Using the Trend Filter for stock trading

[Tony Beckwith]

Hi guys

Following recent discussion of when/whether/how to use the STF (Strong Trend Filter), here's a good example on U.K. oil major BP .

The sell set-up in early August was backed up by the red STF (the STF on the weekly BP chart, but handily displayed on this daily chart)...[B]huge profits.

However, the 3 latest buy set-ups (1st shown) are NOT backed up by the STF, as it is still red...so far, 2 losses avoided.

BTW1 - the STF on the FTSE 100 index was black (neutral) for the winning sell but blue (long) for the 3 latest buy set-ups...message - check the individual stock as well as the overall market.

BTW2 - there was STF bearish divergence on the winning sell (STF on the daily chart, not weekly) - another good sign - but not on the 3 latest buy set-ups.

Hope this helps.

Thanks

Tony.

[rabbitrun]

Hi Tony,

Thanks for the BP Amoco example. I was one of the 'amateurs' that got stopped out on this long trade. I was swayed by the fact that the FTSE was blue and ignored the STF on the stock.

As you know I'm a rookie to all of this but you can understand why this might have seemed like a good trade.

check the individual stock as well as the overall market.
and then what? :rolleyes:

There is one very clear school of thought that you would be wise to trade with the overall market and therefore focus less attention on the individual STF stock. Where should the weighting be applied - market first or stock first?

There were several reasonable shorts on the US market last night but the market is still brightly blue; stay away I suspect.

Are there any other indicators which might help the decision making process, 20 MA?

Thanks

[stevej]

Hi Tony,

Thanks for the BP Amoco example. I was one of the 'amateurs' that got stopped out on this long trade. I was swayed by the fact that the FTSE was blue and ignored the STF on the stock.

As you know I'm a rookie to all of this but you can understand why this might have seemed like a good trade.

check the individual stock as well as the overall market.
and then what? :rolleyes:

There is one very clear school of thought that you would be wise to trade with the overall market and therefore focus less attention on the individual STF stock. Where should the weighting be applied - market first or stock first?

There were several reasonable shorts on the US market last night but the market is still brightly blue; stay away I suspect.

Are there any other indicators which might help the decision making process, 20 MA?

Thanks

My (very few) rules for what they are worth:-

1. Tale a top down approach - ie what is the market doing? Trade with the trend. Why on earth would anyone wish to trade against it?

2. In a strong market trade (long) only strong stocks - strong stocks go up unless the market is dragging them down. Strong stocks go up faster and further than weak ones.

3. In a weak market trade (short) only weak stocks - weak stocks go down unless the market is forcing them up. Weak stocks go down faster and further than strong ones.

That's it.

HTH

[rabbitrun]

Hi HTH,

My (very few) rules for what they are worth:-

1. Tale a top down approach - ie what is the market doing? Trade with the trend. Why on earth would anyone wish to trade against it?

Fair enough.

2. In a strong market trade (long) only strong stocks - strong stocks go up unless the market is dragging them down. Strong stocks go up faster and further than weak ones.

3. In a weak market trade (short) only weak stocks - weak stocks go down unless the market is forcing them up. Weak stocks go down faster and further than strong ones.

That's it.

HTH

So how do you define weak and strong stocks. Is this purely mechanical - ie size of redness or blueness or is there some fundamental analysis going on to determine weak and strong?

Very helpful

Thanks

[stevej]

Hi HTH,



So how do you define weak and strong stocks. Is this purely mechanical - ie size of redness or blueness or is there some fundamental analysis going on to determine weak and strong?

Very helpful

Thanks

Look at the list of stocks you monitor. Which are near their high / low for the period you are monitoring.

