Originally posted by Runningbear
Quah, first let me congratulate you on the success of the system, it's one of the few mechanical systems I have seen that works so consistently.
Personally I think the fib entry has little to do with the success of the system. I think the secret is the fact that you use a smaller profit target, than your stop, and as long as you trade with the immediate direction of the market, you will get hit predominantly on the profit target side.
As you can see from the performance of the system on the NQ to the ES today, the higher the volatility and the lower the profit target, the better the performance. Buying directional momentum with a very small profit target is what I believe makes this system so good.
There was an article in Active Trader magazine a couple of months ago about a trader who also used a longer stop than profit target, which at the time I found interesting. He also had a very high win to loss ratio. Worth a look for any of you guys interested in this thread. From memory he was using much bigger stops, in the region of 7 points.
So instead of using the fib entry points, I would like to offer a suggestion to everyone for another entry point, that should give similar results with more trading opportunities per day.
Now many traders trade off five minute bars, both scalpers and intraday swing traders, so when each five minute bar is completed, if the high is higher than the high of the previous five minute bar, it is going to trigger, momentum buy signals for a range of traders operating off longer time frames. Therefore if in the last few seconds of a five minute bar, the market has already made a higher high than the previous five minute bar you would go long.
Once the market ticks over into the first minute of the new five minute bar, new players get their signal and buy in and the market gives a little surge, which should be enough to get your profit target hit most of the time. You could confirm the direction with any other indicator, such as the Stochastic.
The reason the stop reverse also works so well is because when the market doesn't hit your profit target, you have generally bought at the top of an exhaustion move and the market wants to reverse quickly, getting you hit on the other side often.
If you traded once every five minutes for the first 2 hours and the last two hours, you would have 40 trades a day plus however many reversals. And you could take a decent lunch break.
Many of you may be surprised to know that I trade a swing system, that uses a stop reverse on failed breakouts from a two day high. So the reversal technique can work across any time frame with great effect.
I'm not a daytrader so I'd be happy to hear from anyone that can test my theory in the market.
Cheers,
Runningbear
