Trading with Chaos Barometer

Trading with Chaos Barometer is remarkably simple. Add indicator named “Chaos Barometer Trend” to your chart.

ChaosBarometerTrend_Select

You will see the oscillator fluctuating in a range between zero and one. The closer to zero the barometer is, the stronger the trend is.

ChaosBarometerTrend

The direction of a prevailing trend is indicated by the color. Red indicates a prevailing down trend, while green suggests a prevailing up trend.

Normally, indicators for both price directions appear combined into one cumulative indicator showing the prevailing trend only. However, you can choose showing them both alongside to compare the intensity of uptrend against down trend explicitly. This would be at the user’s discretion.

Appearance can be switched with “ShowLead” setting, which is by default set to “True”. If you change this setting to “False”, both trend oscillators will show up. Below you can see the same symbol and time frame as above but with two trends shown individually.

ChaosBarometerTrend_UpDown

 

Distinction of trends manifests most prominently through an additional “Chaos Barometer Excess” indicator, which is calculated as the difference between two trend oscillators comprising “Chaos Barometer Trend”. You can add this indicator to your price chart instead of “Chaos Barometer Trend” allowing one to watch only pure excess dynamics.

ChaosBarometerExcess_Select

Below “Chaos Barometer Excess” is plotted alongside with “Chaos Barometer Trend” for a visual comparison.

ChaosBarometer_ExcessAndTrend

 

“Chaos Barometer Excess” is greater than zero, it indicates an uptrend. Values less than zero suggest a down trend. The bigger the deviation is, the stronger the trend evidence is. To facilitate this visual interpretation the indicator is accompanied with a zero line. Additional parameter “Threshold” plots constant level lines depicting a trigger condition. When “Chaos Barometer Excess” exceeds trigger level, trade signal emits. The level can be selected and optimized per time frame and security using strategy backtesting and optimization.

ES 03-15 (Daily)  10_29_2014 - 3_7_2015

 

The Chaos Barometer package includes a ready trading strategy based on the above principles. Look when the barometer is in a green zone you would enter a long position preparing for an uptrend. When it finds itself in a red zone, an exit signal is cast and optionally you could enter a short position expecting a down trend to occur.

We have tested a hypothetical historical performance of such a strategy and as you see received positive results as depicted below.

CB_ES_Perform_1

 

Results will vary from market to market and largely depend on the size of the sliding window used in chaos estimations. It is worth exploring optimization of the strategy on various periodicities and windows sizes.

In our backtests the optimized strategy shows profit factors above 2 on most of the markets and time frames we have tested.

Additional extensions of the strategy may include a delay in entering the trade to ensure that the trend stays stable for one or more bars. This would be at the user’s discretion. In combination the precise value of the one side trend above the opposite trend can also be used. Of course, the absolute value of the barometer in itself can serve as an additional filtering factor, again at the user’s discretion. This should offer even greater performance outcomes.

In real trading this simple strategic approach should be complemented with proper money management techniques for stop loss and profit taking conditions. This should offer even better performance outcomes.

 

Disclaimer: Trading futures and options involves the risk of loss. You should consider carefully whether futures or options are appropriate to your financial situation. You must review the customer account agreement and risk disclosure prior to establishing an account. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. Past results are not necessarily indicative of futures results. The risk of loss in trading futures or options can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition. Information contained, viewed, sent or attached is considered a solicitation for business.