Patrick Mikula CTA
Mikula Forecasting Company
Copyright © 2010 by Patrick Mikula All Rights Reserved
Warning: The trading method described below involves selling short. Many stop brokers will not allow retail customers to sell short. If you are going to use this method with stocks, please discuss the issue of selling short with your brokerage firm before you start.
Notice: MarketWarrior does not include an order placement module. You need to have a method for placing orders with your broker to use this trading method.
Here are some instructions for using a MarketWarrior stop and reverse method on real-time charts. After you create a chart, the first step is to check the settings for indicator recalculation. Do this by selecting the name on the Format tab and clicking “Reformat” button. See the first picture. This will open all the chart settings on the Format tab.
The picture below shows the chart settings. Look for the setting “Real-Time Indicators will Recalculate On:” This should be set to “New High Low”. This means all the indicators will recalculate when the current price bar makes a new high or low for that current bar. It is not necessary to recalculate on each new tick.
The next step is to add an indicator template to your chart that contains your stop and reverse method. This is done on the Group Tab. Select your stop and reverse template and click “Add Template” button. If you have not saved a stop and reverse template, you will need to set up an indicator as a stop and reverse indicator and save the template for later use.
When the indicator applies, you will notice that the indicator always draws one bar into the future. When trading real-time we do not use the indicator value that draws one bar into the future. You should turn off the labels for this indicator because they show the price for this future bar value that we are not using. The picture below shows this label. This future bar value is used when trading daily charts and is not for real-time trading which we are discussing here.
The picture below shows the indicator settings where you turn off the labeled shown in the previous picture.
Now we are ready to start trading. A stop and reverse trading method is always in the market; it always has a position open. But when we first start trading, we have no position open. We need to find an opportunity to enter our first position. To do this we identify what position the indicator currently is showing as open. On the chart below, a long position is currently being shown as the open position by the indicator. This is because the line that defines the stop order price is below the price bars. The stops for long trade are always below the current prices. The stop order prices for the open long trade are defined by the blue line on the chart below. To find our first trade and enter the market, we will wait for this stop order line to be hit. Remember we are using the stop order price that is lined up with the current real-time bar, we are not using the stop order price that extends one bar into the future.
The chart below shows the time when the long stop order is hit. A long stop order is a sell order. Each time a new price bar starts, a new stop order price is created. When you are trading a long-term real-time chart such as a 60 minute chart, you can place a stop order with your broker and then when a new bar forms each hour, you would cancel the old order and place a new stop order. When you are trading a short-term real-time chart such as a 1 minute chart or a 5 minute chart, you will want to watch the chart and when the stop is triggered, you would place the order as a market order. On the chart below, the blue line stop order which opens a short trade would have been placed as “Sell 1 Silver April 2010 contract at 230.1528 Stop”. Or if you were using a short-term chart you would place a market order to sell. Once we are in the market with an open position we will have an open position from this point forward.
The chart below shows our open short position. The short position stop order is the red line. On a long-term chart such as the 60 minute chart, you would place a new stop order each time a new bar is started. On the chart below when the current real-time bar starts, you would cancel your previous stop order, and then would enter a new stop order like this, “Buy 2 Silver April 2010 contract at 230.3617 Stop”. Notice we are now entering an order for 2 contracts. This is because we must always stay in the market. One contract in this stop order will exit the current short position and the second contract will open a new long position. So we will stop out the open short position and enter a new long position. This is why the method is called stop and reverse. If you are trading a short term real-time chart, you may want to watch this stop order get hit in MarketWarrior and then manually enter a market order to buy 2 contracts. This is often easier than cancelling the previous stop orders when a new bar charts. The result should be basically the same.
The picture below shows the time when our short position stop order is hit. At this moment our short position is stopped out and a long position is started. Notice the blue line has now started below the price bar. This is the new long position stop price. At this point you need to either place a stop order for the new long position such as “Sell 2 Silver April 2010 contract at 230.0841 Stop” or you need to watch the market and be ready to place these orders as market orders.
The picture below shows a continuation of the long trade entered on the previous chart. Each time a new bar starts, a new stop price is created. For the chart below, you would cancel the stop order from the previous bar and place the new stop order “Sell 2 Silver April 2010 contract at 230.3032 Stop”. On a 60 minute chart, you would only have to do this once an hour. If you are trading a 1 minute chart or other short-term chart you would want to write down the stop price and get ready to place this as a market order as soon as MarketWarrior shows the stop price hit.
One problem to watch out for occurs when a market forms small ranges and starts to hit the buy stops and sell stops repeatedly. On the chart below, I have circled two areas, labeled A and B, where this occurred. When this starts to occur you will need to exit the market and wait for this to pass. If this occurs frequently in a market, then do not trade that market with this method.