Poke holes in this trading strategy.

1. To the QQQ  chart, add indicators DPO (detrended price oscillator) and CCI (commodity channel index).
2. To the DPO and CCI, add the 8EMA .
3. Buy TQQQ when the DPO or CCI are above the 0 line and sell when either show a strong downtrend towards 0 using the 8EMA as a tempering guide.
4. When DPO or CCI cross below zero (which ever first) buy SQQQ and hold until either DPO or CCI rises to the 0 line or both show strong movement to it. Again using 8EMA as guidance. 

Before I pass judgement on your strategy could you answer a few questions?

1. What are the periods for DPO and CCI?

3. Can you define what you consider a strong downtrend towards 0?

What time frame are you using for the system?

When conditions are true; are the buys and sells at the close of the day or the next day open?

No reason to poke holes in your system, but I would like to back test your system.

If your system is truely profitable as you say then I am sure that a lot of people would be very happy that you took the time to share.

that's exactly the reason I barely use oscillators and moving averages. Once you have found a timeframe, and period setting that would have worked over a period of time, then while taking your next trade based on these settings, the momentum, volaitility changes and  you get stopped out. very frustrating. I prefer to use a more objective approach, by using fib based indicators, and support/resistance zones. But that's just my experience. Still interested in seeing your settings, maybe post a couple of charts? and yes some backtests?

thx.

The DPO and CCI settings are default as TC2000 has them. By a strong downtrend, I have added the 8EMA to both oscillators and if the oscillator line is closer to the zero line than the 8EMA, I would consider that strong trending, but conservatively, one would wait until the zero line has been crossed. I am using the daily time frame and all buys and sells are performed at the open of the next trading day.

The DPO and CCI are over a wider time frame than the likes of %R or Stochastics. I'll give some background on how I began playing with them.

I belong to an Investors Business Daily user group. Last month we had a speaker who works at IBD. His name appears in the paper and website frequently. As he was giving his presentation, he asked us to open our newspapers and go to the "What's The Market Trend?". It's usually in the second section and four pages from front.  On this chart they have their trend calls. Currently they show "Follow through" on July 27 or there about. I'm working from memory. The trend was called "under pressure" on October 6.  He said to buy SPY and QQQ on the up calls and hold until the down calls.

So in playing with this, I found that the CCI and DPO are crossing the signal line at pretty much the same time as IBD is calling the begining and end of an uptrend. So, I began adding contra ETF's to the strategy and then going with leveraged ETF's. The results in backtesting over the last year are very, very attractive. Take any contra ETF and check it since October 6. The CCI crossed the signal line and began the downtrend July 25 and the DPO October 5.

I played around with your system, thanks for sharing!  It appears to work in strong trending markets but will get you chopped up in choppy markets.  For example, the period Aug - Dec 2011 would be choppy, how would you know that Jan 2012 would be the beginning of a long bull run or just more chop??

Same thing for Jun - Aug 2012??

I was at an Online Trading Academy graduate meeting last night and we really worked this over. It is a work in process so things are being learned. One strategy would be to simply obey the 8EMA crossover  of either the DPO or CCI.  If you do that, 8/23/11 to 9/21/11 would be selected, as an example, and the return would be good and great using a leveraged ETF. 9/28/11 to 10/5/11 would be a down period so buying PSQ would return 1.4% or more with leverage. Just examples and possibilities.

Steve Bukosky

Thanks Steve.  I decided to get in on this idea and am playing the SQQQ.  I'll keep a close eye on the DPO and CCI indicators.  I think I'll program Tradestation to handle the "babysitting" and exit as soon as DPO or CCI 8ema hit the zero line.  I have to figure out the formula for DPO. Making $$$  :)  Beers on me!  

it doesn't work.  its simply a system thats only going to work in certain trending markets. and it won't work in a choppy market.

your indicators are basically momentum indicators, and do not show underlying technical strength.  they will simply mimic price.

Funnymony, I asked for holes to be poked into it so I'll say thank you.

