Saxo Bank (Saxo Bank)
Markets  |  October 25, 2012 11:28:29

Introducing business model FX Trend Snagger

This article describes the business model FX Trend Snagger, which was designed to allow a profit zobchodovat period in which currency markets show a trend. Through this model we first were traded real current position (short position in the AUDUSD) on 2 October 2012.

Unlike many models, monitoring the trends of the logic "seizure of profits (Eng. snagger)," on which the model is built, trying to cash in profits even when the trend is relatively short.

The weakness of many systems monitoring the trends lies in the fact that their business strategy is successful only in cases where the market shows an extremely steady and long-term trend, and closing positions often occurs only when the price clearly (and often significantly) issued against nastolenému trend , thereby trader loses much of the potential profits.

Trend Snagger aim of the model is to provide consistent and continuous recovery of profits instead of a low-frequency alternating periods of "abundance" and "lack" and "seize" the profits at a time when the possibility of recovery of profits exceeds the limit value and momentum when the market falls. So does not wait for it to occur to weaken the position of successive movement against the existing trend. The model will therefore be where markets exhibit exceptionally trend behavior achieved in comparison with the traditional models trends pursuing worse results, however, in cases where the trend is not as pronounced, the results will be better contrast.

A model based on rules

This model is based on pre-defined rules, which, however, leaves some room for the establishment of specific price level at which the trader places the initial and interim stop orders, and for determining when to select the gains when the market trend fully succeed. Notwithstanding the possibility to derogate from certain rules that are based on the conditions prevailing in the market, however, the baseline risk (assuming a peaceful development of the markets) each specific position from the opening of trade is always the same regardless of the distance from the stop level, because of the size individual positions are calculated based on the potential loss in the event of activation of the initial stop command, as described below.

Traded products

At present, follows the model of the following instruments, which provide signals for trading the:


Opening trade

FX Trend Snagger open positions based on the following basic parameters:

1)        Crossing exponential moving averages (EMA). The trend is used to define two exponential moving averages (short and long EMA), whereas bull trend is in the case of short EMA is above the long EMA and bear trend is contrary in the case where the long-short EMA EMA.In a position to enter into the day, when the short EMA is above or below the long EMA (assessed according to the daily closing prices).

2)        Exceptions. If a particular instrument should last two signals (one in each direction) results in activation of the stop orders and if these stores not received during its period of significantly profit, third, and subsequent signals are implemented only when the market has emerged from trading in the zone that is on the market during the last two trades (or more, ifmarket can not continue trading in the band break) has set up - ie when the market closes outside this band or this band breaks (see chart below).

Examples of signals to the opening of trade, which were not realized - the above graph shows the evolution of EURJPY during the summer of 2011. Signals 1 and 2 would be implemented and resulted in the activation of stop orders, and over the life does not get much profit. Signals No. 3 and 4 should be ignored, because the market remains in the band and never conclude failing outside the range defined signals No. 1 and Second Accepted the signal would be 5, because the market closes on the day when the signal occurred, originally established outside the zone.

Closing the deal

The moment you open the trade, place a stop order initial model, which is based on a percentage of the value of recent market volatility. This percentage depends on the traded currency pair and its previous behavior. When the position acceptably gets far into profitable territory, his assuming the role of interim stop orders.

Stop orders

Initial stop command: (depending on the instrument approximately in the range of 1 to 1.4 times the average true range (Average True Range - ATR) ATR usually about 1.0 for EURUSD and EURJPY and slightly more for other couples with whom model of business. Ranking stop command can be modified in the event that there is a significantly large shift in favor of a new trend, before a signal is generated for trading the, or if the value of the ATR is extremely low compared to historical volatility traded pair. Regardless of the above, the size of the position adjusted so that the distance to the initial stop command has always led to the same absolute percentage loss (price slippage is not taken into account).This situation is discussed in more detail below, but the main idea is that for each new position is maintained constant risk of losing starting at x% regardless of the length of the underlying instrument from the stop command expressed by the number of points (pips) or percentage.

