Purpose
First and foremost I designed this strategy exclusively for short term intra day trading as a complement to my other trading strategies. For the time being I am using discretionary execution of the strategy and so far have only traded it in simulated accounts.
Setup
I first look for a defined intra day trend in the KBE etf, I choose to identify this market state with a simple two moving average crossover.
(below is the KBE chart for last Friday 4-11-2008)
I am currently using a longer 20 period SMA and a shorter 8 period SMA, these were selected because my back tests indicated those values to be efficient as a preliminary filter for trend.
I next apply Keltner channels to each of the 24 components of the KBE etf, an alert is set to notify me anytime one of the components touches a Keltner band on a strong counter trend move. At this point I am using a moving average of 5 for the center of the Keltner bands and an average true range of 2.05, again these values were selected based on my back tests and fell within a range of values that I deemed acceptable.
Entry
Once these conditions have been met I set a stop limit order at the current value of the average true range, this is done to ensure a reasonable entry price and to minimize the effects of slippage.
As the strategy develops I shall incorporate a pyramiding entry system, however for my initial testing I am limiting myself to only a one time entry.
Above is an example of two triggered signals (indicated by the red arrows) that occurred last Friday (4-11-2008), this is the same date as the KBE chart in this post so you can compare the component to the index.
In my next post in this series I will discuss my stop placements, profit targets, and position sizing.
Andrew
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