Key Reversal Patterns Using Kase Bars

Transcription

1 Issue 3 Wednesday, August 13, 2014 Key Reversal Patterns Using Kase Bars Michael Burke VP, Client Training and Education TSLabs@TradeStation.com Features Studies/Files Included: Strategy Style: Bar pattern Workspace Markets: Equities, Futures, Forex Trading Horizon: Day trading, Swing trading Background The key reversal bar pattern is a simple two-bar pattern that may help signal the reversal of a trend. In an uptrend, prices hit a higher high and then close lower than the previous bar. In a downtrend, prices hit a lower low, and then close higher than the previous bar. Figure 1: Key Reversal The most common application of the key reversal concept is to identify a short-term change in direction on daily bars for swing trading. However, this technique can also be applied to shorter- and longer-term bar intervals. Key Reversal Patterns Using Kase Bars Page 1 of 7

2 The strategy presented here utilizes only strategy components built into TradeStation. No custom strategies or EasyLanguage modifications are employed. Figure 2: SPY daily bars with Key Reversal Up and Key Reversal Dn ShowMe studies, along with the supplied strategies Key Reversal LE, Key Reversal SE, Profit Target and Stop Loss. Note: The close of each bar is highlighted in yellow. Strategy Elements The key reversal up pattern and key reversal down pattern are exact opposite patterns; the following paragraphs will focus only on the key reversal up pattern to illustrate the concepts. The two technical components in a key reversal up pattern are the lower low and higher close conditions. The lower low may be considered the setup and the higher close the trigger for the trade condition. Figure 1 above illustrates the key reversal up conditions based on a comparison of the current bar s low to the previous bar s low, a 1-bar lower low. However, it is common to adjust the strength of the key reversal low by increasing the number of bars in the lower-low look-back. This may be done with the Length input in the strategy. If we look back only 1 bar, as is the strategy default, the overall trend is unclear. But if the Length input is increased to, say, 3 bars or 8 bars or 21 bars, then the strength of the trend leading into the key reversal bar may be more significant. The higher-close trigger in a key reversal up pattern is somewhat arbitrary in that only the previous bar s close sets the hurdle for the pattern trigger. If the previous bar closed at its high, it will be more difficult for the key reversal close to complete the pattern. It is often the case that the current bar s close just misses overcoming the previous bar s close, yet the reversal continues on the next bar and the trade is missed. In order to make the higher-close trigger condition more robust, we can use a price-based charting style called Kase bars to avoid the issue of just missed completed patterns. Kase Bars Kase bars are a variation of range bars, a type of charting style driven by price movement; a new Kase bar is created when the specified true range has been met. For example, if the specified range amount is 1.00, it means that each Kase bar will have a true-range value of Since Kase bars are based on price movement and not time, each bar will represent a different time span. A single Kase bar could represent several minutes or several days of price action. The open of each Kase bar is always the same price as the close of the prior Kase bar. Key Reversal Patterns Using Kase Bars Page 2 of 7

3 Figure 3: Kase bar, range set to 1.00 Kase bars are all equal in height based on the range specified by the trader in the Format~Symbol dialog. Kase bars always close at the high or low of the bar; however, there could be overnight gaps displayed with Kase bars that are exceptions to this rule. Kase bars build new bars based on a user-specified Range setting in the Format~Symbol dialog of the Chart Analysis window. The primary benefit of Kase bars for key reversal patterns is that the higher close condition now has a consistent hurdle to cross: the low of the previous bar, which is also typically the open of the current bar. The trigger condition also benefits from the confirmation in price movement in the reversal direction by virtue of the size of the Kase bar. Kase bars have a secondary benefit in that much of the random market noise and occasional low liquidity bars are compressed into the range of just one or two bars. Figure 4: SPY 1.00 range Kase bars built using 1-minute bars - with Key Reversal Up and Key Reversal Dn ShowMe studies, along with the supplied strategies Key Reversal LE. Key Reversal SE, Profit Target and Stop Loss. Strategy Rules The strategy enters on the open of the bar following a key reversal and exits when either the profit target or stop loss is reached. It is also possible for the strategy to reverse from long to short or short to long before hitting either the profit or stop exit. Long Entry If the current bar makes a new Length bar low (3 default) and the close of the current bar is greater than the close of the previous bar, then Buy next bar at Market. Key Reversal Patterns Using Kase Bars Page 3 of 7

