System Name:RLCO/SQC Framework

System Name:RLCO/SQC framework
Version: 1.0
Date of last update:Jan 15, 2014

System description:A general purpose, statistically based framework for assessing price action within a trade-able time frame,that provides an adaptive, disciplined, consistent, simple basis for framing favorable reward:risk based trades in either direction at critical moments.

System logic, concepts and definitions:
Regression lines: the best fit line that summarizes price action during the look back period. Hypothesis: RLs can replace/improve MAs for insights derived from smoothing price action to a single line.
RL slope:The slope of the line describes the relative strength/direction of the trend. Changes in slope represent a change in the underlying dynamic of relationships between buyers and sellers, expressed through price
R2 statistic:The R2 statistic describes relative variation of price with respect to the regression line. Varies from 0-1. At R2 value of 0, there is a maximum volatility, and the RL is a poor description of the price action. At R2 value of 1.0, there is minimal variation and the RL is an excellent/perfect description of price action
RLCO:“regression line crossover”. A moment when the fast and slow regression lines cross over each other outside of the 30 period Bollinger band (30, 1) (aka“river”) Defaults: Fast (10), Slow (30)
“The River”: the 30 period Bollinger Band, +/- 1 StDev, defined as “normal range”
“The flood plain”: the 30 period Bollinger Band, +/- 2 StDev, defined as the maximum “normal” excursion from the River
“The Dragon”: the 10 period Bollinger Band, +/- 0.5 StDev; defined as the early warning of trend change within the river; because it is 6x more adaptive than the River, it MUST turn before the river; Can be used to adapt your stops.
Bollinger bands: envelopes created by multiples of StDev of the price variation during the lookbackperiod, centered on an SMA of the look back period (See Bollinger on Bollinger Bands). Used to define normal price action or the range of fair value. Width of the BB can be used to describe relative volatility. Where choppy price action is most likely to occur.
Pinch: when BBs contract, alerts to the possibility of a Sideways Quiet Channel (SQC) forming in the near future if price goes sideways
BBmean: the 30 period SMA, the center of the BB
BB2: a Bollinger Band (2,1) acting as a proxy for price; looks like a ribbon. I think it is a better description of the “real normal price” than the colors of the real bodies of individual candles.
RL10: default fast RL, can also act as a proxy for price
RL30: default slow RL; its slope can act as a proxy for strength of trend for current trade. RL30 crossing the BBmean is an early warning for change in direction of intermediate term trend (next time frame higher than the trade trend)
RL90; default long term RL; acts like the RL30 for a time frame 3x as long; allows you to see longer term trend slope without changing your screen
Trade trend: the direction you are favoring for your reward:risk favored trade
SQC:Sideways Quiet Channel (SQC) A moment when breakouts can be sharp, sudden, decisive, tradable with tight stops. Criteria:
both RLs and price are inside the BB
The BBmean slope is approximately 0 (flat, sideways)
The BB width is narrow (quiet volatility)
Beginning of trending behavior: when Price and both RLs have left the river, on the same side, going in the same direction. Not unusual to see an extended, very tradable move in that direction. (Imagery: “The herd has left the river;” “the train is leaving the station”)
Signal decay: After noticeable trending behavior, the first thing to weaken and change is Price, then BB2, then RL10, then RL30, then BBmean. If you are in a directional trade, you need to be out of the trade not later than the RLCO or when Price ((price/BB2, RL10)) has re-entered the river.
Price: defined as either:
Price
BB2
RL10
VWAP:Volume Weighted Average Price. An additional indicator, the slowest of all indicators, can represent “fair value”; Intraday can seem to act as a price target or a magnet for price
Z-score: a measurement of how many StDev’s from average the current reading is. Used to define the boundary between normal and exceptional; default definition of normal in this framework is a z-score between 1 and -1. Formula: (Value – Average(x))/(Stdev(x))
SlopeStat: a z-score measurement of the current slope of the RL, which provides context for describing relative strength of current trend. Can be used as a market classification indicator.
HOD/LOD: yesterday and today’s HOD and LOD are important price markers of tension, that yield to sudden sharp directional moves when the tension is resolved. Decide if you can trade those areas and position yourself accordingly

