Trading strategy: LS Histogram Scalper

Description

The LiveStatistics Histogram Scalper trading strategy uses the LiveStatistics (LS) module for NanoTrader Full. LiveStatistics projects historic prices into the current chart allowing statistical inference. These price trajectories -like all statistical data- consist of clustered data and outliers. The Histogram Scalper strategy operates on the outer edge of the price clusters. In this zone the clustered data ends and the market price is "attracted" to the outliers.

* This strategy was developed and tested by the WH SelfInvest managed account team on the DAX 30 future. Active investors can trial other instruments or underlying values as long as they have tight spreads and high liquidity.

The strategy in detail

Before examining this strategy it is advisable to first read more about LiveStatistics: webpage, free guide, video 1 and video 2.

LiveStatistics is a unique tool. It projects statistical price data based on historic events in the current chart. This allows the trader to see how the current market price could evolve based on how it evolved in the past. The data projections can be shown in different formats. One of these formats is the histogram. A histogram or block diagram is a graphical representation showing the frequency distribution of grouped data blocks. The advantage of a histogram is that it allows the trader to visualize the transition zone between clustered data and outliers.

LiveStatistics divides the positive and negative projection zones into four areas each. These areas represent respectively 20%, 30%, 30% and 20% of the positive and negative projections. The top green line is the line below which 80% of the positive historic prices find themselves. The bottom red line is the line above which 80% of the negative historic prices find themselves. The outliers find themselves, per definition, in the areas above (below) the 80% lines. But … these zones often also contain some price projections which are the edge of the price cluster. The 80% line and the edge of the price cluster are what interest the Histogram Scalper.

This example shows the 80% lines (2). 20% of the positive (negative) projections lie above (below) the 80% lines. In these areas there are real price outliers (1) but also a few prices levels which are still on the edge of the price cluster (3).

Note: use the Drawing Tool selection style in LiveStatistics to get the histogram projections. Once the 3-minute period is finished, simply move the box one candle to the right.

When to open a position?

Once the price goes above (below) the 80% line an argument can be made that the market price is on a trajectory towards a price outlier. The likelihood of the market price reaching a price outlier is still small. However, the likelihood that the market price, ‘attracted’ by the outliers, will move through the last price levels which are on the edge of the price cluster, has increased significantly.

A long position is bought by placing a buy stop order on the green 80% line. A short sell position is sold by placing a sell stop order on the red 80% line.

This example shows both a buy stop order and a sell stop order on the respective 80% lines. Just above (below) these lines are price levels which, as indicated by the size of the histogram bars, have occurred several times in the past. These are the edges of the price cluster. A strong market will move beyond the edge of the cluster if "attracted" by the outliers.

But … there are a few limitations. Like any other scalping strategy the Histogram Scalper requires the trader to make a judgment when no precise rule is possible. In general a position should not be opened when:

- The number of LiveStatistics hits is small. There is no fixed rule on this. The number of hits will depend on the quantity of historic data, the rarity of the pattern and the parameter settings in LiveStatistics. There are two main parameters which influence the number of hits: Similarity Delta % and Shape Accuracy. If there are too many hits decrease the percentage (15% → 10%) and/or increase the shape accuracy (2 → 3). If there are not many hits increase the percentage (10% → 15%) and/or decrease the shape accuracy (3 → 2). Once you are used to this you can easily do it at the beginning of each 3-minute candle.

- The price levels above (below) the 80% lines did not frequently occur in the past (i.e. the histogram blocks are small). In addition there need to be sufficiently large histogram blocks on about 4-5 successive price levels.

In this example there are no histogram blocks on the 4-5 price levels just above the green 80% line. The distribution of the historical price data is also erratic. Do not open a position. Simply wait. Given that the strategy operates on a 3-minute chart the next opportunity may present itself very soon.

- The 3-minute time period is coming to an end. Always keep your eye on the yellow clock at the bottom of the chart.

- The LiveStatistics indicate a bullish or bearish sentiment in the opposite direction. As described in the LiveStatistics guide, these sentiments also offer other trading opportunities. These can be traded in parallel with the Histogram Scalper strategy.

When to close a position?

The strategy uses a profit target and a stop. As in every scalping strategy the profit target and stop are fairly small. The profit target and stop for the DAX future are both 5 ticks (2,5 points). In the chart each histogram bar represents a tick price level. One can quickly see if 5 ticks is a realistic target or not. If not the position can be closed a tick or two earlier.

Experienced traders who are confident in their own judgment can put the profit target a bit higher. This allows potentially for a bit more profit but requires the trader to manually close if the candle does not break to his target above the 80% line after three or four attempts.

In this example the buy stop order on the green 80% line has just been executed at 6299,50. The platform automatically placed the two sell orders: the profit target at 6302,00 and the stop at 6297,00. The profit target was reached shortly thereafter and the position closed with a profit.

Conclusion

The exciting LS Histogram Scalper strategy is based on the statistical inference offered by LiveStatistics. As befits a scalping strategy the objectives and stops are fairly small. The success rate should, however, be high. The time frame is three minutes making this strategy suitable for active investors who like a fast pace and who enjoy frequent trading opportunities.

Practical implementation

In NanoTrader Full follow these steps:

• Choose the instrument you wish to trade.
• Open a chart with the template study "WHS LS Histo Scalper".
• Semi-automated trading? Simply activate the TradeGuard+AutoOrder or the AutoOrder function.

A note on the Chart Trader: the Chart Trader offers a quick and easy way to place the two OCO stop orders required to open the position. Right click in the buy (green) column whilst holding the Ctrl key on your keyboard. Then right click in the sell (red) column whilst holding the Ctrl key on your keyboard. These orders are now linked. If one is executed the other is automatically cancelled. To activate the Chart Trader in a chart, click the blue Chart Trader icon. The icon then becomes red.

This example shows the Chart Trader and the Chart Trader icon. In the video regarding the Histogram Scalper strategy you can see the trader using this functionality.