Developing a Trading System for QQQ – Part 1 12/14/12

Friday I flew into Pittsburgh to take care of some family matters. During the flight I pulled out my charts on QQQ with all the indicators I wanted on them. I am sorting through my favorite indicators and linking them to see if they yield a reliable trading system.

First I looked at basic trend following systems. They are reliable but tend to give a lower probability of success. That also means I would face several losses in a row – possibly as many as six. Those losses would stretch over 2-3 months on a daily system. Not a good system for me.

Next I started looking at shorter duration trades based on price movements in waves. I want to catch the waves with my indicators and not wait for the waves to form visually before making a decision to enter. By the time I see the price wave forming, I am entering late. Mentally it is hard to enter long when price is falling.

My preferred method is to use a price accelerator/decelerator to tell me turning points. Stochastics is good but this is the second derivative of price movement, the first derivative being a price change. I am a trend follower in my heart as a trader, so I still want to keep a watch on whether the tide is coming in or going out. When the tide is coming in, the waves for going long are easier to catch and bigger in size. When the tide is going out, the troughs are larger than the wave tips and a reverse approach is better – that is to sell short or buy put options or sell futures at high points.

I had three pages with each page representing about a 14 months of QQQ data. One of the charts is a nice trend following chart. The second one was a nightmare – as QQQ stayed in a sideways mode for a full ten months; enough to destroy any trend follower’s system! The third page showed some smaller up movements, but very distinct medium sized wave formations that a trend following system would have done well in. I want my system to do well in all three scenarios....