It’s been a while since I contributed an actual SYSTEM here (well other than posting links to various trading systems that is) so I thought I’d post this little one ‘just for fun’ (and WOULD YOU BELIEVE that it actually appears to work for forex pairs)!!! LOL!!!
Many of you will have heard of Bill Williams (his ‘claim to fame’ is the ‘Profitunity Trading System’ or ‘Trading Chaos’). What many may NOT know is that Bill Williams has, in fact, released these systems three times in three seperate books. Now a long time ago: I was ‘playing around’ with this stuff and in the very first book (which in my opinion is definitely the better and far more detailed than the other two) he talks about the ‘Balance Line’. The parameters for this line were apparantely tested and tweaked by some ‘supa dupa’ mainframe computer and apparantely produced good results. Now the ACTUAL ‘Balance Line Trades’ to me are just a tad too complicated so I came up with this little ‘variation’. By the way: the ‘Balance Line’ is nothing more than the ‘Alligator’s Jaw’ (you have an entire Bill Williams section of indicators as standard with MetaTrader of course).
Simple to set up: choose your timeframe (I’m messing around with this on a 1 hour chart but it appears to work for all timeframes i.e. it just depends on how patient you are I guess). Attach the ‘Alligator’ indicator with default settings BUT HIDE the ‘Teeth’ and the ‘Lips’ (just change their display colors to ‘None’). Now you are really only seeing the ‘Alligator’s Jaw’ (which, as noted, is in fact the ‘Balance Line’).
Now: I would also suggest that you trade IN ONE DIRECTION ONLY (but that’s up to you of course i.e. I only trade long anyway).
Simple: to enter you go long at market when the price closes on or above the ‘Balance Line’. You initial stop is the low of the entry bar minus ‘a couple of ticks’. You stop stays in place until either it is executed and you’ve been stopped out OR once the ‘Balance Line’ starts to lock in profits and only then do you move your stop. In addition: you will note that the ‘Balance Line’ is ‘offset into the future’ by eight bars. This is handy BECAUSE once the very last value of the ‘Balance Line’ exceeds your entry price you move your stop to breakeven and again leave it there until the ‘Balance Line’ is effectivel locking in profit in which case you simply trail your stop by the value of the ‘Balance Line’. One last but very important thing: if price goes AGAINST you and CLOSES BELOW the ‘Balance Line’ but not far enough to take out your stop THEN YOU SIMPLY CLOSE THE TRADE AT MARKET AND REALISE THE LOSS!!! A lot of the time this means that your loss is far less that it would have been had your stop been hit. One other thing that I’ve noticed is that many times your risk is minimal so you can pretty much ‘bet the farm’ as it were i.e. depending on your risk percentage (2% or 5% or whatever you use) you can normally open far larger positions which is nice it would seem.
That’s it. The only reason (by the way) for my saying to trade in only one direction is simply to eliminate as many ‘whipsaws’ as possible. This is always a problem with most moving average type systems i.e. if you stop and reverse upon every opposite close the ‘whipsaws’ can be a REAL ‘pain’!!!
Feel free to play around with this little system of course. You may even see something that could improve it’s performance and profitability. Oh and choose your pairs carefully i.e. there are some pairs that are a real ‘pain’ by the looks of things i.e. they tend to trend FAR LESS than others.
OK: I shall attached chart for the purposes of explanation and you can also then get and idea why this could indeed be quite a profitable little system with pretty minimal effort really.
Regards,
Dale.
Edit: the chart is in the attached WinZip Archive i.e. I hate it when the compression here changes my charts after having uploaded them (they look terrible and are hard to see sometimes).
I forgot to mention some ‘variations’ on the above system.
For one thing: you could place orders so that when price actually HITS the ‘Balance Line’ then your trade is opened. This, however, may lead to problems with the trade size because at that point you don’t know where you initial stop is eventually going to settle. Also: it requires that you will sit and monitor the chart all of the time so that if you are stopped out you would then place another order and re-enter.
