Methodology

Rate of Change Strategy

Everyone has a plan until they get punched in the mouth. – Mike Tyson

The rate of change strategy we are exploring here isn’t all that fantastic. Mechanically, it trades equity index futures on a daily and weekly basis decently. It seems more profitable with ETFs than individual stocks. The advice generated from this strategy is excellent, making it a critical part of my methodology.

Candles are colored based on two rate of change measurements of the weighted price. The weighted price is calculated by (Open + High + Low + Close + Close) * .2.

The two rate of change measurements are:

  • 3 period rate of change
  • Composite rate of change calculated by
    (3 period + 7 period + 7 period + 13 period rate of changes) * .25
  • Green – Both measurements are positive.
  • White – The 3 day rate of change is positive, and the composite is negative
  • Yellow – The 3 day rate of change is negative and the composite is positive.
  • Blue – Both measurements are negative.

The algorithm mechanically takes a position at the close whenever a green bar appears and the current position is flat. The algorithm goes flat at the close whenever it has a position but a non-green colored candle appears.

PPO Histogram

The PPO histogram is color coded using different logic.

Bars are colored based on four possible states:

  • Green – The bar is above zero and higher than the previous bar.
  • White – The bar is above zero and lower than the previous bar.
  • Yellow – The bar is below zero and higher than the previous bar.
  • Blue – The bar is below zero and lower than the previous bar.

The PPO histogram has the high virtue of being smooth in contrast to the rate of change histogram, so that is useful for signal confirmation.

Analysis of SPY

The choppy action this week caused the 3 day rate of change to weaken and turn negative on Wednesday and Thursday. The green candle on Friday is a buy signal.

The PPO histogram had also been showing minor weakness but changed from white to green on Friday.

Calling the market a buy here seems like pretty good advice.

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