So you are creating your technical trading strategy and it seems to go okay, but suddenly a price drop and your strategy didn't work as expected? I have been there and I feel you.
After careful study, I have come up with a way to detect price dropping. Price dropping detection is important because you can change the behaviour of your strategy during this period.
To me, and therefore in this article, a Price dropping happens when in 24 hours a symbol has lost 5% or more of its price. Visually speaking, you will see a slop of 45 degrees or more like the above image.
This is the interesting part. First some facts you have to know:
With this said, these are the criteria conditions I have come to:
Let's verify it with this graph.
As I have said, you never know, however, there is a way to protect you. You may use one of these approaches:
If you want to keep it simple, you can double-time it, but if you want to get more accuracy, you can use a statistical approach, by analyzing last year's price droppings, you can use a standard deviation and a simple rule as follows:
When using a standard deviation approach, the μ (mean or average) has a special meaning: 50% of the consecutive price drops (b) are there. So, it is more likely that there will be another solid bar than a change of trend.
When the b reaches μ, the logic becomes different. Pretend, μ = 3, if b = 4, it becomes less likely that there is a b = 5 (5 solid bars in arrow). Meaning that a reversal may happen, so you may want to decrease your time-lapses to catch a trading opportunity.
I am not very concerned when this happens on a bull market, as you can sell as soon as the pricing reaches the minimum you require to make your minimum profit (according to your own strategy).
Good luck!blog comments powered by Disqus