- Trends can occur at anytime and without warning; employing a method which allows you to benefit from these spontaneous outbursts is the main priority of any trade signal.
- Volatility is the core ingredient of profitable trading. Without it, it is often better to be flat.
- Stops should be as large as possible but never larger than necessary, finding that balance is a mind numbing balance of never wide enough and too wide. We still struggle with this after many years of experimentation.
Stops are based on the swing high or swing low of the current market structure. If the daily trend is long then our stops will be at the daily swing low.
Daily swing low is a somewhat subjective notion, an art if you will, that assumes that the prior spike downward is the "line in the sand for the market" by which all large market participants will base their next trade decision on.
Some examples of Swing Lows:
Swing Highs are the method by which we determine our stop losses for short trades. Swing highs often look like this:
What separates our method of stop loss from any other system I have ever observed is that we do not employ price based stops, we employ closed bar based stops. If you take a look at the screenshot above you can see that price pierced the swing high on 3 occasions. however it never closed above the swing high and thus there was no loss. This is a slightly controversial method of taking stops because it has two inherent weaknesses:
- The actual price at which a stop is taken is unknown before entering the trade.
- It allows subjectivity in actually applying the stop loss rule.
While it is true that often stops are larger on losing trades. It is also true that many trades which would have normally been stopped out by using fixed price stops are saved and go on to very large winning trades. This is primarily why we apply closed bar stops in the Meantrades system. Counter-intuitive to most but completely logical to us.
Determining Market Direction
While it's subjective and often dangerous to enter a trade based on a simple notion of trend. It is far less so if you simply apply the concept of the overall market trend to a smaller time frame to determine when to enter trades based on your trade system. In the case of Meantrades we use a binary concept of trend: long or short.
- Long is created at the open of the next day when the Supertrend indicator is signaling Long.
Occasionally we are subjected to meandering markets and in this case the binary determination of trend gets us into trouble. But it is fairly common that volatility will also drop off simultaneously. When that is the case, very few indicators will produce winning results.
Meantrades uses only two indicators in it's system, Keltner bands, Supertrend and the "3rd indicator," arguably the most important, is the structure of the OHLC price bar.
Employed for their measure of volatility of the previous price range. We only take trades after price, within the previous 24 bars, has either touched or traded outside of the Keltner bands/ Keltner Channels. This is a safe bet that the volatility range in a given market is healthy and the potential for trend continuation exists.
Keltner bands are also employed to move winning trade stops to break even. If we enter a short trade and price reaches the lower band, we move the stop loss to break even to protect from any adverse price movements.
Although the name is somewhat prosaic, it is indeed a super indicator as far as Meantrades is concerned. Fairly quickly in our trading evolution we learned to discard the absolutism of indicators. However, the Supertrend has always been a robust indicator of the market regardless of current conditions This is the case for two reasons:
- Allows you to stay in winning trends until they are reasonably at their end.
- Prevents you from entering runaway markets which have paused and giving you a false impression that they are about to reverse.
Not technically an indicator, it is nonetheless the most important aspect of the Meantrades method. Without a proper close of the price bar confirming the other two indicators are in sync, trades are ignored. What this means simply:
- Do not go long until the price bar closes higher than it opens
- Do not go short until a price bar closes lower than it opens.
Although not set in stone, the timeframes meantrades takes signals from is quite important. Nothing smaller than a 1 hour time frame should be implemented if the historical analysis is to be believed. Smaller time frames allow for very small stops but are widly inconsistent depending on markets. For more consistency we look at daily charts for the trend and hourly charts for entries and exits.
When looking at the trend, we use a binary observation. Depending on where price is in relation to the supertrend, we can decide the following:
- If price is above the supertrend we look for long signals on the smaller time frame
- If price is below the supertrend, we look for short signals on the smaller time frame.
Meantrade Entry Signals
- Check Daily Timeframe for Supertrend. Establish if market is Long or Short.
- Drill down to either a 1 hour timeframe or a constant range bar chart of no less than a 10 pip range.
- Check that the Keltner Channels have been either touched or pierced in the opposite direction of the daily trend. For example, if the daily trend is long, the lower keltner band should have been traded in the previous 24 bars (as in 1 full day for the hourly chart). And, of course, the opposite for daily short trends.
- Only enter on the close of a bar, never in the middle of a bar. The bar should close in the direction of the intended trade. This means for a long signal the bar will be bullish or close higher than it opens, for short the opposite is true.
- Once the daily trend, the keltner and the price bar are in alignment, the final step is to ensure that the supertrend is also in the direction of the trade on the hourly chart. Once all of these criteria are in alignment, the final check is to ensure that the price bar has not already crossed the entire keltner channel and is still "nesting."
- At the close of the first bar where all criteria are met, an entry signal is created.