In addition: if you are indeed stopped out but price retraces and closes above the ‘Balance Line’ then you simply re-enter. You MAY want to wait for a bull candle (if you’re only trading long) but, of course, this may get you into the trade a bit later.
Oh and for the record: the ‘Balance Line’ is nothing more really than a ‘smoothed’, 13-period EMA, applied to the median price (H+L/2) and shifted 8 bars ‘into the future’. Because of this shifting: ‘what you see is what you get’ i.e. unlike a ‘normal’ moving average the CURRENT value that you’re seeing never changes.
You COULD simply trail your stop at the high or the low of the preceding bar once in the trade and once you’re showing a profit. Of course: you stand a chance of missing a trend but there is indeed a ‘school of thought’ that says to never let a winner turn into a loser. So if you’re into trying to catch just a few pips or whatever then maybe this method would suit you better i.e. a close on either side of the ‘Balance Line’ is pretty reliable amd most times price will continue to move away from the ‘Balance Line’ at least for a few bars before a retracement.
You could also NOT trail ANY stops i.e. wait for a close on the other side of the ‘Balance Line’ in order to take your profits but this of course COULD mean that your profits dissapear if there is a huge move in price against you. This does happen frequently on the shorter timeframes so just take this into account.
For interest sake: the REAL ‘Balance Line System’ dictates that you wait for a second (BAR 2) to make a lower high and a lower low than the previous bar (BAR 1) and then you place an order to buy at the high of BAR 1 if price is above the ‘Balance Line’ (and visa versa for a short trade). But it gets a bit more complicated than this though unfortuanately.
Yep: that’s also an option. There are many ways to ‘skin this cat’ I guess and anybody finds it interesting then I’m sure some other ideas will come to light. I don’t know WHY I sort of ‘designed’ this little system (boredom I guess). I’ve always felt that Williams’ ‘Balance Line’ theory ‘holds water’ excepting as I say: the REAL ‘Balance Line System’ or ‘Balance Line Trades’ is a bit more complicated and ‘cluttered’ hence this little variation on the theme.
One thing that DID occur to me while typing this: what about some type of filter (like a 200-period or 50-period SMA or EMA) to indicate whether you should be taking only short or only long trades??? Maybe it’s possible to eliminate more ‘whipsaws’ (although they’re not THAT bad to be honest).
I’ve attached a daily chart of GBP/USD. This is the KIND of trade that would be good let’s face it. As I said though: the pairs need to be picked carefully because some of them are REAL ‘dogs’. Something like EUR/CHF is good for this (even although it takes a long while to make money due to the fact that there is not really a lot of movement generally unless the Swiss Banks interfere)!!!
One thing that maybe should be looked at more seriously is the thing of entering RIGHT AT the ‘Balance Line’. If you look carefully you’ll see that in some cases even a BAD trade has the potential to break even or even make a few pips profit. In other words: you enter RIGHT AT the ‘Balance Line’, initial stop is the low (if only trading long) of the signal bar but then you IMMEDIATELY trail your stop from the next bar at the value of the ‘Balance Line’. I’ve stared at EMA’s and the like for a LONG time now and IF there were a way to get ‘in’ AT the moving average i.e. not after price has closed or whatever then your profit is represented BY the moving average itself (I’m not sure if I’m explaining myself correctly here i.e. maybe another chart will explain better).
It explains the theory behind the ‘Balance Line’. As I said though: it forms only a PART of ‘Chaos Theory’ i.e. is only one small part of the entire system. HOWEVER (and this I note from experience): it’s way more effective on it’s own. I’m of the opinion that the rest of the system is superflous and, what’s more, does NOT work on forex pairs. The signals given and the rules for NOT taking a trades are WAY too restrictive normally resulting in you buying the top of a long rally or selling the bottom of a short rally. Equities and commodities (ONCE AGAIN): no problem (although there are better trading systems out there).
