Turtle Trading (you can read the rules here) postulates that many small losses will be compensated for by a few big wins. It would be nice, however, to find a method that would help reduce the number of loss-making positions while leaving the winners untouched.
Note: After posting this I added a section on the force index, an especially interesting tool. See below. (Google's Blogger, in its wisdom, won't allow me to do a link within a page that would allow a direct jump to that section. Do a search for "force index".)
I opened a bear position on ORCL the day of the signal, Sept. 26, and wrote about it here.
The price gapped across the breakout point and was down intra-day, although it reatreated upward somewhat from the day's low low. The decline began after earnings were published on Sept. 20, after the market's closed; the breakout to the downside came on the fourth trading day following earnings.
The obvious fix to failed Turtle signals is a filter, an additional indicator that is applied after the signal as confirmation. Call it Turtle+.
There are, of course, thousands of indicators out there, many relying on some sort of price aggregation scheme, but others looking at volume and even the phases of the Moon. I'll skip the astrology in the discussion that follows.
One of my favorite indicators, one that I've used extensively in the past, is the parabolic sar, which is based on price. I like it because it gives clear, unambiguous signals that jump out on the chart. This simplifies screening.
The parabolic sar gave a bear signal on Sept. 24, the second trading day after earnings. It remains in bear phase and so caught the trend before the Turtle breakout and is still in place. ORCL remains in bear parabolic sar bear phase and so has not failed.
A proprietary indicator similar to the parabolic sar, Person's pivot study, performed even better. It gave a bear signal on Sept. 20, on earnings day but before they were published. This indicator also remains in bear phase.
A quick aside: Both the parabolic sar and Person's pivot study can easily be plugged in to the Turtle rules as a replacement for the price-channel breakouts. Turtle Trading is an old system, dating back to the 1980s, when computing power and chart availability was far inferior to what traders enjoy today.
There is no need to limit trading to a breakout system limited by early technology. All that's required is that the bull or bear signal be unambiguous and easily read on a chart.
The biggest advantage to price channel breakouts, that I've found, is that they are based on price alone, without any calculations, and so can be used on many systems to trigger alerts. That simplifies my life. I set the alerts and go drink coffee, assured that when a trading opportunity occurs, my iPhone will chime.
Of course, the question this raises is whether or not those two momentum indicators ever fail to confirm. That's a subject for further study, but clearly if they always confirm, they are of no use whatsoever in determining position entry.
But, they might be of some use in determining an exit. Both remain in bear phase, although the Turtle stop/loss has bit triggered. The price today is showing signs of reversal. Would it be reasonable to use a price channel breakout for entry but the parabolic sar or Person's pivot study in place of a fixed initial stop/loss (which is twice the average true range according to the Turtle rules).
The paraboblic sar, in fact, was first invented mainly as a method for setting stop/loss points.
Many of the popular indicators lack the clarity of signalling found in price channel breakouts, the parabolic sar and the Person's pivot study.
A paper by Paul Ciana of Bloomberg, "Evidence of the Most Popular Technical Indicators", ranks indicators by their usage. (The paper was published as a chapter in a thought-provoking anthology edited by Ciana, New Frontiers in Technical Analysis.
The most popular indicator is the relative strength index, or RSI. On the ORCL chart, the 14-day RSI is at it's mid-point, neither overbought nor oversold. It is moving in lockstep with the stock price, without any divergence. So it is of little use as a filter.
The second-most popular -- the moving average convergence/divergence indicator, or MACD -- gave a clear bear signal on earnings day and remains in bear phase, although the histogram is trending upward, suggesting a weakening of the phase. Like the RSI, the MACD would have confirmed the Turtle signals.
Bollinger bands are among the most ambiguous of indicators. They provide clear cross-overs and breakouts, but their inventor, John Bollinger, in his book Bollinger on Bollinger Bands, hedges such such signals so extensively with confirmation requirements that they are hard to use, at least according to his plan. The bands do give a very good indication of where the price is relative to recent history, however.
In the case of ORCL, the price pierced the Bollinger mid-point on earnings publication day but drew back to close slightly above the mid-point. It fell, and closed, below the mid-point on the second-trading day after earnings, and pierced the lower band on Sept. 26, the day of the Turtle bear signal.
The Bollinger bands gave a clear confirmation of the Turtle signal.
For these three indicators, as well, the question might well be asked whether they ever fail to confirm. Again, a subject for future study.
One widely used and venerable volume indicator is the on-balance volume, which basically is the net calculation volume on up days vs. volume on down days, calculating up and down based on the prior-day's close rather than intra-day movement.
The on-balance volume peaked the day after earnings were published, and then declined into the day of the Turtle signal. The day after, the on-balance volume rose again, in tandem with the price.
Volume is something that must be treated differently in connection with bull and bear signals. An uptrend gains added meaning on increased volume. A downtrend is volume agnostic; it can occur either when traders lose interest or when they all decide to flee. I should also note that on-balance volume doesn't exist for forex trading, which has no reliable volume information.
On-balance volume must also count as a confirmation of the Turtle signal on ORCL.
Another, less well known volume indicator is the force index, developed by Alexander Elder. Here are a couple of more links to explainers: From Chart School, and from Think Or Swim (now part of TDAmeritrade).
For this discussion, I'm interested in using the force index for confirmation of a Turtle breakout. If the force index is moving in the direction of the breakout, then it is confirmation; if opposite, then non-confirmation.
The standard period for the force index is 13 bars.
The failed ORCL breakout to the downside on Sept. 26 was not confirmed by the force index, which was rising. Of all the indicators I looked at in this very limited study, this is the first non-confirmation that I've gotten -- A good sign!
A second breakout, today, was KFT, to the upside, and it has been confirmed by a rising force index.
A third breakout, very late today after I had filed the first version of this essay, was DTV, to the downside, and it is also confirmed by the force index. (DTV was also confirmed by the parabolic sar with a signal on Sept. 20 and 26; by Person's Pivot Study, on Sept. 20; by the MACD, on Sept. 18. Also, by a decline in on-balance volume but not by the Bollinger bandds, where there has been no breakout.)
I've reached no conclusion based on what I know so far. A Turtle bull signal on Kraft Foods Inc. (KFT) today was unconfirmed by the Bollinger bands (no top-line breakout), but confirmed by on-balance volume, the MACD, Person's pivot study and the parabolic sar. The relative strength index was neither overbought nor oversold and was without divergence.
No discussion of indicators would be complete without the moving-average crossovers. For ORCL, the 5-day moving average moved below the 20-day on the second day after earnings, and it remains below, in bear phase. KFT's 5-day moving average crossed above the 20-day, into bull phase, on Sept. 24; the Turtle breakout came of the fifth trading day afterward.
In both cases, the moving averages provided confirmation of the Turtle signal.
Where do I go from here? I'll start including some of these signals in my analyses, just to get a sense of how they behave. The one-bar force index is especially intriguing. If they seem useful as entry filters or as exit signals, then I'll work them into my trading rules.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.