Spring 2016

Joe Krut’s Tomorrow’s Trend Strategy

STRATEGY CONCEPTS CLUB |1

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EDITORStanley Dash, CMTVP, Applied Technical Analysis

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Joe Krut’s Tomorrow’s TrendStrategyJoe Krutsinger, CEOFully Automated Trading, Inc.

2 | STRATEGY CONCEPTS CLUB

BACKGROUND THE IDEA BEHIND THE TOMORROW’S TREND strategy originated while observing floor traders’ habits of looking at short-term reversals against the minor trend but in harmony with the larger trend. The idea is to position our entry ahead of their habit of buying breakouts of the range of the prior bar.

The strategy uses the combination of two distinct bar patterns with a channel breakout in the direction of the intermediate-term trend as defined by a moving average. It has a money-management stop loss as well as a time-in-trade exit and the capability to reverse position.

By using a breakout in harmony with the intermediate trend based on the open of the next bar, many false gap trades are avoided.

The idea of “walking away” after a certain number of bars in a trade is one I first researched in 1989 on daily bar strategies. An example is a moving average cross (or any technical entry signal) that is at its most powerful the day after it occurs. As days (bars) go by since the signal was generated, the signal seems to lose reliability.

STRATEGY ELEMENTSMany traders worldwide use charts and quotes but not fully automated trading strategies. The universal tool in trading is the clock. In the old days, market reports were delivered hourly at the top of each hour. Many “old-timers“ still make their market observations hourly, so using 60-minute bars

Featuresu Strategy Style: Trend following

u Markets: Stocks, futures

u Trading Horizon: Swing trading

Studies/Files Includedu Strategy

u Indicators

u Workspace

DOWNLOAD FILES

allows Tomorrow’s Trend to observe the market moves of these old-timers more easily.

Let’s imagine that the close of the current bar is lower than or equal to the close of two bars ago. Let’s further assume that the close of this bar is higher than the 10-bar moving average that was computed one bar ago. (This set-up shows a minor down trend and an intermediate up trend.) If this pattern is present, we will place a buy stop order at 60% of this bar’s range plus this bar’s opening price.

STRATEGY CONCEPTS CLUB | 3

Figure 1: E-mini S&P futures (ES) 60-minute bars with Joe Krut’s Tomorrow’s Trend Strategy and supporting indicators

Inputs for Joe Krut’s Tomorrow’s Trend strategy. Let’s imagine that the close of the current bar is higher than the close of two bars ago. Let’s further assume that the close of this bar is lower than the 10-bar moving average that was computed one bar ago. (This set-up shows a minor up trend and an intermediate down trend.) If this pattern is present, we will place a sell short stop order at 270% of this bar’s range minus this bar’s opening price. (The moving average lengths and percentages of range for long and short entries were derived by using the optimization process).

A trade can be exited in one of three ways:

1. A stop loss of a certain optimized dollar amount has been hit.

2. A reversing order that takes the open position from short to long or vice versa.

3. After 50 bars in the trade (determined by optimiza-tion), the trade is exited at the market.

Input Default Description

BuyBO 6 Highest high of the last x bars, buy breakout

SellBO 27 Lowest low of the last x bars, sell short breakout

Walk 50 Number of bars to hold trade before man-datory trade exit

Trend 10 Moving average trend filter

PositionBasis false False for futures, true for forex and stocks

Amount 1330 Amount of dollars to risk as a stop-loss per trade

4 | STRATEGY CONCEPTS CLUB

Joe Krut Switcher is an indicator that also tracks profit and loss results. In addi-tion, it may be used to adjust trade size by those seeking to do so based on strategy performance.

There are two indicators included with this strategy to help illustrate trade activity. The Joe Krut Profit Size indicator is an easy way to track the gain or loss on an open position. This indicator has no inputs.

Figure 2: Strategy Performance Report – Performance Summary tab

Input Default Description

Length 2880 Length used for average of equity

Color_EqAboveAvg GreenColor of total equity if it is greater than average

Color_EqBelowAvg Red Color of total equity if it is less than average

Plot Description

OpenEquity Total equity

ZeroLine Horizontal reference line at 0

JoeKrut Average of total equity as of 1 bar ago

Plot Description

OpenEquity Profit or loss on an open position

Zero Diff Horizontal reference line at 0

The TradeStation-supplied indicator Mov Avg 1 Line, with the Length input set to 10, is also used in the chart for visual identifica-tion of the intermediate trend.

