New Test Case: YM3M Scalp - Introduction
From Inspiration to Conclusion
Yesterday morning I was just starting my trading day and I was looking at a September YM (Dow Jones 30 Industrials Index futures) chart when I had an inspiration for a scalp trade strategy. A “scalp trade” is a trade that typically lasts seconds to hours.
I started to think about exactly how the trade would work, and what data I’d like to collect. Then I started creating a spreadsheet to collect and analyze the future data. But before I got very far, I realized two things. One, the spreadsheet was going to be much more complicated than I first thought, and two, I need to put this on the shelf for the rest of the day and instead focus on my trading for the day.
This morning I had a new inspiration. Now that I’ve finally started my Trade Testers venue, and I’m beginning this trade strategy validation exercise from scratch, it would be a great thread to publish and share with you as a real world example.
I don’t know how this will turn out. It may prove this strategy will be net profitable over time, as I hope, or it’ll show its not a viable idea. Either way we’ll be better off for the knowledge. Both the knowledge of whether to trade this strategy with real money, and the experience of doing a real world trading strategy test.
Since I’ll be posting my progress as it happens, I’ll be risking making mistakes in front of people before whom I don’t want to embarrass myself. But embarrassment has become an old friend with whom I’ve become comfortable. And, if I want to add value by sharing this test case, then it will be worth the personal ego damage.
First, for some background, the YM futures contract is one of the first futures I learned to trade. Its a good one to learn on because the points are integers, as opposed to fractions or decimals. And the price action is manageable, as long as you have decent volume. I’ve been observing YM behavior for many years. I’ve been trading it with setups I’ve learned and a particular setup I created based on observation named “YM AM”. I’ll probably write a book on that one in the future.
From this experience I concluded a couple things. It’s best to give YM some time to settle down after the market opens at 9:30am ET. I settled on 15 minutes. Another thing is that after about 11:30am the price action gets a little squirrelly. Although, maybe this strategy will work after 11:30am. I don’t know because I just thought of it. However, for this first study on it, I want to limit the timeframe in which to trade it to 9:45am - 11:30am ET. If that works, then I can look at the rest of the day.
Because we have a relatively narrow time window we need a fast chart. I have found a 3 minute chart is a good balance between catching trend changes early and filtering out random noise. So, we’ll be using a 3 minute chart for this scalping strategy.
The original strategy idea is to go long on a candle close above the 8ema plus 5 points of follow through over the closed candle high on the next candle, where the closed candle started below the 8ema and crossed over it to the upside. And the reverse, which is to go short on a candle close below the 8ema plus 5 points of follow through under the closed candle low on the next candle, where the closed candle started above the 8ema and crossed over it to the downside.
If this is confusing, don’t worry, it’ll quickly become clear as we progress. By the way, a “candle close” just means when the candle completes it timeframe. When a candle closes, a new candle begins. On a 3 minute chart, a candle closes :03, :06, :09, etc.
You may ask why use the 8ema (8 period exponential moving average)? I have found the 8ema to be an excellent trend indicator. You may ask why use a 5 point follow through confirmation? This is from a seat of the pants observation on the YM AM strategy, but I haven’t done an actual study on it. Now would be a great opportunity to do exactly that. To know if 5 points is the best number of points, we’ll have to collect some data and look at several likely candidates and see which one is best. I think 1 point is too little to waste time considering. Similarly, I think over 10 points is way too much. So, we’ll collect data for 2-10 point range.
Ok, that seems like a good introduction. Next we’ll get into what data we want to collect and how to create a spreadsheet to collect it.