Trading strategy: SiWorks Automated Trendline

Description

The SiWorks Automated Trendline (ATL) strategy was developed by the German company SignalWorks. The strategy automatically calculates and (re)draws trendlines. Buy and sell signals are generated on the basis of these automated trendlines. Additional information about this strategy can be found on "signalworks.de".

 

  
Suitable for : Market indices (DAX, CAC, DOW...)
Instruments : Futures and CFDs
Trading type : Day trading
Trading tempo : Medium
Using NanoTrader Full : Manual and semi-automated

 

The strategy in detail

When the market is in a positive trend the strategy looks for oversold situations (buy opportunities). When the market is in a negative trend it looks for overbought situations (short sell opportunities). In order to determine if the market is in a positive or a negative trend a 200-period moving average (MA) is used. If the market price is above the 200-period MA, the trend is positive. If the market price is below the 200-period MA, the trend is negative.

In order to identify overbought or oversold situations Connors uses the 2-period RSI. In short, the signals are generated by the 2-period RSI and filtered by the 200-period MA. For day trading purposes, the strategy can be applied in a 30 or 60-minute time frame.

Connors closes positions on the basis of the 5-period MA. A long position is closed when the market price closes above the 5-period MA. A short position is closed when the market price closes below the 5-period MA. This is a closing strategy that will produce quick exits.

Connors does not use stops on open positions! In the platform, however, a percentage stop (3% price change versus the entry price) has been added. The 3% stop is used and suggested by the Italian trader Gabriele Bellelli. This gives users the option. If, like Connors, you do not wish to have a stop you can either temporarily replace the 3% with a very high % or you can delete the stop altogether in the designer dialog.

 

This example shows a high pivot point. It is defined in this case as a point where the highs of the previous five candles are lower and the highs of the following two candles are lower. In the designer dialog PivotHigh and PivotLow are used for defining the pivot points.


When there is a new pivot point the trendline is redrawn in such a way that it follows the two last pivot points. Note: in the case the new low pivot point is lower than the previous one, or in the case the new high pivot point is higher than the previous one, the strategy will draw a horizontal line. This day trading strategy uses 15-minute charts.

When to open a position?

Buy signals are generated on the basis of the upward trendline. Short sell signals are generated on the basis of the downward trendline.

The trader can choose between two settings in each case.

- In the case of a short sell signal either a close below the upward trendline is required (SignalBase = 1) or simply a low below or equal to the upward trendline is required (SignalBase = 2).

- In the case of a buy signal either a close above the downward trendline is required (SignalBase = 1) or simply a high above or equal to the downward trendline is required (SignalBase = 2).

 

This example shows two low pivot point (red circles). The pivot points are, in this example, identified on the basis of five preceding candles and two succeeding candles. After the identification of the second pivot point the upward trendline (red) is drawn as an extension of the two low pivot points. This trader defined that a low below or equal to the upward trendline (SignalBase = 2) is sufficient to generate a short sell signal (indicated by the red triangle in the green oval).


 

This example shows two high pivot points (red circles). The pivot points are, in this example, identified on the basis of five preceding candles and two succeeding candles. After the identification of the second pivot point the downward trendline (blue) is drawn as an extension of the two high pivot points. This trader defined that a high above or equal to the downward trendline (SignalBase = 2) is sufficient to generate a buy signal (indicated by the green triangle in the green oval). Note: in this example even the close is above the downward trendline.



The strategy contains an optional signals filter (DeltaPiv in the designer dialog). The filter will eliminate signals when the most recent high pivot point and the most recent low pivot point are close to each other. The trader can set a required minimum distance between the high and low pivot points. The objective of such a filter is to eliminate signals when the market is in a range. Traders avoid range markets because they give frequent signals which go nowhere.

 

This example shows signals solely based on the automated trendlines. The optional signal filter is visible but not activated.


 

This example shows the same period as the example above. In this example, however, the signal filter is activated. As a consequence some signals are filtered out.

When to close a position?

The SiWorks ATL strategy will close an open position when the reverse signal appears i.e. a long position is closed when a short sell signal appears and vice versa. If the user elected to have both buy and short sell signals (CONFIG_UpTL = 1 and CONFIG_DnTL = 1) the strategy will nearly always have a position open. If the trader activates the filter there will be more periods without a position open.

The strategy also uses a fixed stop for safety reasons.

 

Conclusion

The 2-period RSI strategy is based on the concept of a return to the mean price. In case the market is oversold or overbought the strategy expects the market price to return to the mean market price. The strategy opens short positions in a downtrend when the market is overbought. The strategy opens long positions in an uptrend when the market is oversold. It is a simple strategy which can be applied to all financial instruments for day trading. Connors also uses the strategy for swing trading (positions open for days). In this case he opens the positions earlier; somewhat before the market close instead of at the next day open.

Practical implementation

In NanoTrader Full follow these steps:
  • Choose the instrument you wish to trade.

  • Open a chart with the template study "WHS SiWorks ATL".

  • Semi-automated trading? Simply activate the TradeGuard+AutoOrder or the AutoOrder function.