(I’m afraid the you’re going to have to trust me that the ‘Balance Line’ IS the ‘Alligator’s Jaw’ as that’s in one of the books and I don’t see it detailed in Alpari’s ‘brief summary’ and, what’s more, as I’ve noted before here, remember that Alpari’s ‘brief summary’ IS JUST THAT i.e. there’s quite a bit of information missing that’s contained in the books).
Anyway: I just ‘threw this’ ‘little system’ together for everyone really and, as can be seen from the charts, it’s ‘elegant in its simplicity’ and appears to be effective ‘as is’ (if you can stomach a string of losses due to ‘whipsaws’ and IF you’re practicing sound money management that is).
Good to see you posting again. Question: I used the ema data you supplied (instead of the alligator) and observed that trades taken with the trend of the ema seem to last longer and further than when against, comments? No true in all cases, always exceptions to the forex rules, but seems pretty consistent. I would like your take on this. Thanks, d.
When you say trades taken WITH the trend: I’m not sure what you mean by that??? Are you saying (for example) that if the EMA is pointing upward then THOSE are the better trades to take??? Or are you saying (for example) that is the EMA is pointing upward on a LONGER timeframe then one should only take trades on a shorter timeframe in the same direction (or BOTH maybe)???
One thing that I HAVE (possibly) noticed is that if the ‘shifted’ portion of the EMA is pointing upward (for example) i.e. the portion of 8 bars ‘into the future’ then that could be used as a filter. In other words: if the ‘shifted’ portion of 8 bars is pointing downward then it’s SUPPOSED to act as a sort of ‘forewarning’ as it were (I’ve found that if you’re in a long trade and the ‘shifted’ portion of 8 bars starts pointing downward it’s seldom a bad time to take profits).
As I noted: this is not a sort of ‘mainstream’ system i.e. it’s just something that I’ve ‘toyed’ with over the years and probably needs a bit of ‘honing’. That said: some of the trades can be quite spectacular i.e. sometime last week I think I remember seeing a long EUR/GBP trade on the 1 hour timeframe that was good for around +700 or so pips. Also: the longer the timeframe the more reliable it is BUT (of course) your stops get ever further away from your entry price.
One or two other things that I’ve been noting:
Maybe it’s a good idea to NOT go in at market when you have a close above or below the EMA i.e. rather place a stop order to buy or sell ‘a couple of ticks above the high or below the low’ of the signal bar. This can keep you out of some bad trades but gets you ‘in’ a bit later.
I’ve also been looking at a way to move your stop to breakeven sooner rather than later (as I may have noted before somewhere this seems to be ‘the thing to do’ of late). To this end I’ve been thinking about using 1 x ATR(14) or maybe even 2 x ATR(14). In other words: as soon as the trade has moved by this distance from your entry point you move your stop to breakeven and then simply use the EMA to trail your stop after that (lock in profits).
I’m not sure if this has any merit but instead of using the CURRENT value of the EMA to trail your stop you used the ‘shifted’ value i.e. the 8 bars ‘into the future’ value MINUS ONE bar as the trailing stop value. This appears to lock in profits a lot sooner (but of course can also get you stopped out too soon also).
I just marvel at it’s simplicity is all. It ‘beats the pants off’ of a ‘standard’ 13-period EMA that is ‘unshifted’.
"Are you saying (for example) that if the EMA is pointing upward then THOSE are the better trades to take??? " Yes, exactly. But noting the end of the ema 8 shift would seem to be important too. Thanks for the reply, still digesting this. I do agree with using Buy Stop or Sell Stop type orders as I would rather miss a few small pips before entering than get whipsawed. To each his own howver. d.
This is interesting…, I think it may need two ma’s for trend determination ie 30 and 60 ema or a long macd. For sure the winners would be nice, the chop could be dangerous.
I use this strategy all the time but I place my trade just above the high of the first candle to the left of the entry candle that is higher than the entry candle.