Continuous stop command: Once there is a trend setting - ie move into profitable territory by more than a predetermined multiple of ATR - changes the stop command to the new "rolling stop" that shifts compared to the initial stop command above, which new command is slightly wider with the way the business was getting stronger inprofit. Jump from the initial order to stop the continuous is relatively large, but stop command when it does not necessarily get into profitable territory. Continuous tracks is determined algorithm and generally does not modify, if it is still active a position (initial open position, consisting of two parts). At the moment but there is a withdrawal of profits from the first part (half) position, the stop command cancels the ongoing and instead creates a stop fixed with a little more freedom in decision making, which is often wider than a standard running track and provides more space volatility market. In any case, it is the second part of the position stop is always created in profitable territory, which provides protection against the case that would be the trend so far has developed an unmatched position adversely.

"Stop Orders" a change in trend. In some cases, a change trend before reaching levels at which they are located or initial interim stop orders. In such cases, of course, closed position or open a new position in favor of a new trend in accordance with the above rules described in "Opening the trade".

Profit taking

The whole system is based on a relatively simple logic of profit-taking, which is clearly defined for the first half, or "part" position. The rules for profit-taking in the second half of the position are a bit more flexible and changeable and depends on market developments. For selecting the most important profit overall development trend strength indicator (Trend Strength), which model is used, which is only a statistical indicator indicating where the price in comparison to the two moving averages and what is the strength of this indicator compared to the last historical record.

• Selecting profits at the first position of the: When profit taking at the first position of the two conditions to be met. Collected some of the profits must firstly exceed the threshold established for the position for profit taking, which is set as a multiple of the volatility of the traded instrument. Second, it must be true that the trend strength indicator is in its "second wave" and that had been in the first wave reached the minimum required value (the first wave is defined as the increase in the daily trend strength indicator - wool is finished when the peaked and the indicator begins to decline again) and profit-taking occurs only after the appearance of the day "retreat", which is a day on which there is a loss of momentum.Special command to stop half position (first part) we enter when the market will exceed the threshold for levying income to secure a decent profit before from it takes too much of the market turn back. For more, see example below.

profit-taking position on the second part: For profit-taking in the second part of position requirements are a little looser, even though logic remains essentially the same. Profitable threshold is essentially twice the profit threshold of the first position. For the second part similarly waiting for the two waves of growth, strength and trend of weakening one day momenta, then we choose profit.If we choose the first part of a very large profit, more profit can in general also hope for the second part, even if it often just happens, if the trend continues and model zisku waits before selecting the desired force values ??trend.

Exceptions. Exceptions to the above may be used in those cases where profit increases parabolically very fast pace and goes well beyond the first and second threshold. If both of the positions greatly exceed its basic thresholds for the selection of gain, in this case for one or both parts of the gain select.

Graf -The principle of operation strategies FX Trend Snagger: Note that the shops on the first two signals (first and second arrow up arrow down the left side) in the above chart ended activating stop command, and therefore the second long signal we open store in the first moment of green ring, which leads to breaking the previous minor highs. Ring 2 shows the moment when the momentum achieved first nominal profit targets, but in this model we choose to gain the next day, when the price drops a bit, since that day will weaken momenta. The same is true for the second collection of profit at the time indicated by the ring No. 3 Note that due to the fact that the price exceeded the nominal profit goal in both cases was entered tighter stop command in case the market corrected too much.In this case, the relevant part of the position was closed in profit stop command to the red line. This method is applicable if the trend continues without losing momentum and far exceeds the nominal target selection for profit - which is part of the overall concept of strategy Snagger. For example, if the market at the time indicated by the ring No. 2 continued for two more days in a sharp rise, a long trade, according to this model remained open for two days, provided that it also rose and trend strength indicator, which in the days of a strong general trend is.