4 Short Entry If the current bar makes a new Length bar high (3 default) and the close of the current bar is less than the close of the previous bar, then Sell Short next bar at Market. Exits Sell or Cover with a limit order at a set profit target in dollars. Sell or Cover with a Stop Market order at a set stop-loss target in dollars. Strategy Inputs Key Reversal LE Length 3 Length (bars) for the Lowest Low look-back. Key Reversal SE Length 3 Length (bars) for the Highest High look-back. Profit Target PositionBasis True Calculate profit in total dollars for the position. Amount 200 Amount of profit in dollars at which point the position will be closed. Stop Loss PositionBasis True Calculate stop loss in total dollars for the position. Amount 200 Amount of stop loss in dollars at which point the position will be closed. Note: Click on the definition button in the Insert~Strategy dialog to learn more about any of the supplied strategy components. Strategy Performance Report Highlights An initial set of strategy tests was done with a baseline set of assumptions and input parameters for entries, and was tested using $200 as both the profit target and stop loss, which, in this case, equals two full range bars. Key Reversal Patterns Using Kase Bars Page 4 of 7

5 Back-testing Settings Initial Capital: $20,000 Trade Size: 100 shares Commissions: Issue 3 $1 per trade Wednesday, August 13, 2014 Slippage: $1 per trade History: 1 year Bar Interval: 1-point Kase bars, using 1-minute data Profit Target: $200 per trade Stop Loss: $200 per trade Figure 5: Strategy Performance Report Performance Summary Tab Simulated historical past performance does not guarantee future results. Key Reversal Patterns Using Kase Bars Page 5 of 7

6 Figure 6: Strategy Performance Report Equity Curve Detailed Simulated historical past performance does not guarantee future results. Suggestions for Improvement This key reversal strategy using Kase bars can be adjusted to a wide range of risk/reward profiles that would allow most any trader to find a combination of performance and risk criteria they are comfortable with. This strategy may also benefit from an additional, independent technical exit to more efficiently capture profits and limit losses (e.g. trailing stop, momentum). Using only fixed profit and loss exits can be useful for initial testing, but is not flexible as market volatility changes over time. There is also an opportunity to strengthen the initial entry by adding one or more signal-filtering criteria that look at key levels of support and resistance, long-term trend, or overbought and oversold conditions over longer time frames. Key Reversal Patterns Using Kase Bars Page 6 of 7

7 All support, education and training services and materials on the TradeStation website are for informational purposes and to help customers learn more about how to use the power of TradeStation software and services. No type of trading or investment advice is being made, given or in any manner provided by any TradeStation affiliate. This material may also discuss in detail how TradeStation is designed to help you develop, test and implement trading strategies. However, TradeStation does not provide or suggest trading strategies. We offer you unique tools to help you design your own strategies and look at how they could have performed in the past. While we believe this is very valuable information, we caution you that simulated past performance of a trading strategy is no guarantee of its future performance or success. We also do not recommend or solicit the purchase or sale of any particular securities or derivative products. Any symbols referenced are used only for the purposes of the demonstration, as an example not a recommendation. Finally, this material may discuss automated electronic order placement and execution. Please note that even though TradeStation has been designed to automate your trading strategies and deliver timely order placement, routing and execution, these things, as well as access to the system itself, may at times be delayed or even fail due to market volatility, quote delays, system and software errors, Internet traffic, outages and other factors. TradeStation Group, Inc. Affiliates: All proprietary technology in TradeStation is owned by TradeStation Technologies, Inc. Equities, equities options, and commodity futures products and services are offered by TradeStation Securities, Inc. (Member NYSE, FINRA, NFA and SIPC). TradeStation Securities, Inc. s SIPC coverage is available only for equities and equities options accounts. Forex products and services are offered by TradeStation Forex, a division of IBFX, Inc. (Member NFA). Copyright TradeStation Group, Inc. Key Reversal Patterns Using Kase Bars Page 7 of 7