Recently, I’ve been revisiting the strategies of the Two Larry’s, they being Larry Williams (not to be confused with Bill ‘Fractal’ Williams) and Larry Connors. This pin is inspired by a strategy published by Larry Connors, appearing in several of his books and, of course, quoted and misquoted in numerous web articles and PooTube vids.
Multiple Days Up (MDU), Multiple Days Down (MDD) strategy.
Larry Conners devised this strategy for ETFs. Whereas individual stocks could, in theory, drop to zero value, an ETF is made up of many stocks and is unlikely ever to reach zero value. In fact, Larry Connors found that ETFs should perform well for mean reversion strategies. Forex is another asset class with a high probability of mean-reversion on appropriate timeframes. (NB: You can use the MDU pin to trade ETFs by combining it with the JagzFX pinTrader Dashboard.)
The precept is that if the price has risen over a consecutive number of days, the higher the probability that it will drop to the mean. But, conversely, if the price has similarly fallen, the higher the probability of rising to the mean.
This type of multi-day reversal signal might remind you of the zig-zag indicator. However, the zig-zag is typically based on the candle high and candle low, whereas MDU/MDD uses the candle close. Thus, for a valid short signal, the last day must close at a higher than any previous x days (x being the lookback period).
For a valid long signal, the last day must close lower than any previous x days (where x is the lookback period). For a valid short signal, the last day most close higher than any previous x days.
The MDU pin allows you to select a timeframe, period and shift, but keep in mind that Larry developed this strategy for the daily timeframe.
There are, of course, many different ways you could exit, here are a few to consider.
- Risk Reward. If you prefer to trade to a target, a dashboard EA such as pinTrader will allow you to set SL and Risk-Reward ratios.
- 10SMA: Another interesting exit for mean-reversion strategies is to use the 10SMA as the target. Exit a long trade when the price moves above the 10SMA, and exit a short when the price moves below it. You can use ONEpin and AllAverages to create a 10SMA signal.
- Timed exit: If we assume that a signal on the D1 timeframe is valid for one day, it will make sense to exit the trade at the end of the same day. I set my dashboard EA to start trading at 00:10 server time and end (closing trades) at 23:50. Why not 00:00-23:59? Because many brokers freeze their servers at rollover and around 23:55 on a Friday. I want to be sure my trades are closed to don’t pay swaps or get stuck with trades open over the weekend. I also want to broker server to have been running for a few minutes at the start of the day to allow the pins to update correctly. It is better to open trades a few minutes into the session than to open them with yesterdays signals!
- First profitable close. This is one of my favourite exits and is sometimes referred to as Larry Williams’ Bail-Out Exit. Again, this is quite simple. If the trade is in profit at the end of the day, then we close it. If it is not in profit, we leave it open, giving it more time to revert. Out worst case is that the trade will hit SL or be closed when we get an opposite signal. I like this exit so much that I built it into pinTrader. Just select the option: At Session End – Close profitable trades: