Trading strategy: L.W. Proxy index

Description

His Proxy Index is one of the indicators to which Larry Williams pays the most attention. It is an oscillator, which identifies trend reversal zones. Although the indicator can be used for swing trading, it is most commonly used in day trading.

The strategy in detail

The strategy is applied on a 1-minute chart. Sufficient historic data must be loaded to calculate a 200-period moving average.

The L.W. Proxy Index is an oscillator. The oscillator is visible below the main chart. As in every oscillator there are two key levels, the upper limit and the lower limit.

When to open a position?

If the oscillator moves above the upper limit, Larry Williams is of the opinion that the market price has dropped sufficiently. If, at the same time, the 200-period moving average is bullish (green chart background), he will consider buying.

This example shows the Proxy Index above the upper limit for the DOW future. Given that the trend is bullish (green background in the main chart); a long position is bought.

If the oscillator moves below the lower limit, Larry Williams is of the opinion that the market price has risen too much. If, at the same time, the 200-period moving average is bearish (red chart background), he will consider selling short.

This example shows the Proxy Index just below the lower limit for the DOW future. Given that the trend is bearish (red background in the main chart); a short sell position can be sold.

The upper and lower limits of the Proxy Index vary from instrument to instrument. They also vary depending on the main market trend.

Tip: when setting the parameters in trading strategies, always open the equity chart. You can immediately see the impact your changes have on the strategy’s result.

This example shows the DOW future. The upper and lower limits of the Proxy Index are set to a simple +5/-5. The result is initially negative and later positive.

It is possible, however to get a better result. The main market trend is bullish. The DOW goes up, sideways and up again. Traders follow the trend. This means we should (1) indicate a preference for buy signals by putting the upper limit close and (2) eliminate some short sell signals, unless they are really favorable, by putting the lower limit very low.

This example shows the same horizon on the DOW future but with the upper and lower limits set to +2/-10. Notice the diminution in short sell signals. The equity chart improved significantly.

When to close a position?

The L.W. Proxy Index strategy uses a stop loss and a target. When day trading on a 1-minute chart, the target is set fairly close, usually two to four ATRs. The stop is set to double the value of the target.

The position can also be closed by a reverse signal or by the time filters, integrated in the strategy.

This example shows once more the DOW future over the same horizon. By adding the stop and the target the strategy is always in positive territory. Notice also that strategy is profitable when the market goes up. This strategy benefits from eliminating short sell signals in bullish markets.

Tip: to change the parameters of the stop and target you can simply left-click on the relevant number in the chart and type the value you want. Don’t forget to save.

Conclusion

Traders need to set the limits of the Larry Williams Proxy Index and the target and stop in function of the instrument they are trading and in function of the market’s main trend. If this is done correctly, the strategy appears to ride the waves well.

Settings

These are the parameters you can change in the strategy. As usual they can be changed in the DesignerBar or directly in the chart.

The DesignerBar.

Practical implementation

Using the NanoTrader Full follow these steps: