In our last indicator presentation we discussed the alligator indicator. We came across the following findings:
- The alligator indicator is a trend following indicator.
- It has weaknesses in sideways markets.
- By crossing the MAs, the indicator can identify trends Recognize early.
- The indicator must be viewed in an optimized manner depending on the trend direction.
In the last contribution to the indicator, we also made it clear that the common interpretation rules for indicators often only provide a framework. In practice, a more individual approach is suitable - depending on the traded value and trend direction. Therefore, optimization is necessary in many cases.
Development of a strategy
Based on this knowledge, we can now develop a strategy, the first rules of which could be as follows:
- The 4-hour chart of the Dow Jones Index is always analyzed.
- As a result, only the Dow Jones Index is traded.
- Since, according to our findings, the signals are better at Downtrends work, only put options are bought.
- An option is bought when the blue line crosses the other two lines from left to right, indicating a trend reversal.
- The term of the Option is 24 hours.
Let's take a look at the current chart of the Dow Jones Index to see if the rules may need to be further optimized.
We have a total of six Course levels where our rules would have generated a signal. The crosshair shows us the entry. This alone shows that the alligator signal is not given very early, we almost always bought put options at certain lows. Therefore, the somewhat longer terms are important.
The first trade (arrows from left to right) would have ended with a loss after a period of 24 hours, while the second trade would have been a plus trade; the third trade again in the minus, the fourth in the plus and the fifth and sixth also also in the minus.
That means, of six trades, only two would have been successful. That literally cries out for optimization. But how do we do this? There are several options for this, all of which should be tried out.
For example, a filter indicator could be used, because it is noticeable that the bad trades would often have occurred in volatile, strong sideways phases, see also "Weakness of the alligator indicator", So we really only want to catch the big trends as they were shown to us in the second and fourth trade.
We therefore use the accumulation / distribution line, also called ADL indicator, as a filter indicator. The indicator itself can be said briefly that it is calculated on the basis of the cash flows, i.e. that is, volume is critical. The volume in turn often indicates a weakening in demand. The additional rule would be:
- The ADL indicator must form two highs, which are either the same high or lower, and then fall.
Look Let's take a look at this in practice: The first trade would not have taken place because the ADL indicator did not form two highs, but our second plus trade is certainly accompanied by two highs and a fall in the indicator. The situation is somewhat unclear for the third trade, but the sharp rise in the ADL indicator alone points to an upward strength. In addition, the highs are not falling, but rising - therefore no signal here either.
The fourth trade was again signaled by the ADL indicator. The fifth trade is also displayed. However, it still ends up in a loss because the term was too short to take full advantage of the trend. The second high is missing for the sixth trade.
All in all, we would have a total of three trades, including two winners, through the optimization using the ADL indicator. How do we get the third trade on the winning side? Since this trade ended in loss due to the short time, we would have to extend the time. However, this must also fit the other trades.
With this strategy, however, it should not pose a problem, since the trends identified using the alligator and ADL indicators are usually larger and therefore more long-term. Therefore, it would not make much difference if the runtime was not 24, but 48 hours. Thus, rule number 5 would be optimized to 48 hours, which would also make the third trade a profit.
Conclusion: An approximation to success
Das The example above shows how a successful trading strategy could be approached. It should be noted that the common interpretations of the indicators must first be checked. Then you set up the first rules based on the test results. Tests should then be used to check how successful these rules would be. In most cases, optimization is required.
In this way it is possible to approach the successful trades, but this also means that far fewer trades are made. Therefore, it might make sense to adjust rules number 1 and 2 by not only trading the Dow Jones Index, but also considering other underlyings for trading.
Such strategies can be implemented with the broker Anyoption.
Click here to learn more about the Martingale system.