Sniping Method – a Universal System for Trading Stocks, Futures, and Foreign Currencies

The first part of the article ‘SNIPING – New Trading Technologies.From a Speculator to an Investor’ (Based on a presentation during КievExpo 2011) briefly dealt with special features of trading at an OTC forex market.Even though the sniping system was conceived and tested for the stock market, we decided to experiment a little and use it in all markets by automating a few things as much as we could.Trading robots, a subject quite popular today, were implemented in our technique as well. This is what it resulted in.

This algo-trading system is fully formalized and does not allow any dubious interpretation of signals. It tells the trader what he or she should do at any given moment of time.

This all actually is about a trading robot as manual work is minimized. All you have to be able to do is put your entry and exit stop losses (a counterpart of pending orders in the forex). A similar approach is now actively used by large banks and hedge funds because manual trading is no longer as effective as it used to be. A simple example: last year Goldman Sachs’ army of supercomputers brought it only 14 losing days, especially given that machines mainly trade while people are responsible only for their maintenance. As a result, the market underwent the most significant evolution for the past ten years.

Therefore, a trader has a choice:

1. move to algo-trading and maximize their profits;

2. trade as they are used to and eventually leave the market for good.

Old techniques will become absolutely uncompetitive with time because computers do the same work better and faster already now.

With the current situation in mind, we developed our own semi-automated trading strategy that offers a real competitive edge in the market. Now it is realized in three versions:

1. an intraday trading system for stock markets;

2. a medium-term investment strategy for 5-10 business days for all markets;

3. a short-term trading system for the foreign currency and commodities markets.

All three system versions have been tested on a live account for reliability and profitability of trading algorithms. Eventually, making sure we made the right choice, we decided to share our results.

1. The intraday trading system for stock markets.

It is based on the idea of trading in a channel that we analyze in three timeframes at a time: daily, 1 hour and 5 minutes.

Back testing statistically proves that this TF combination is optimal for intraday trading in the stock market. We wait till channels show in the same direction and only then look for an entry. You end up in the positive territory by using this simple technique alone.

Unlike the common sloping channel ours does not have to be drawn manually – it is automated and works on any timeframe, from 1 minute to the weekly, and offers an important market advantage – you always trade only with the trend.

The trading in the sloping channel is based on the following algorithm: we enter from price levels or ‘patterns’ exclusively with the trend. I’d like to point out at once that each share keeps its levels and it is impossible to trade them profitably unless you know how they are calculated. But, as soon as levels have been calculated, further operations are fully automated.

1. We set an entry stop (a pending order) a cent above or below the pattern for all shares where the system signals coincide strictly in one direction.

2. As soon as the entry is made automatically (without pressing the buttons), we set the exit stop at a level shown by the stop loss indicator.

3. We exit by a simple trailing stop or moving the stop loss into breakeven.

Example one: the break of the 50 cent level

Example two: the break of the 25 cent level

Example three: the break of the 10 cent level

And a few more elements that help find shares for trading from a full list of those selected for the day. To make this algorithm as effective as possible, we also use some additional indicators.

1 – The market step indicator is used to find out what levels the share keeps.

2 – The market driving force indicator.

This indicator uses arrows to point to spots where volumes are entered by large market players and provokes the market movement.

Remember – there is no strong movement without large volumes. It is only information about real trading volumes that gives us an idea of what levels the market operators are working at so that we can follow their action and become profitable. This indicator works well with the sloping channel: you need to find a large buyer in a rising trend and a large seller in a falling one. This technique is similar to the idea of market profile but much easier to understand – you only need to follow arrows in the screen.

3 – The volatility indicator.

It helps solve the timing problem, namely, when the right time is to enter the market. Intraday ranges vary from a share to a share. Some shares move 30 cents a day, others – 50 cents. There are also shares that cover 100 and more cents a day. Our task is to try and take at least 60% of the daily move with a profit-to-risk ratio of at least 3/1. If the stop is at 5 cents a trade, this share should move at least 30 a day (stop * 6). Otherwise, this rule is not met.

Another feature of this indicator is that you can enter when the daily move begins rather than ends. The only thing you need is simply not to enter a share that has already moved over 70% of its daily range. This indicator is useful not only for the stock market, but also for futures and foreign currencies.

It allows screen off ‘dead’ or unpromising stocks as early as at the selection stage.

4 – The market stop loss indicator

The rule of profitable trading tells you to cut your losses, and the profits will take care of themselves. To meet it, we must have a small stop loss.

Based on the volatility indicator, an indicator was created to automatically define the optimal stop loss level for a given share.

It calculates its intraday volatility and offers a tip where to put the stop loss. This helps as early as at the share selection stage to find those with a minimum stop loss by screening off high-risk shares.

5 – The trend continuation probability indicator

This indicator is essentially very simple and unique in that it allows you to see at first glance where the share is most likely to move – up or down.

There are also other indicators that there is no point in describing in this article. Essentially, this all comes down to a simple and, at the same time, effective trading algorithm. We actually ended up a step away from fully automated trading: a complete trading robot only needs automated stop loss placement and movement features. Trading this system, we follow the modern market tendency, namely, to automate our own trading.

2. Medium-term trading – profit maximization

There is a medium-term modification of the technique in addition to intraday. It involves being in a trade for five to ten business days.

This system is very convenient for those who cannot monitor a trade all day long by being employed elsewhere or simply want to maximize their profits (the most profitable trading is medium-term characterized by minimum commission costs and unlimited profitability of trading).

The main peculiarity is a very little risk. We enter a trade in the 5-minute chart with a stop loss of 5-7 cents and exit a few days later with a profit of 50-100 cents. You cannot reach this risk-to-profit ratio trading within the day. Of course, there are false, or losing, trades, but these losses are more than compensated by the amount of profits.

There is TF synthesis where

1. the weekly chart shows the long-term trend,

2. the daily chart – the medium-term

3. the 5-minute chart - short-term.

The system’s main goal is to find shares with a maximum growth or fall potential and a minimized risk. The maximum risk in this system is only 15 cents and allows you to make a couple of mistakes and then cover all losses in one trade and enter the positive territory.

3. The short-term trading system for the foreign currency and commodities markets

It is half-way between the two previous systems and is intended for intraday trading in currency futures.

1. The daily chart shows the long-term trend,

2. the 4-hour chart - medium-term,

3. the 1-hour chart - short-term.

Trading in this market is special in that it:

1. works round-the-clock,

2. has high intraday volatility. So, normally working at charts less than the hourly chart is simply impossible,

3. offers high risks – much higher than shares,

4. entries are made by rules that significantly differ from share trading.

This system has been tested on a live account. The test took place from early February to early April. Two full trading months showed 74% profitable trades and a 251% growth of the account. This proves the trading algorithm is effective. Interim results were posted in open access for the Academy’s members in the Strategy and Tactics of Current Trading thread.

Now we are prepared to share our ideas and get feedback.

Personally I would like to add that you cannot fully rely on robotized trading because all trading robots are a live implementation of ideas of such people as me and you. If this area continues developing, it will not represent a struggle between bots – it is the same stock market trading, only on a different technical level.

Igor Vasev and the Team of the Futures Trading and Stock Exchange faculty.