Trading Strategies

Description of the Trading Strategies
TradingAdvisor has a very strong belief that system trading is the path to trading success with its ability to objectively analyze the market with no interference from human emotions like greed and fear. This statistical/mathematical viewpoint of the market is a tool that makes it possible to design and test different trading strategies that fit the trader's preference towards risk and reward. The trading strategies are built out of several independent models or logics. While they are all different, they are definitely linked. A brief description of the models and how they are linked follows, but first the links to performance numbers and equity curves are presented:

Market Modes
Different market modes require different trading strategies. TradingAdvisor has designed two different strategies for consolidating markets and trending markets respectively both for the nearest forward contract and for the nearest year contract. For the German power market and the Emissions market a Trend and a Breakout strategy form a portfolio of trading strategies.

Entry and Exits
When designing trading strategies the entry and the exit methods are designed separately.

Trend Strategy
This model is built out of three components. The first is the setup which shows if a trading opportunity is emergent. The setup gives information about the direction of the market and shows if a trend is developing. The second component is a volatility measure which determines the entry level once a setup has been given.

Lastly, the third component is the exit logic which consists of a multiple of exit signals.

Consolidation Strategies
A Range Strategy is usually designed to buy low and sell high in a directionless sideways market, and is not working well during trend periods. TradingAdvisor’s range strategy for NordPool nearest forward contract trades both ranging markets, but also a strengthening market after consolidations in an uptrend and weakness after a downtrend consolidation.

For the NordPool nearest year contract another consolidation strategy has been developed and is designed to take advantage of the short term move after weakness in an uptrend or the downward movement after strength in a downward trending market.

The indicator used in this strategy is an adaptive RSI which is more responsive than the standard RSI with dynamic overbought and oversold zones. This indicator's main purpose is to determine the market's direction. If the Adaptive RSI is below the oversold zone the market direction is down. If the Adaptive RSI is above the overbought zone the market direction is up. This is the first part of the setup.

The second part of the setup is to look for strength in a downward biased market and weakness in an upward biased market. If the market direction is down (indicated from the Adaptive RSI) and the high of the day is higher than the high two days ago a sell setup is given. If the market direction is up (indicated from the Adaptive RSI) and the low of the day is lower than the low two days ago a buy setup is given.

Another strategy which is used for all three markets (Nordic, German and Emissions), is the Breakout strategy. This is a robust strategy where the entry is based on changes in market volatility. A position is taken when the price action is significantly larger than the prevailing market volatility. The position is exited early and will take advantage of sudden price jumps and not the larger trend. This strategy should be a part of a portfolio of strategies which often also include a trend strategy.

Trade different strategies together as a portfolio
TradingAdvisor do not think that all buy and sell signals are created equal and therefore the models are designed and tested for the long and the short side of the market separately, as well as using different entry and exit logics for different market modes.

The trading strategies will run regardless of the current market conditions, but each strategy is designed to limit losses in market conditions for which it was not designed. The reason behind this is one do not know which trade will be a winner or a loser and that performance numbers are valid in the long run when tested appropriate and therefore every signal should be taken into account. Only in hindsight one will know if the "directionless market" developed into a trend.

The straightforward rules are mandates upon which TradingAdvisor's strategies make the trading decisions and the trading signals are posted in the signals table. It forces one to have an exact buy or sell parameter for any position that one has taken on regardless of what the market may be doing in an intraday perspective. This keeps one from overtrading and allows for some of the emotional 1-2 day events to work themselves out. In conclusion, all of the independent models have good stand-alone characteristics. But, collectively, they give one an opportunity to diversify risk while trading different market conditions and this approach is well researched and technically sound.