Bi-Directional Algorithmic Trading
Algorithmic model has a limitation, it is either a long or a short system. A
long position must be closed before a short position can be established. Can we
trade both sides of the market at the same time?
The Opening Phenomenon
In his book Trading
the 10 O’Clock Bulls, Bysshe proved that: in the first 30 minutes of trading, markets do not have a
trend. All
Indicators failed to detect a trend in the 30 minutes. Fisher in his book The
Logical Trade: Applying a Method to the Madness proved that a trend forms
when price breaks out the 30-minute price range.
Law of Price
The Law of
Price states that the High is higher than the Open, and the Low is lower than
the Open. This means price will
always
fluctuate around the opening price.
Market Neutral
Our bi-directional algorithmic model does not need to
detect a trend. It is simply the combination of two Buy-Low, Sell-High systems,
one goes long and the other goes short on the same asset.
According to Guppy, markets are not trending 70% of the time.
Back-Testing
We tested this model on the Dow Jones index futures.
Net profit was 33,800 US dollars from Jan 2, 2011 to
Aug 26, 2011. Detailed test results are found in our book: Quantitative Grid Trading (ISBN:
978-1463652388). Maximum drawdown is only $1,000.00 per
day. Sharpe ratios are quite high.
Live Trading
We live traded this system on many symbols in different markets, from equities,
futures to forex.
The
performances are satisfactory. >>
More
Equities:
We tested this bi-algorithmic model on QQQ-QLD. The results are satisfactory.
Forex:
We tested this model on
EURUSD-E7. The results are satisfactory.
Futures:
We tested this model on
ES
GC MHI
NQ QM YM. The results are satisfactory.
Entry and Exit without Indicators
The model enters the market both long and short the same asset right at the opening
bell.
No indicators are being used as entry signal.
For futures, we long the current month and short the next month. For QQQ, we use
QLD as the pair. For EURUSD, we use E7 as the pair. For equities
and forex without a pair, we long the asset on one account, and short the same asset on another
brokerage account.
Risk Management - Price Breakout
In his book: Long-term Secrets to Short-term Trading, Larry Williams revealed a
trend confirmation signal: when price breaks out today's opening price +/- 50%
of yesterday's true range, or 1.8 times of the High - Open or Open - Low of
the previous 3 days, a breakout will be confirmed.
Combining Larry's wisdom and Bysshe's opening phenomenon, we structured a risk
management algorithm that stops (exits) the position (long or short) when a breakout is
confirmed.
The leg that is not stopped will continue to trade the trend.
No positions are carried overnight. Our model has no overnight risk, and no
impact on overnight buying power.