Trading strategy: Momentum Pinball

Description

The Momentum Pinball strategy designed by traders Linda Raschke and Larry Connors is a range break-out strategy. Positions are held one or two days. Linda Raschke and Larry Connors claim that "For [...] one- to two day flips, the Momentum Pinball strategy can't be beaten". The Pinball indicator, so-called because it 'pinballs' between two trigger levels, informs the trader if he should short sell or buy the next day. The position is only opened the next day if the market breaks out of a specific trading range.

The strategy in detail

The Momentum Pinball strategy is easy to use and easy to understand. The strategy uses a purpose-built technical analysis indicator called the Pinball indicator. The Pinball indicator is an aggregate indicator. It plots a 3-period RSI (relative strength) of a 1-period ROC (rate of change). Few trading platforms are capable of calculating and managing aggregate indicators. For the NanoTrader it is, as usual, not a problem.

The Pinball indicator oscillates between 0 and 100. The strategy's designers, Linda Raschke and Larry Connors, determined two levels (more about these later) for buy and short sell signals. The signal is given for the next day i.e. when the Pinball indicator closes below (above) the relevant trigger level, the trader will buy (short sell) the next day. The position is not opened immediately. The strategy allows the first trading hour to go by in order to determine a trading range based on the highest and the lowest price. A position is opened when the market breaks -in the right direction- out of the trading range.

The trader can define the trading range in the designer dialog. The default settings are 9h00 to 10h00 for the morning. Traders wishing to trade U.S. indices and stocks would enter 1530 and 1629 to define the afternoon range.

All parameters can also be changed via the chart. Click the relevant parameter and enter the value of your choice.

When to open a position?

When the Pinball indicator closes below 30 the trader prepares himself to buy the next day. When the Pinball indicator closes above 70 the trader prepares himself to short sell the next day.

This example shows the Pinball indicator below a 1-day chart. Notice how the indicator 'pinballs' between the two trigger levels (30.00 and 70.00). The strategy's name is derived from this behaviour.

The last valid signal is a buy signal. The trader would act upon this signal the next day. The red signal is the current day. It is not a confirmed signal yet.

This example shows the complete Momentum Pinball trading strategy. At the top the 5-minute chart used for trading the signals and at the bottom the Pinball indicator.

When the Pinball indicator gives a signal the trader will act upon the signal tomorrow. If the Pinball indicator gives a buy signal the background of the chart will be green the next day. If the Pinball indicator gives a short sell signal, the background of the chart will be red the next day.

The trader will not immediately buy at the open the next day. He will allow an hour to pass in order to use the high and the low as a trading range. If the Pinball indicator gave a buy signal yesterday, a buy stop order is placed above the high of the trading range. If the Pinball indicator gave a short sell signal yesterday, a short sell stop order is placed below the low of the trading range.

This example shows a green chart background. A green chart background indicates the Pinball indicator gave a buy signal yesterday. The trader can now place a buy stop order above the high of the first hour's trading range.

The buy stop order was triggered and the trader bought a long position. The position was profitable at the close of the market. The trader would carry the position overnight and close it the next day (see When to close a position?).

This example shows a red chart background. A red chart background indicates the Pinball indicator gave a short sell signal yesterday. The trader can now place a sell stop order below the low of the first hour's trading range.

The market never reaches the bottom of the trading range. No position is opened.

In their description of the Momentum Pinball strategy Linda Raschke and Larry Connors stress the importance of selecting indices and stocks which have a good average daily range. In the NanoTrader trading platform it is possible to add a signal filter based on the average true range (ATR). If the range is below average on an index or a stock the NanoTrader will not show the trading signal.

When to close a position?

The Momentum Pinball strategy uses a stop loss but does not have a target. The stop loss is simply placed on the low of the trading range in the case of a long position or on the high of the trading range in the case of a short sell position. Once the position is open the following scenarios are possible:

1. Do not carry the position overnight if the position is losing money.

2. Carry the position overnight if the position is making money or if the position is break-even. The designers of the strategy advocate closing the position the next morning on the follow-through i.e. either at the open if the market goes in the opposite direction or when the market goes in the right direction but loses momentum. Whatever approach you take, make sure the position is closed that day. A Momentum Pinball position is never held a second night.

This example shows a long position which was stopped out. The stop loss order is positioned on the low of the trading range. If you activate the TradeGuard, the platform will automatically place the stop order at this level for you.

If a trade is stopped out, the strategy allows the trader to again open a position in the right direction if the market breaks out of the trading range.

This example shows two short sell signals. The first signal which was triggered and later stopped out with a loss. The second short sell signal had a better result. The position was profitable at the market close. The trader would carry it overnight and close it the next morning on the follow-through.

Conclusion

The Momentum Pinball trading strategy is explained in detail in the book "Street Smarts. High Probability Short-Term Trading Strategies" (by Linda Bradford Raschke and Laurence A. Connors, ISBN 0-9650461-0-9). The strategy is easy to use and easy to understand. It is suitable for market indices and stocks. The strategy can be used when the markets open in Europe or the U.S..

Select WHS Momentum Pinball in the strategies folder. The Pinball indicator will also open automatically.

Practical implementation

In NanoTrader Full follow these steps:

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

Thanks to Gordon Gekko theeviltrader.com for providing part of the Express code.