.
In this article we have covered many areas. Here is a summary of the topics we have covered:
Trading Strategy: A set of rules and guidelines that a trader follows to enter and exit positions in the financial markets.
Micro-Trend: A short-term trend that lasts for a few days to a few weeks.
Trailing Stop Loss: A stop-loss order that is set at a specific distance away from the current market price and moves as the price moves in the trader’s favor.
Average True Range (ATR) using period 200: A technical indicator that measures the volatility of an asset over a specific period, calculated by taking the average of the true range of price movement over 200 periods.
Risk Model: A framework used to manage and control the risk associated with trading, involving setting limits on the amount of capital that can be allocated to each trade and using risk management tools such as stop-loss orders and position sizing.
Trend Following: A trading strategy that seeks to capitalize on sustained price movements in a particular direction.
Positive Expectancy: A statistical measure that determines whether a trading strategy is likely to generate profits over a large number of trades.
Performance Metrics: Various metrics that traders can use to monitor their trading strategy, including win rate, average profit/loss per trade, risk-to-reward ratio, Sharpe ratio, maximum drawdown, profit factor, MAE, and MFE.
By considering and monitoring these factors, traders can develop and implement effective trading strategies, manage risk, and make informed trading decisions.
Stocks, Futures and Forex Trading involves a substantial risk of loss and is not appropriate for all investors. Past performance is not indicative of future performance.
There is a substantial risk of loss in futures and Forex trading. Online trading of stocks and options is extremely risky. Assume you will lose money. Don’t trade with money you cannot afford to lose.
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