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


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() ); } } } } }

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