In my ‘quest’ to eliminate the ‘drawbacks’ (‘drawdowns’ is probably a better word if you are able to excuse the pun) inherent with Parabolic SAR I have been doing a lot of ‘playing’ with EMA’s, SMA’s, and the like.
During this ‘quest’ I have ‘stumbled’ along ‘price channels’ and some associated ‘price channel’ indicators and/or trading methods. These include ‘Envelopes’, ‘Linear Regression’, ‘Keltner Channels’, ‘Donchian Channels’ and ‘STARC Bands’ to name but a few.
If you want to read more about some of the above then take a look at this link:
Capture Profits Using Bands And Channels
Of the above I found ‘Donchian Channels’ to be of extreme interest.
Essentially what the ‘Donchian Channels’ represent are ‘price channels’ or (my interpretation) support and resistance for a given period.
In other words (as I understand it) a ‘Donchian Channels’ indicator will draw lines representing the highest high and lowest low of the preceding number of bars for a given period. The middle line represents the difference between the two.
None of my trading platforms provide ‘Donchian Channels’ as an indicator so I ended up ‘coding’ my own ‘version’ and I think I’ve come pretty ‘close’ as it were (see attached chart).
Having ‘coded’ my own ‘version’ of ‘Donchian Channels’ I then needed to formulate a method of trading with them and this is what I have come up with:
For the purposes of this demonstration I am using 4 periods on a daily chart of EUR/USD.
Essentially (the way I see it) you place a buy order at the current value of the upper channel and a sell order at the current value of the lower channel.
Let’s say that the buy order gets executed first.
You continue to ‘track’ the upper and lower channel placing buy orders and sell orders at the current value of the channels on a daily basis.
This will result in the following:
As the price keeps moving up (in this example - remember our first buy order got executed first) you will be opening new long positions at or above every resistance level as indicated by the the indicator resulting in multiple long positions.
If (or rather when) the price reverses your nearest sell order will get executed resulting in a take profit and a stop and reverse.
As the price now keeps going down you will be opening new short positions at or below every support level as indicated by the indicator resulting in multiple short positions.
Obviously the number of lots has to be tracked on the way up and the way down i.e. the opposite order should be the number of current lots open + 1.
In other words: let’s say that by the end of the long rally you ended up with 10 long positions. Your corresponding (and closest) short order would be for 11 short positions i.e. you would be taking the nett profit on 10 long positions and opening a single short position when the price reverses and so on and so forth.
The ‘method’ SHOULD work in a ranging market as well. Why? Because you are in effect always covering your exisiting positions + 1 additional position.
In a ranging market you will obviously not make profit on more than one lot at a time though BUT you will NEVER have to write off any capital i.e. you should NEVER have to take a loss using this method. The only thing that you have to ensure is that you have LOADS of free margin and/or a highly leveraged account in case you get stuck in a range for an extended period of time. Another way of protecting yourself in a ranging market is to use what the brokers refer to as ‘hedging’ (which is not quite the correct term as we know) BUT what it means is that if you get stuck in a range you would effectively have multiple long and short positions open on the same pair + 1 position so that when the pair eventually does break out and start to trend you take profit on that 1 position and start adding as detailed above.
Now - this is just something that I ‘came up with’ over the past couple of days and I am posting it here for some comment and any thoughts on the ‘method’.
I have started trading it today (live) so I’m interested to see what happens.
What do you people think?
Ideas? Thoughts? Drawbacks? Pro’s? Con’s?