Targettedstocks/ETFs/markets:All ETFs, futures, commodities, large caps

Historical performance: Initial discretionary trading is excellent and robust in both directions, and in multiple time frames
Critical state/critical moment: a place where we have reason to believe that buyers and sellers will be equally strong and in tension about the next directional move AND where a favorable reward:risk trade can be framed in either direction. A moment of maximum uncertainty, which, when resolved turns into a tradable, directional move Often appears as a doji on high volume, in conjunction at previous price levels of support and resistance, at the BBmean, at the boundary of the river, at Fibonacci retracement/extension levels etc. The essential idea is that there is a potential turning point that can allows for a reasonable trade frame in either direction. This is consistent with the idea of the SQC for example or a test of the 10day High or Low, or intraday High or Low.
Price action indications: these are checkpoints where price action or the action of an indicator line occurs at a boundary defined in the framework. We observe behavior of the RLs, BB2 “ribbon” and/or price when they approach these checkpoints, looking for evidence about the behavior of the price action, building towards conclusions/confirmations of the state of the trend. These include either RL, the BB2 “ribbon” or price, when they:
Crossover outside the river
Entering or exit the river (+/- 1 StDev)
Entering or exiting the floodplain (+/- 2 StDev)
Encountering an HOD/LOD
Encountering the BBmean
Encountering the VWAP

As far as “what is crossing what”. I typically think of the “faster” item in the pair as crossing the slower one to be consistent. So, the “BB2 ribbon” crosses the RL10, not the other way around

Setups/Filters:see concept descriptions and screenshots. We have identified a number of recurring patterns so far:

Entry rules:
RLCO opportunities for entries
After RLCO outside the river, go in the direction of price (reversion to the mean)
immediately,
when (price/BB2, RL10) enter the river
when ((price/BB2, RL10) find support neat the BBmean and continue towards the farside of the river
when (price/BB2, RL10) leave the river
After RLCO outside the river, and a failure of the reversion to the mean trade,
Price failing at the BBmean, especially if failing before the BBmean, is a signal to go immediately in the direction of the primary trend; reinforced when price then leaves the river
When prices leaves the river after failing vicinity the BBmean
Optional rule: Be positioned into trades when price is near yesterday and today’s HOD/LOD as critical moments when sudden sharp price action is a higher probability
SQC:especially after a very good RLCO move with a clearly identifiable trend, you can expect for price to revert to the BBmean; Price will decay towards the BBmean, and the BBmean will move to catch up to the previous trend. When they meet, an SQC will often develop. See criteria above:
Enter when Price/BB2/RL10 leave the river
When RL30 leaves the river you have the beginning of trending behavior, and you could consider a conservative entry there or adding a second position

Exit rules: Don’t stick around
when the trending signals decay. They decay in the following order.After noticeable trending behavior, the first thing to weaken and change is Price, then BB2, then RL10, then RL30. If you are in a directional trade, you need to be out of the trade not later than the RLCO or when Price ((price/BB2, RL10)) has re-entered the river.

Position sizing rules:trade smaller and more often; you will see 5-15 high quality opportunities a day if you manage between 5-20 symbols

Optional decisions/rules: see chatroom and RFA strategy

Preferred brokers: low cost transaction per share is the most important decision criteria for this system. If you are an intraday trader trying for more, then consider slippage and speed of execution as well. Any large deep discount broker should satisfy these requirements.
How to start the portfolio from all cash: use money from your total portfolio that is allocated for equity exposure and begin.

Examples:

Example 1: an SQC entry

Example 2: with market condition considerations added (SPY)

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