Stocks & Commodities V. 23:12 (50-52): A Simple Range-Trading System by Xavier Maria Raj
Creating a trading system is always a good idea, and
keeping it simple is even better. Here’s a look at one
strategy that could make all the difference.
It is always tempting to react to price movements, but doing so to each one may not be a good idea. If you
react to each and every price move, your transaction costs could be comparatively more than your profits!
To avoid this situation, you could use filters or identify specific patterns and build a trading strategy. With this in mind, I have presented a simple strategy based on a specific chart pattern.
THE LOGIC BEHIND THE PATTERN
The chart pattern involves identifying the bar with an expanded range relative to the previous bar’s range. This pattern is confirmed when the current bar’s range (High – low) is greater than the previous bar’s range.
Today’s Range (High – Low)> Previous Day’s Range
Based on this pattern, let’s formulate a trading strategy.
• Signals to be generated for the next day are based on the direction of the expanded day. So on the day of the upward direction in prices — when the close is greater than the open — take only long signals for the next trading day.
• If prices move in a downward direction, take only short signals for the next trading day.
The last bar on Figure 1 shows an expanded range day with an upward direction. Figure 2 shows an expanded range day with a downward direction. Based on this trading rule, let’s generate signals using the following condition:
• Generate a buy signal on the trading day following the upward direction expanded range day with a stop-loss buy order above the previous high plus one tick. . .