In this issue, Slawomir Bobrowski presents his article, “Camarilla Points.”
Camarilla points may be used to identify price levels to enter and exit trades in the direction of the prevailing trend. One way to identify the trend is by using the MACD (moving average convergence/divergence) indicator, which in its simplest form may be expressed as the difference between two moving averages. If price moves sideways over time, the averages tend toward the same level, converging. As price moves strongly up or down, the averages diverge as the shorter time frame average moves away from the longer one in the direction of the price change.
The MACD camarilla trend system uses this simple conceptualization of MACD as the trend indicator, and employs camarilla points to time entries and exits in the direction of the trend. Here, we will look at the system applied to a portfolio of stocks consisting of just over 100 markets that come shipped with Trading Blox as sample data. Since we are trading stocks, we will keep things simple and trade long only, as it can be difficult or impossible to short some issues.
To start, let’s take a look at the MACD as a trend indicator. The difference between a faster and slower exponential moving average yields a positive number if the faster average is above the slower one and a negative number if the slower one is above the faster one. When the moving averages are at the same level, MACD is zero. When MACD is positive we can presume that the trend is up, and when it is negative, we can assume the trend is down (Figure 12).
Figure 12: TRADING BLOX, MACD. Here, the MACD crosses above zero. This is the type of condition we want to look for in order to permit a long trade.
Once an uptrend is indicated by MACD, we place a stop order to go long the market at the R3 camarilla point. This forces the market to rise further and confirm the trend in order to trigger a position. Once a long position is taken, the S4 camarilla point serves as a stop-loss or trailing exit, and a stop order to liquidate the position is placed at that level. In addition, if MACD crosses below zero indicating that the uptrend is no longer in place, the trade is exited on the next open (Figure 13).
FIGURE 13: TRADING BLOX, CAMARILLA SYSTEM. The light green line above price represents the R3 camarilla point for each bar and the red line below price is the S4 level. This trade goes long as price crosses R3 with MACD > 0 and exits when price touches S4.
Trading Blox’s built-in Fixed Fractional Money Manager is used to size each trade. This money manager sizes positions based on a percentage of simulated account value and the distance from trade entry to the stop-loss or exit point. For example, a $100,000 account that is set to risk 1% of account equity per trade has a $1,000 per trade risk budget. If a position is indicated with an entry at $10 and a stop-loss at $8, then each share represents $2 worth of risk. In this case, the $1,000 risk budget indicates a position size of 500 shares ($1,000 budget divided by $2 risk per share).
Once the system is defined, Trading Blox allows the user to test any number of choices for the various parameters such as the moving average period or camarilla point time frame (Figure 14).
FIGURE 14: TRADING BLOX, SYSTEM PARAMETERS. The system contains four parameters that can be changed at will or stepped across a range of values by the user. In this example, we have an MACD employing 10- and 50-day moving averages, a camarilla lookback of 20 bars, and a risk per trade of 1%.
In simulated trading since the year 2000, this particular parameter set for the camarilla trend system returns the results shown in Figure 15. While this version of the system does make money over time, an exploration of the parameter space might reveal a lower-risk, higher-return alternative.
FIGURE 15: TRADING BLOX, SYSTEM RESULTS. Here is a performance summary for the MACD camarilla trend system.