From the July/August 2013 issue of Futures Magazine • Subscribe!

Unlocking the mystery of building trading strategies

We will use the Volumizer indicator and convert it into a strategy. This strategy is included for illustrative purposes only. Readers should perform their own testing and evaluation prior to using this or any other trading strategy.

To evaluate the idea, we first convert the Volumizer into a basic stop-and-reverse strategy that is:

  • Long when average price crosses above the relative average volume
  • Short when average price crosses below the relative average volume

Rather than using the daily SPY chart on which our first observations were made, a 60-minute chart is used to provide better volume resolution and improve testing accuracy. “Stop and reverse” (below) shows the stop-and-reverse strategy applied to a 60-minute chart of the SPDR S&P 500 ETF (SPY). Each time average price and relative average volume cross over, the trade changes direction. While we catch some nice moves and find that our idea has potential, there are areas where the strategy does not fit the market, evidenced by the cluster of trades that took place in late April. 

A performance report over a five-year time period shows that the basic stop-and-reverse strategy has a total net profit of $38,293, a profit factor of 1.49 and a maximum drawdown (trade close to trade close) of $15,893. These are, of course, not the only important metrics provided by the performance report; however, for simplicity’s sake, these are the metrics we will note when comparing the different versions of the example strategy.

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