[rabbitrun]

Hi,

I decided to stay up late last night and have some fun with a bit of back testing on the FTSE 100 to see which STF guidelines give better results. Here are a few comments and the spreadsheet is attached:

1. Why the FTSE 100 - because the trade scanner is quick.
2. I only used trades that were identified by the trade scanner so Tony's ITV short is not included (I'm using Paritech as opposed to E-Signal et al)
3. 14 June was the lowest point before going long thereafter
4. There are only 50 trades in total, the 50th is still unfolding so has not been counted.
5. MTP identitfed 37 shorts and 13 long
6. The biggest win was 2.6R.
7. All losses were -1R
8. There are 3 rule bases tested:

- All trades: still uses MTP guidelines but ignores what the market or STF is doing
- STF rules A: STF for stock must be red or blue (not black); ignore what the market is doing, therefore take shorts and longs
- STF rules B: Only take trades based on the market trend, in this case only long trades; STF on stock can be blue or black (not red)

Results:

1. All trades - -10.3R , total number of trades 33
2. STF rules A - -4R, total number 6
3. STF Rules B - -2.6R, total number 12

Conclusion:

1. Going with the market is the most successful way to trade paying some attention to what the STF is doing on the individual stock
2. It would have been different with the ITV trade but as it does not appear on my set-up it can't be counted. (As a short with a value of at least +4R it would have changed the result)
3. If you're new to this like me and you are a simple EOD trader - find more markets; the FTSE 250 provides more opportunity for instance. I have reached the conclusion that the more markets the better.
4. There were no good trades, never mind great. Only 1 or 2 actually reached the minimum wave C point.
5. I was also generous using histoical data and gave the trade the best outcome in terms of where my stops would have been ie moved the stop to 1R as soon as stock hit 2-3 times area.

Hope this is of interest.

[Dentalexpert]

Hi rabbitrun

Nice piece of work. Looks like its all very well cutting the losses short unless you hit a big one every now and again you are not going to do much. Wonder how long you should wait for this to happen!!

Dentalexpert

[rabbitrun]

See attachment this time. It's a spreadsheet which I've zipped in order to attach.

[Tony Beckwith]

Hi rabbitrun (and Dentalexpert)

Well done on such a thorough piece of work - I know it takes a huge amount of time and concentration to do properly!

Just to let you know that, using the same Paritech UK FTSE100 stocks daily data, I have checked a little back from your 14 June 06 (market low) start point on my preferred guidelines.
Note: these are my own guidelines, not concrete rules for everyone...

14/6/06 - 31/7/07 (so far)
14/6 BLND long 0.0R (b/even)
14/6 CPG long +4.8R
29/6 SVT long +4.4R
7/7 CBRY short -1.0R
28/7 SMIN short 0.0R (b/even)
_________________________
Total +8.2R

Among my simple guidelines: I check the individual stock STF (not the market) and need it blue to take a long/red to take a short; untick the 'Last Point at Typical Wave C WPT' Trade Scanner restriction (to find set-ups at the min and max support/resistance levels as well); want the blue/red signal bar within 2 bars of the Wave C extreme bar plus the order filled within 2 bars of the signal bar (my '2+2' guideline); minimum risk/reward +2.0x at 1st profit target; no TS2 set-ups completing at the max support/resistance; only 1 closing price allowed beyond the nearest set-up support/resistance; standard MTP trade management guidelines (using the profit targets).

For anyone interested, please contact me directly!

Thanks

Tony.

[rabbitrun]

Hi,

Following up on Tony's comments about how a conservative trader might use the STF to avoid unnecessary losses, I'm interested to pick-up on Steve's comments about the QQQQ, TS1 sell set-up on 15 Dec (see Daily Report). This was described as a 'perfect sale set-up'; see attached chart.

(By the way, I'm not interested in nit picking, just understanding how an experienced trader knew that this was a good set-up).

General conditions are/were:

1. Top of a wave 5, was the QQQQ another signal indicating that the market had turned? With this situation, the view presumably would be that the market was now shorting and therefore a short would be a valid trade set-up as it follows the new trend. (Way too clever for a rookie to call but for this exercise should therefore be accepted as a valid market condition for a short).

2. The signal occurs at the typical Wave C support which is good.

3. The weekly STF, however, is blue and appears to be rising. (Would normally therefore be dismissed).

4. The daily STF is black; is there divergence? Some evidence that sentiment may be changing; blue to black and reduced volume but hindsight is a wonderful thing.