STRATEGY RULESLong Entries

u If the close of this bar is higher than the 10-bar moving average of one bar ago and the close of the current bar is lower than or equal to the close of two bars ago, then buy on the next bar on a buy stop order at 60% of this bar’s range plus this bar’s opening price.

Short Entries

u If the close of this bar is lower than the 10-bar moving average of one bar ago and the close of the current bar is higher than the close of two bars ago, then sell short on the next bar on a stop order at this bar’s opening price minus 270% of this bar’s range.

Exits

u A stop loss of a certain optimized dollar amount is in place to help pre-vent outsized losses.

u After 50 bars in the trade (determined by optimization), the trade is exited at the market.

STRATEGY PERFORMANCE REPORT HIGHLIGHTS

Initial Capital $15,000

Trade Size One E mini S&P 500 futures contract

Commissions $5 round turn

Slippage $10 Round turn

History 3 years, ending 12/31/2015

Bar Interval 60-minute bars

Session Regular session

Look-Inside-Bar Back-testing resolution 1 minute

All performance results are hypothetical. Past performance, actual or hypothetical, is not necessarily indicative of future results.

STRATEGY CONCEPTS CLUB | 5

Avg Trade Net Profit=$154.99

u This is the expectation of the result of each trade event, and it is fairly high for a strategy that trades over 300 times in 3 years.

When I used to give lectures, I told the story of teaching my three young girls how to write trading strategies. They were all smart as whips and pretty good, but I particularly recall my middle daughter at the age of six looking at the strategy performance sheet and stating: “Daddy, I understand what average winning trade is and I understand what average losing trade is, but can you explain what average trade is?”

My response was: “Let’s pretend that Daddy is a gam-bler. (I always told my children I was a professional gambler, as it was easier to explain than commodity broker). Every time Daddy goes to town to gamble, whether he wins or loses, Daddy comes back with $154.99, and in the last three years he has gone to town 307 times. Your decision as the strategy owner: “Should Daddy go to town?” Tracy said, “Daddy, go to town!”

I believe this is THE most important metric. Tracy did not become a commodity trader, but she did graduate with a Masters in Computer Science and supervises a department at a major telecommunica-tions company.

Net Profit as % of Drawdown= 997.54%

u If one divides the Net Profit by the absolute value of Max. Drawdown (Trade Close to Trade Close), you arrive at Net Profit as % of Drawdown. The larger this number, the better. In my opinion, the minimum number here to trade is 300% and anything over 1,000% is stellar. When looking at the equity curve, you can see this illustrated graphically by a better than 45 degree total equity curve with minor downturns. Not being able to tolerate drawdown is the number-one reason people abandon strategies.

Figure 3: Strategy Performance Report – Performance Graphs tab – Equity Curve Line

All performance results are hypothetical. Past performance, actual or hypothetical, is not necessarily indicative of future results.

Percent Profitable= 56.35%

u Most trading strategies that have a larger average trade and a high net-profit-to-drawdown ratio have a lower than 50% correct percent profitable. In my mind, this is the least important of the three measures, but many clients prefer to have the frequent positive reinforcement that comes from a higher percent profitable number.

SUGGESTIONS FOR IMPROVEMENTThis strategy holds overnight and uses a rather large (for me) $1,330 stop loss. The commercial strategies I sell usu-ally have a stop of less than $500, day trade stock indexes and are on smaller interval 1- to 5-minute bars.

I suggest testing different time frames (1-, 5-, 15- and 30-minute intervals) and testing smaller stop losses. (I back-tested $350 as a stop and found that made about $37,000, with an Average Trade Net Profit of $93.59, Percent Profitable of 36.48% and Net Profit as % of Drawdown of 933.60%.) I also suggest that you try trading the Mini

Dow, Russell 2000, S&P 400 MidCap and Mini Nasdaq 100 contracts.Joe Krutsinger, CEO of Fully Automated Trading, Inc. He began his futures career over 40

years ago and has worked in almost every facet of the trading industry. He continues to be a

prolific developer of trading strategies as well as a design consultant specializing in state-of-

the-art strategy automation software. Joe was one of the first beta testers of TradeStation.

Joe has given over 200 lectures. His trading systems have been featured in several

journals, including Technical Analysis of Stocks & Commodities. Joe’s books include The

Trading Systems Toolkit, Trading Systems: Secrets of the Masters and his latest, Trading System Secrets: Selecting a

Winning System, now available in paperback.

Joe can be contacted at joekrut@gmail.com or 573.224.3366. For more about Joe’s work, visit  

www.eTrackRecords.com.