Saturday, February 17, 2007

Reinventing the wheel

Today, when taking a walk with my dogs in the sun, I had the idea to add a study to my charts, which would show me on a percentage scale, where the current price was trading relative to the total range of the last 20 bars.

Implementing such a study in Ensign using a DYO study was relatively simple

You see the result of this DYO study in the second subsection (% Range). (There is a second study doing all the colors you see on the chart, but it's not important for the results)

The study results looked interesting enough as the trading idea behind the study was to enter a trade with the trend, when you see a retrace of 50% of the current range. And that's something the study was sure giving me.

But there was a lingering doubt, that even if I found something interesting here, it might not be something new. Actually it reminded me of the stochastic indicator, which as far as I remembered measured exactly what I was doing with my DYO. So I added a STO 20 to the chart and when setting the fast STO to a setting of 20,0,0 I got my newly designed indicator.

Eureka! The wheel has been reinvented.

Not only did I design an indicator, but I came up with one already known to the trading community. An indicator I now really understand, as I designed it from scratch. I used no formula book, I just implemented an idea and then saw that someone else already had exactly the same idea.

But while you might use the Stochastic indicator with certain standard settings, I now know exactly what I want, what this Stochastic indicator is showing me and why I don't want any smoothing introduced by averaging the fast line.

I want a retrace of 50% on the range of the last 20 bars and I want a Turbo (STO 6,0,0) to be at the bottom or the top at the same time in a trending market to get me in a trade or to add to a trade (if I happen to be still in).

If this Stochastic indicator will replace my CCI I just don't know yet. I have had a time two years ago when I had the CCI replaced with the Stochastic, but then I had done it because the Sto and the Turbo-Sto showed me clearer slings. I did not know then, what this indicator really was showing me, what this retrace to the 50 line (or zeroline on my chart) really meant, especially when it turned at this 50 line. I used settings, which mimicked the CCI, the patterns where similar and still different in detail. So when I hit a rough bump in trading I went back to the CCI. Now I went again full circle, but with new found insights into this Stochastic indicator. An indicator which now fits extremely well with my current trading methodology.

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