“Using a mechanical system is the best way to consistently make money trading. If you know that your system makes money over the long run, it is easier to take the signals and follow the system during periods of losses”. – Richard Dennis
Automation really seems like the Holy Grail of trading. Craft a method, smack it on a machine and let it do the grunt work day after day. If only it were that simple!
Many traders attempt to automate their strategies and fail. In our experience, successful trading models aren’t necessarily complex – but they are tedious to implement in a totally automated way. So our solution, at FXRenew, has been to approach things in a different way. Instead of going for Gold, we’re simply aiming at the podium: if we can’t fully automate a strategy just yet, perhaps we can automate parts of our models efficiently.
And perhaps you can do the same. Let’s find out how.
Adding Automation to a Volatility Breakout Strategy
The example we are going to use is one of our own strategies used in our End of Day Signals: Volatility Breakouts. The systematic approach (which you can read in detail here) presents the following automation potential:
Setup Condition: wait for the Bollinger Bands Relative Width indicator to fall below 70%.
Entry Condition: wait for the price to close over the Bollinger Band in the direction of the prevailing trend. (Note, you need to use daily charts with New York close Candlesticks for this.)
You can see these two conditions illustrated on the chart below. The red vertical lines are the non-discretionary signals given by the setup and entry condition.
Initial Hard Stop/Trailing Stop: often, the trade does not go to the target and it does not make sense to give all your profits back if the market reverses. To this end, we apply a trailing stop using our very own supertrend indicator with the settings of factor 2 and periods 7.
So with a couple of well-cfafted indicators and EAs it is possible to automate Setup, Entry and Hard Stop/Trailing Stop. That’s a LOT of work that you no longer need to worry about. It allows you to save time & effort because your only job from here is to manage the position based on market behaviour.
Systematic Trade Management
We need to digress briefly on the concept of systematic trading decisions and automation. We’ve spoken many times before about the necessity of having extremely clear rules for confronting the markets. Without clear rules, you will be at the mercy of the market’s temperament. Here are some classic symptoms that usually indicate a lack of clarify:
- getting out of a position prematurely due to a “fast move” (which afterwards was only a retracement)
- trying to guess whether a move is a retracement rather than a reversal
- being nervous until you can “trail your stop to par”
The benefit of thinking systematically is that you disregard any market behaviour that doesn’t fit into certain boxes. We can’t possibly attempt to craft an “all season” trading model. Rather, each model should be built to exploit a very specific edge in the market (for example, volatility breakouts) and the trade management should follow on logically, complementing the approach (capture the breakout momentum before trailing more passively).
If you can do this, you are very close to automation. You will avoid guessing and make clear decisions based on various market behaviours.
For example, in order to capture momentum bursts off of volatility breakouts, you might decide to adopt the Supertrend on a smaller timeframe, in order to trail price more closely. In the 4H chart below, the red lines indicate “breakout” days, and the Supertrend is a potential example of trailing stop that knocks you out of the market when momentum dissipates.
I really need to stress the fact that we are not blindly seeking to “pick a few indicators” and create a system from them. Real-world trading models always start with the end in mind: what exactly are you attempting to do?
- Are you attempting to catch long-term breakouts a-la-Turtle Trader method?
- Are you attempting to catch volatility breakouts?
- Are you attempting to catch short/medium/long term trends?
- Are you attempting to catch extended prices before they mean-revert?
Each objective must be followed up with logical setup/entry/management/exit rules.
Ready-Made MT4 Indicators and EAs
We have decided to compliment our systematic methods with indicators and EAs that can automate bits & pieces of the work not only for us here at FXRenew, but also for you.
Each one goes through rigorous testing before being released to the public. They are a natural complement to our Signal Services and maintain their educational value because each indicator and EA comes with an explanatory PDF and there is always the possibility to reach out to our programmer directly for questions or for ad-hoc requests.
Our objective is to help you make your trading as simple & efficient as possible.
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.