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Trading With the FXCM SSI - Automate the Range2 Trading Strategy

By , Quantitative Strategist
06 March 2013 12:00 GMT

In our guide to FXCM Speculative Sentiment Index-based trading strategies, we discussed the “why trade against the crowd?” with a specific look to our SSI.

This article covers the “how can we trade with crowd sentiment?” with a closer look at the Range2 trading strategy.

The Range2 trading strategy is fairly unique in that it is primarily a counter-trend strategy. It attempts to buy when currencies have fallen and sells when they’ve strengthened. This stands in clear contrast to our other SSI-based trading systems, which most often buy into strength or sell into weakness.

Below is a fuller explanation of trading logic so that we might understand the pros and cons of trading with and against the trend.

Trading Against the Crowd - Automate the Range2 Trading Strategy

range_trading_with_the_speculative_sentiment_index_body_MirrorTrader.png, Trading With the FXCM SSI - Automate the Range2 Trading Strategy

Automate our SSI-based trading strategies via Mirror Trader free of charge

Buy Rule: Buy when the 28-period RSI crosses below 30.

Sell Rule: Sell when the 28-period RSI crosses above 70.

Filter: System can only buy or sell if the Speculative Sentiment Index ratio is below 1.5 or above -1.5. Understand more about the Speculative Sentiment Index with this article.

Profit Targets: Range2 does not use fixed profit targets. Instead the system takes profits via a trailing stop loss.

Stop Losses: Calculate the Average True Range (ATR) on the past 14 daily bars. Set a trailing stop 1 ATR away from entry price. If short, this means placing a trailing stop above entry price and will move lower if and when the currency moves lower. If long, the system places the trailing stop below price and moves higher if and when the currency pair trades higher.

Reviewing and Understanding the Logic of the Range2 System

Entries: Buy when the 28-period RSI crosses below 30, Sell when the 28-period RSI crosses above 70: This is a range trading system that looks to sell when a currency is overbought and buy when it is oversold using a popular and Relative Strength Index indicator.

Yet we know that buying into weakness and selling into strength is often a losing strategy, and indeed our other SSI-based systems essentially do the opposite. Such a fact makes the trading filter that much more important.

Exits: Take the daily Average True Range (ATR) of the currency pair for the past 14 days. If short, place a trailing stop 1 ATR above entry price which moves lower if and when price declines. If long, place stop 1 ATR below entry price which moves higher if and when price advances.

Range2 uses no hard profit targets and instead relies on a trailing stop loss to ultimately take profit on its trades.

If SSI is not at important extremes, the counter-trend trade may play out in our favor. Thus we don’t want to limit our profits to a fixed amount.

One suggested strategy is to manually trade Range2 strategy buy and sell entries with a mix of a hard profit targets and the trailing stop—much as our Breakout2 trading system employs. This money management method serves as an attractive template to managing trades.

Sample Trades from Range2 as Shown on a NZDUSD 60-Minute Chart

range_trading_with_the_speculative_sentiment_index_body_Picture_6.png, Trading With the FXCM SSI - Automate the Range2 Trading Strategy

Chart Source: FXCM Marketscope, prepared by David Rodriguez

The SSI, while not pictured, would have prevented the strategy from buying or selling at times not marked on the chart.

Strategy Tips and Resources

Not all market conditions suit the Range2 trading strategy, and as such there are definitely factors to keep in mind before taking any of its trade ideas. Our research on the RSI Trading Strategy shows that it tends to do quite poorly during times of strong market volatility.

In our Weekly Strategy Outlook report, we cover market conditions with a special focus on volatility and prices in forex options markets. We report the “Volatility Percentile figure” indicator for individual currency pairs. Range2 has historically performed better when the Volatility Percentile has been below 75% on a specific currency pair.

Our research likewise shows that volatility and trends are quite correlated. Thus strong market trends may likewise encourage us to stay away from specific Range2 trades. Our Forex Technical Analysis page shows a daily update of our Volatility Percentile figureas well as our Trend indicator. If the Trend is up, we are likely to avoid selling into a currency and vice versa. :

range_trading_with_the_speculative_sentiment_index_body_Picture_7.png, Trading With the FXCM SSI - Automate the Range2 Trading Strategy

Past performance is not indicative of future results, but our experience shows that using the Volatility Percentile and Trend indicators helps improve performance of the Range2 trading system.

range_trading_with_the_speculative_sentiment_index_body_MirrorTrader.png, Trading With the FXCM SSI - Automate the Range2 Trading Strategy

Automate our SSI-based trading strategies via Mirror Trader free of charge

View Previous Articles on Automating DailyFX and DailyFX PLUS Strategies

View how to automate the high-volatility Breakout2 Trading System via our previous article and webinar recording.

Auto trade the trend reversal-trading Momentum2system via our previous article and webinar recording.

Trade with strong trends via our Momentum1 Trading System and view an archived webinar.

Automate the DailyFX Breakouts on Volatility System article, webinar.

Take advantage of forex intraday seasonality via our DailyFX AsiaRSI Trading system, view archived webinar.

Why do most forex traders lose? How can we avoid common mistakes?

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up for his distribution list via this link.

New to FX markets? Learn more in our video trading guide.

Contact David via

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06 March 2013 12:00 GMT