Panic and Retracement Implementation

I have now implemented the panic and retracement strategy – called PANIC1 for now. It looks like this strategy can be used in two ways.

1)    The original design of this strategy, i.e., a large sudden move in the order of several standard deviations, with the expected retracement afterwards. This of course does not happen very many times so there are not many trading opportunities…

The following table shows the number of trading opportunities for changes in price by standard deviation over a 3 and half year period

StdDev

 Trades

4.0

60

4.5

30

5.0

15

5.5

9

However, this strategy tends to have a rather high success rate – in the excess of 50% trades.

2)    A relatively large move based on recent history (but actually small on a larger scale), indicating the start of a volatile period. Given the volatility is high, this combined with a large buffer (large stop loss), it is highly probable that the market will move enough to take profit.

Given we are dealing with much lower standard deviations of price changes, there are significantly more trading opportunities, and a large number of loss trades. Additionally, the move is not that significant and thus the potential profit is also not that significant. This strategy is effectively scalping the market.

This strategy has been difficult to optimize for. Certain periods can be very profitable but others can be disastrous which I guess is expected given there isn’t really much of a theory behind this strategy anyway.

It may prove to be the case that with smaller deviations of this size, a retracement shouldn’t be expected but a continuation of that price move. Maybe the strategy can be altered accordingly to follow the direction of the move.

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