One concern that I have anytime that I backtest an idea that is not completely mechanical is that try as one might to avoid influence by knowing the future, it very often does so. I have looked at the choppy market situation and it always seems to happen at the zero point of the momentum type charts and the 8EMA can be used for confirmation and follow through..

Choppy markets aside, dismissing the strategy entirely is failing to look closely at the historical conditions of convergence, divergance and even confluence of some indicators when a moving average is added to them. The way to handle choppy markets might be as simple as creating rules of follow through and other observations.

No matter, I have presented the concept to other people with more experience than I who are genuinely excited about the possibilites and together we are looking for the signals and rules that will make it work.

I will add this which I did not mention previously. The inspiration for this method was from a person from IBD who used their trend calls for such swing trading. It was my observation that some of the indicators that I have mentioned coincide with IBD's trend calls, so I carried the idea further.

This brings out the question of why the strategy isn't being touted elsewhere if it works? Fair enough. I asked myself why IBD doesn't tout it when one of their own, a person whose name appears frequently in the newspaper and in association with IBD, told our IBD group that he uses it to manage his parent's money. I think the answer is....money.

Consider this. ETFs are the new kid on the block. There are many products and newsletters that have been around well before ETF's and could be threatened as a business if they were to say simply get a good charting program like Worden's and use some indicator to enter and exit certain ETF positions.

To anyone who may be looking at this strategy that I've spoke about. Consider adding the MACD to the indicator that you are using.

A word of warning. The QQQ appears that a swing up may happen the next few days. This would give you losses if you entered a position in SQQQ recently rather than right at the Zero line crossover which was around 10/4 depending on how you interpret the indicator signals.. You will notice that the current downtrend has made what I call "drop base rallies" a few times since 9/19/2012. Notice also that the hammer candle has pierced a level of support formed by the gaps on 6/4 and 1/19. So I expect that Monday will bring the Rally, to the drop and base of the last two days. Oh yes, Friday's hammer candle is also a bullish engulfing candle which forms the "base".

How much will it rally? Draw Fibonaccis on each of the swings and the retracement seems to be either to the 61.8 or 50% level. That would mean a rally to the $64.30 area.

But the larger point is that it will most likely then drop again, but if you just got into a contra position, you will likely have a loss unless you stick with the larger trend.

Last Thursday at a investment club meeting, we struggled with what would be happening.  The consensus was that given the political uncertainty in Israel, the odds are the the support level, or demand zone, of around $61.25 to $62.12, would be broken and the downtrend will continue.

Decide for yourself but be warned about the next few days.

another question might be when exactly do you enter a trade, at the instant the indicators show a buy or sell, or do you wait a full day for confirmation, or simply at the close of the trading day?

it may seem insignificant, but over time good entries and exits will add up.

While presenting a completely different strategy, I stressed the importance of being in the cash positions that the particular timing strategy creates. I am still thinking things out but it could very well work out that there is an area of uncertainty where a person should be in cash when using this concept. It continues to be a work in progress.

The goal is for decisions to be made in the evening when the market is closed and a market order placed for the following open.

Thank you for your comments. I do desire to explore the weaknesses of the concept.

that brings up another issue, false signals.   you'd need to know when to bail as well as what is considered confirmation of a buy.  especially since your indicators are momentum indicators are not showing underlying technical strength, like say the mcclellan oscillator would. false signals could get expensive. i've seen systems like this before where they gennerally will wait a day after the buy signal before actually placing the trade.

Some updates. I've added Bollinger bands to the chart and use the candle types to enhance my entry and exit decisions. I have also put the 34 day MA on the chart. An aquaintance of mine is applying calculus to the curves and other oscillation in the other indicators.  I also found a description of a very similar strategy in the archives of Stocks and Commodities Magazine. Also had a popular poster on a different newsgroup who seems to have discovered a very similar strategy. Seems a lot of people are interested in that one. I'm trying to get together to compare our strategy.