The All Weather Trader by Tom Basso

Author:Tom Basso
Language: eng
Format: epub
Publisher: enjoytheride.world LLC
Published: 2023-02-23T00:00:00+00:00

Let’s get into what I consider to be Counter-Trend Trading. I look at overbought/oversold conditions and set up the trade in the opposite direction. If conditions on whatever oscillator I use indicate that the market is oversold after falling significantly, then I’m looking to buy. I then use an extremely short-term Buy/Sell engine to trigger a trend-following trade to the upside. I place my stop at the indicators in the opposite direction.

The time periods are different from my long-term trend-following timing models. When looking to capture very long-term trends in something like my Sector ETF Timing, I use fifty days for my sell stops and twenty-one days for my buy stops. In Counter-Trend Trading, I would opt for something between one and three days, depending on whether it is in the futures markets or the stock markets. You can dial it in wherever you wish, but the important point is to make it a lot shorter time period than longer-term trend-following models you might have in the portfolio. You want to pick up profits in the sideways, so trades are going to be shorter, profit-to-loss ratios smaller, and trades a lot more frequent.

Because the profit-to-loss ratio of Counter-Trend models is lower than typical long-term trend-following models, you’ll expect a higher profit/loss reliability percent on the trades. You should be striving for more than 50 percent on these types of strategies, but smaller profits on positive trades. A trick I’ve learned to use is to put on a normal position, then liquidate half of the position at a profit equal to the risk on the trade. In this way, that trade immediately becomes a low-risk trade, and the remaining position can be allowed to run like a typical trend-following trade, albeit for what will likely be a shorter time period.

Several things you can note looking at the statistics on these runs. First, let’s remember that the same exact portfolio was used in the case of both the long-term and short-term strategies. Also keep in mind that the same three indicator package of Donchian, Keltner, and Bollinger was used in both cases. Normally, in the real world, I might mix up the indicators a bit to diversify by indicator, but I didn’t in these cases to show some simple concepts. The number of trades in the short-term simulation is off the chart at 19,750 trades over the period. That would be a lot of work to keep up with and probably is not easy for many traders out there, but I wanted to show you how blending in something like this different short-term strategy can provide some diversification to longer-term strategies.

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