Re-enter the market in the current trend

Re-entry after activation stop command. Sometimes it happens that due to market volatility will trigger stop command and instrument subsequently reports rather signs of continuing trend in the same direction before turning to a new trend in the opposite direction. In these situations, the model allows re-entry into the market in the direction of the original trend. Rules for re-entry would be necessary to more fully explain, but in essence, re-enter the market if 1) the market has seen only a sharp spike, which caused the stop command, and then immediately walked away from the stop level or 2) when the market closes new extreme level, in line with the current trend, or near that level.For example, when closing a long position activating the stop command, but the market then in the following days again reverses and goes above, according to this open model after reaching new highs 6 to 10denního closing values ??(depending on the degree of consolidation in the band) again long position. Example of re-entry is shown in the following chart.

Example of re-entry after activation of the stop command. EURUSD: Red arrow pointing down indicates the date when the new model detected a downward trend and generate a signal to sell. If we used a standard size 1 stop ATR (indicated by a red line on the ring), two days later, this position unfortunately for this model triggers a stop command. Model then allows two ways of re-entry into the market: the day after the deadline, after which the position was terminated stop command (the day after which swing closed position stop command, since achieving this level clearly caused a temporary blip), or the model can possibly wait for closure a new low, as shown by the green ring two days later.

Other types of recurrent inputs - re-entry within a strong trend.

Sometimes there is an extremely long-term trend, and this model has no positions left open, because of its two parts were choosing profit. In this case, the correction of the position of the opening half-size, and assuming that the input level is significantly better than the level at which occurred within the initial trend to select the gain of the second position.

The position of the half or full size can be re-opened when nearly occurred crossing EMA (exponential moving averages) in the opposite trend, but then again the market continues in the direction of the last signal (for which it has probably been the selection of profit and no position will be left open ). Parameters for setting the risk for these types of positions equal.

Size of business

Size of the position of the new trade consists of two parts, because the collection of profit always occurs in two phases, while the store is always open in full size.

The size of each new position is based on the recent volatility of the financial instrument and thus the distance from the initial stop level (which also depends on the volatility). A corollary is that, regardless of the current market volatility or a traded instrument, the risk of any new positions constant. Various instruments with which, in this model, trades, have different initial stop levels, which are based on historical volatility of these instruments - so EURUSD and EURJPY with stop orders at a distance of approximately 1 ATR from entry level, while other instruments, this distance is somewhat greater. It also means that for pairs without EUR size position due to their relatively smaller daily volatility.Please note that the price slippage (slippage) in the case of fast market movements or. weekend price gap may cause a slight deviation from the plan to maintain a constant risk.

Considerations in terms of portfolio composition

In addition, it is necessary to take into account the composition of the portfolio and, if the model generates a number of signals for highly correlated instruments (especially if such signals appear on the same day), reduce the size of some positions (half) or completely ignore some signals.

Important notes / exceptions.

In the event of extreme volatility caused by events such as natural disasters (eg earthquake / tsunami in Japan in March 2011), or other sudden events which cause wild market parabolic moves, it is possible to trade in this model apply exceptions to the above these rules. All such exceptions shall be taken solely in order to avoid further risk or to eliminate existing market risk when the market situation is developing in favor of open positions (stop orders are entered, so if there is an extreme fluctuations, stop orders will be activated and the only additional risk will only slippage).In such cases, will need a few days to stabilize the situation and to be able to re-join the implementation of new trading signals.

John J. Hardy, chief currency strategist at Saxo Bank

 Globální online investiční banka

Saxo Bank je globální investiční banka specializující se na online obchodování a investice na mezinárodních finančních trzích. Saxo Bank umožňuje soukromým investorům a institucionálním klientům obchodovat s FX, CFD, cennými papíry, futures, opcemi a dalšími deriváty a poskytuje i profesionální správu portfolia a fondů díky svým online obchodním platformám oceněným řadou různých ocenění.

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