TRADE RANGE SELECTION STRATEGY
Choosing the cycle Trade Range is a very important task. The system provides you with several ways to construct, view and measure the Trade Range.
The Trade Range has two important functions. First it is a component of calculating the expected profit. To refresh, the expected profit is calulated by summing the initial Cycle Series numbers multiplied by the Shares Per Series. That result is multiplied by the Trade Range to get the expected profit amount.
Fo example, if the Cycle Series is 1,2,3,4 and the Shares Per Series is 100 then the sum of the series is 1+2+3+4 = 10. 10 X the 100 Shares Per Series = 1000.
Assuming the Trade Range is $2.00, then 1000 X $2.00 produces an expected profit of $2000.
The second function of the Trade Range is to tell the system when to buy and sell. The Trade Range is added to and subtracted from the last trade price to determine the next order prices. If the last trade price is $10, with a Trade Range of $2, the next order limits are $12 and $8.
As you recall creating the Trade Range is a function of historical volatility and Daily Move. It can then be further customized using the Five Lines Technique. The first stop in the path to creating the desired Trade Range is the Volatility page.
On Volatility one of the charts is titiled “Trading Range Lines”. This is your first look at how the Daily Move compares to the chart of the recent 40 trading days (2 months). This chart uses the Five Lines Technique to plot a linear regression line plus two lines above it and two lines below it. The distance between the lines is equal to the Daily Move. Here you can see the slope of the lines and view how the Five Lines fit the overall price action. This chart is purely informational and is used in conjunction with the other charts and data to give an overview of whether or not a stock is suitable for trading in the system.
Next you will the move on to Simulation. This is where you can backtest the components of the system using historical data. Run a backtest with the base Trade Range, then run the sim with different adjusted Trade Ranges. You will know pretty quickly what works and what doesn’t. The next step is Trade Range Optimization.
Trade Range Optimization will automatically run multiple cycles with varying Trade Ranges. When setting up a Cycle for backtesting you will have the opportunity to adjust the base Trange Range if desired. The system will then calculate three Trade Ranges above and three Trade Ranges below the base Trade Range in increments of 25% of the base. Run the optimizer and get a report showing the profit outcome of each of the seven possible Trade Ranges. It will be very clear which of the results to use going forward.
The next step is to note the selected Trade Range and go back to Simulation. This time plug in the selected Trade Range, but now try it using various Series Cycle Numbers. You will easily find the most profitable Cycle parameters by using this workflow.
These article has shown you how to select the appropriate Trade Range for your chosen stock.