TASC 2011-07 | A Color-Based System For Short-Term Trading (Kraut)

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Traders' Tip text

In the current issue, author Edgar Kraut presents a super simple system that consists of two rules for taking long positions. Formally it does not share traits of classic swing trading systems (as advertised) except for its sensitive 1% trailing stop, so with its trend condition rule and a volume confirmation rule seeking to identify and hold a rising stock for a short period of time, we would rather classify it as pure momentum trading.

Figure 1. A Wealth-Lab Developer 6.2 chart showing the Color-Based System applied to a Daily chart of the SPDR S&P500 (SPY).

Our C# version of the system allows Wealth-Lab 6 users to easily change the lookback and exit parameters by dragging the parameter sliders in the lower left corner of Wealth-Lab's main workspace. We replaced the default trailing exit with a combination of a profit target and a stop loss, and made the system exit on Red and Orange bars. For traders willing to tweak the rules further, here's a uber simple trend identification idea of the same kind to go along with the volume confirmation rule:

Bullish trend starts after X consecutive closes above the trailing close from Y days ago,
Bearish trend starts after X consecutive closes below the trailing close from Y days ago.

WealthScript Code (C#)


using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;

namespace WealthLab.Strategies
{
	public class ColorBased : WealthScript
	{
		private StrategyParameter paramLookback;
		private StrategyParameter paramSL;
		private StrategyParameter paramPT;
		
		public ColorBased()
		{
			paramLookback = CreateParameter("Lookback", 20, 2, 100, 1);
			paramSL = CreateParameter("Stop %", 4, 1, 10, 1);
			paramPT = CreateParameter("Target %", 4, 1, 20, 1);
		}
		
		private Color color( int bar, int lookback )
		{
			Color c = Color.Transparent;
			
			if( Bars.Count > lookback )
			{			
				int b = bar-lookback;
			
				bool green = (Close[bar] > Close[b]) && (Volume[bar] > Volume[b]);
				bool blue = (Close[bar] > Close[b]) && (Volume[bar] <= Volume[b]);
				bool orange = (Close[bar] < Close[b]) && (Volume[bar] < Volume[b]);
				bool red = (Close[bar] < Close[b]) && (Volume[bar] >= Volume[b]);

				if( green ) c = Color.Green;
				if( blue ) c = Color.Blue;
				if( orange ) c = Color.Orange;
				if( red ) c = Color.Red;
			}
		
			return c;
		}
		
		protected override void Execute()
		{
			int lookback = paramLookback.ValueInt;
			double SL = paramSL.Value;
			double PT = paramPT.Value;
			
			for(int bar = lookback; bar < Bars.Count; bar++)
			{
				Color c = color(bar,lookback);
				SetSeriesBarColor( bar, Volume, c );
				SetBarColor( bar, c );
				
				if (IsLastPositionActive)
				{
					Position p = LastPosition;
					double Stop = p.EntryPrice * (1 - SL / 100.0d);
					double Target = p.EntryPrice * (1 + PT / 100.0d);
					
					if( c == Color.Red || c == Color.Orange )
						SellAtMarket(bar+1, p, c.ToString() );
					else
						if( !SellAtStop(bar + 1, p, Stop, "SL") )
						SellAtLimit(bar + 1, p, Target, "TP");
				}
				else
				{
					if( c == Color.Green || c == Color.Blue )
						BuyAtMarket( bar+1, c.ToString() );
				}
			}
		}
	}
}