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Bulletin #26
May 20, 1999
The Serendipity Entry Trigger
Because we prefer to get our trades started in the right direction as soon as possible we spend a great deal of time experimenting with various setup conditions and entry triggers. If the setup conditions are favorable we will often trigger the entry on the long side of our trades based on an upward excursion from the opening price. We find that measuring favorable movement from the opening price rather than from the previous close tends to produce reliable entry signals that offer a high probability of success. This particular method of getting new trades started in the right direction is one of our personal favorites and it has been used as the entry trigger in several of our systems.
Late one evening while testing entry triggers on a new system we inadvertently coded the entry so that we would enter TOMORROW based on a specified price excursion from TODAY�S OPEN. We had originally intended to have the system enter tomorrow as the price moved upward from tomorrow�s open. However the mis-coded entry that was based on today�s open worked much better than we expected and it substantially out-performed our intended entry trigger. Our initial reaction to the outstanding test results was one of skepticism and we naturally assumed that this entry trigger might have been a mere fluke. We feared that perhaps we had simply stumbled into an accidental curve fit. However when we tested this entry method on other systems and with other setup conditions it continued to perform admirably. Because our discovery of this entry method was quite accidental we named it the Serendipity Entry Trigger and we immediately began to investigate to see if there was any logic behind the entry that might explain why it seemed to work so well in our tests.
After carefully studying the patterns of the Serendipity Entry Trigger we concluded that it is particularly effective because it is a trigger that is based on two days of cumulative price movement rather than the typical one day or less of price movement that we would normally measure.
For the sake of this discussion, let�s assume that our specific entry trigger is to buy the bonds TOMORROW on a stop that is 20/32 above TODAY�S OPEN. Now if we look carefully at the relationship of today�s close relative to today�s open it helps us to better understand what will be required tomorrow to trigger an effective entry signal. If today is a strong day with a close that is well above the opening then we will be able to enter quickly tomorrow on just a small amount of favorable price movement. In fact if the close today is 20 or more points above the opening today then we are very likely to be stopped into our new trade immediately on tomorrows opening.
Our first chart illustrates a strong setup day where the close is well above the open. Because the close was strong and well above the open, there was very little upward price movement required for our Serendipity Entry Trigger on the following day.
However, on our second chartthe market closes very weak on the setup day and this weakness places our entry trigger well out of reach for the following day.
On our third chart we show a setup day with a close at mid-range but well above the day�s open. The Serendipity Entry now requires a fairly strong move on the following day in order to initiate the new trade but the trigger is easily within reach.
In our opinion, the Serendipity Entry Trigger works so well because it is almost like adding an element of hindsight into the entry process. The precise sequence of price action on the setup day becomes an important part of the final trigger mechanism.
We could of course simply require that the setup day be a strong day as a pre-entry condition. However the Serendipity Trigger is more adaptive and robust than a setup condition because it is flexible enough to occasionally permit an entry even though the setup day is weak. A weak setup day can occasionally be followed by an abnormally strong entry day and the Serendipity Trigger would still allow us to enter on this strength. If we were to use a more conventional entry trigger and make a strong setup day a pre-entry condition there would be no entry signal on the following day even though the market showed remarkable strength.
The Serendipity Trigger offers an important operational advantage as well as contributing to improved timing. When using the conventional trigger that is based on tomorrow�s opening price, our exact entry point cannot be calculated until after the opening trade has been posted. However one of the benefits of the Serendipity Trigger is that the exact entry order is available the day prior to the entry and our stop order can be placed prior to the opening.
We have added the Serendipity Entry Trigger to our Toolbox of entry methods and it was employed as part of our entry strategy in the Serendipity Bond system. We hope that our Traders Club members will find this unique entry trigger to be a very practical and profitable trading tool.
Conventional Entry Code
Buy("Long Entry") Open Tomorrow + 20 points stop;
Serendipity Entry Code
Buy("Long Entry") Open + 20 points stop;
All of the charts and the Easy Language code can be found in the Traderclub Toolkit http://traderclub.com/toolkit.htm
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MTA Conference
We enjoyed participating in the Market Technician's Association 24th Annual conference in Manhattan Beach, Calif. last weekend. At the conference we presented a discussion of various exit strategies that was very well received by a large and enthusiastic audience. Apparently the subject of exits continues to be generally neglected in technical circles and our contribution to the knowledge in this field was very much appreciated by this knowledgeable group of technicians. We will post some of our graphs and lecture notes on the web site and discuss some of the exit strategies in future Bulletins.
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We would like to encourage our members to participate actively in our Forum section of the web site. We receive a copy of every message posted and we would be happy to respond to questions and comments in the Forum as often as possible. The Forum is self-perpetuating and the more it is used the more valuable it becomes to everyone. Please set aside a few minutes and make a point of posting a question, a comment or an idea on the Forum in the next few days. We need to push it up to a critical level so that we will be assured of having many new and interesting messages every day. You would be amazed at how much excellent material has been posted there already. Post anything you like and don't worry about being flamed or criticized. We seem to have a very friendly group.
Good Luck and Good Trading
Chuck
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