5. The ABC wave is not very convincing, C:A is 5:2 although B:A price is over 50%

6. R/R and all other standard conditions are met

This is a good trade, shorting nicely as of last Friday. So what else could I/we have done to provide further evidence that this was a good set-up to accept.

I appreciate that this may not be seen as conservative thinking but I'd like to understand if any other evidence exists?

Thanks

[Steve Griffiths]

Hi,

Exactly, this was not a “conservative” trade, it was one where using my 20 years experience I know when to “bend” the standard rules slightly. This is not recommended for a new trader wishing a conservative approach, but more for advanced traders who have many years experience.

But for your info, my main reason for “bending the rules” on this occasion was that I suspected the Dow and S&P were at Wave 5 highs, so the market may be making a top. So yes, in this respect I was “top picking” slightly, so this was not a conservative trade.

I hope this helps ?

Steve

[rabbitrun]

Hi Steve,

Exactly, this was not a “conservative” trade, it was one where using my 20 years experience I know when to “bend” the standard rules slightly. This is not recommended for a new trader wishing a conservative approach, but more for advanced traders who have many years experience.

But for your info, my main reason for “bending the rules” on this occasion was that I suspected the Dow and S&P were at Wave 5 highs, so the market may be making a top. So yes, in this respect I was “top picking” slightly, so this was not a conservative trade.

Okay, so this is about experience, but you also provide perspective by your action.

The relevant importance of the STF on the stock and which way the market is trending. In essence the QQQQ was simply supporting your view that the Dow and S&P had peaked. As a trader you had additional evidence that the Wave 5 was at an end and therefore a short trade might be worth considering. In other words there was good supporting evidence elsewhere that meant that the blue STF on the QQQQ was actually irrelevant. With 20 years experience you know that the STF is by definition a lagging indicator so the weekly STF is actually not important at that moment. More useful, perhaps was the fact the daily STF was already starting to support your view that the QQQQ could be worth shorting.

I'd like to ask whether you had any other supporting evidence which would have swayed your decision but I think the answer is probably, 'what else did I need'. The market had been 'top picking' for some time; other indexes with the help of MTP had given you a Wave 5 resistance target, the QQQQ tracks the Nasdaq; and you had a cleanish WPT1 set-up.

Features that I look for every day like - weekly STF, is the curve symmetrical didn't really matter. Far more important is the fact that there was a WPT1 set-up at typical support, coinciding with the red reversal bar, decent R/R and masses of evidence from the other indices that the Wave 5 had ended.

Would that be a good summary?

[Steve Griffiths]

Hi,

I think you are over complicating things, in the early days just stick with the basic set-ups and the standard guidelines, then as you become more experienced you can start to look for more advanced trades.

I am in a difficult position, because if I post "advanced trades" the standard traders can get confused because I am using my experience above and beyond the standard set-ups, but if I only post standard trades, the advanced traders among you will be missing out on the full capabilities of the software......... hum.... what to do ?

Steve

[Steve Griffiths]

Hi Everybody,

As a PS, perhaps this is a better trade set-up for the standard traders among you.

A good looking TS3 buy set-ups that is in the direction of the blue STF.........

:)

Steve

[rabbitrun]

Hi,

I think you are over complicating things, in the early days just stick with the basic set-ups and the standard guidelines, then as you become more experienced you can start to look for more advanced trades.

Sure.

To be brutal, all I'm interested in is making a profit. I don't care how basic or advanced my trades are or will be. The QQQQ would have made me a profit, so I was interested in how a guru defined this perfect TS1 set-up; especially as it was not entirely consistent with current guidelines.

The way you see it and the way many of us see it is bound to be different (at least those of us who are simply following the standard guidelines). I was hoping that you could give us some insight into your thought processes at the time.

By the way, if this were to confuse me, I would of course forgive you.

[Steve Griffiths]

No problem,

In this example, I was just anticipating a possible top in the S&P and Dow, so a TS1 sell on the QQQQ seemed like a good trade opportunity.

But as the TS3 buy came in a few days ago (at the Typical Wave C WPT and "in the direction of" the main trend), it was time to look to the long side again.

I hope this helps ?

Steve