GOOG...Simple Is Best
One thing I've learned over the years is that the best trading systems or methods are the ones that have the fewest trading rules. If you ever come across a system that has many rules, chances are it will fall apart in real-time trading. Simple is best especially when it comes to trading the markets.
Markets cycle form range expansion to range contraction. If you use any volatility study you will be able to see this. Bollinger Bands, Average True Range, historic volatility all will reveal this cycle that has and will always exist in the market.
Markets go from low volatility to high volatility back to low volatility just like markets go from trending to consolidations back to trending.
So how do we trade this? I wish I knew...(just kidding). Well one way is to keep this really simple and not even use mathematical studies such as ATR or Bollinger Bands. For this method we are going to use just our eyes and look for inside bars on the weekly charts. Inside weeks occur when there is a week with a lower high and a higher low than the previous week..The week is "inside" the range of the previous week.
Above is a weekly chart of GOOG. The arrows point to inside weeks. The red line shows where the entry would have been which is simply the breakout of the inside week. The exit is on the close of the following week. Real simple huh? On GOOG this method has been quite profitable for all of last year. The chart was beginning to get a little confusing so I didn't label every trade but as you can see there were many winning trades and only 2 or 3 small losers. I matched the colors for a particular trade to make it easier to see.
Obviously you want to apply this method on stocks that move. I haven't tested it on other stocks but it's been working well on GOOG. Three weeks ago on this blog I recommended GOOG short, part of my reason for being short GOOG was this very method and the trade worked out very well.
Will this method continue to work in GOOG? I haven't a clue but while it is working I want to be trading it. Right now we have an inside week so I will be watching GOOG. You can add other filters to this method like volume or trend if you think it will improve the reuslts.
So there you have it..A simple system that makes money and is easy to trade. If any of you decide to test this method on other stocks and it appears to be making money, let me know so I can post it here for all to see. I'm all about sharing ideas. I'm a true believer in giving. I think thats one of the keys to life and I am thankful I realized this at this stage of my life...
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9 comments:
Fantastic observation! I have been doing some system development recently on this very phenomenon of trading the cycles between low and high volatility periods. Nothing earth shattering yet, but it looks promising.
Yeah, there is alot you can do with volatility trading..I like to apply this concept on intra-day charts as well but the accuarcy is a little sloppy..
K
Interesting observation on goog.
I was looking at a possible earlier entry to the trades.
If the open of the week following an inside week is > than the close of the inside week --go long/
if the open of the week following an
inside week is < the close of the inside week - go short.
If the 2 are equal use other method.
T
Your entry might work as well. You can do lots of things. You can even take the average range and use a percentage of that and add or subtract it from Monday's open as an enty..but the easiest is the way I outlined in my post..
Kevin , i like the simplicity and relevance of your observations/work.
You use an up-arrow for past 'buys' and for last week , yet i understand that this last week could be a sell set-up if prices break the week's low.
{so at this point perhaps the last candle deserves an up and a down arrow ; or are you bullish?}.
thanks again . i especially like your cycle observations.
I'm not bullish...I didn't feel like drawing an up and down arrow so I just chose an up arrow... You're not the only person that asked me if I am bullish... I guess I should have drawn a horizontal arrow...My mistake
Kevin...I see which weeks were inside weeks but how do you determine if its a buy op or a short op? Am I missing something?
Whichever way GOOG breaks out you go in that direction. If GOOG takes out the inside week's high, you buy..If GOOG takes out the inside week's low you sell short....thats's all there is to it.
Interesting method. Does it only work for weeks? I tested it a little bit on AAPL and QQQQ and it didn't fair nealy as well as GOOG. Considering realistic out points, probably a breakeven on both. But I think ever stock has it's own personality.
By week in 2005, for example, AAPL would have only had 2 trades and both probably would have been tiny losses or break-evens.
But - it's certainly an interesting concept and maybe you found the personality for GOOG for now... but if you try this for 2005 GOOG, it doesn't seem so advantageous.
Just observations, thanks for sharing your thoughts, sharing back.
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