I’ve been watching some of FuturesTrader71’s videos (which can be found at www.futurestrader71.com) and one on Harmonic Rotations caught my eye. Basically a harmonic rotation is how far the market going in one direction without a 1 point pullback (This pullback value can be changed to suit your own preference). Watching his video, I wanted to write my own NinjaTrader strategy to pull that information into a spreadsheet so I could do my own analysis and see if this have changed much recently, and do look at some other ideas I’ve had (Which I’ll write about later). I also wanted to utilize this information to fine tune my stop loss and where to scale out.
So I dug out Visual Studio Express and starting writing up the strategy and output the data to Excel. Here’s a distribution breakdown of the data:
As you can see, the most frequent rotation is 1 point which differs a bit from FuturesTrader71’s video (His was 1.5 I believe, but he also rounded to 0.5 I believe). The next more important information is the 1st and 2nd standard deviations. Rotations of 1.75 and less make up 68.2% of all rotations while rotations of 3.5 and less make up 95.4% of all rotations.
What does this mean? It means your stop loss should be wide enough to handle enough rotations before your expected direction takes hold. If you enter after a 1 point pullback, a 2 point stop should keep you in on 68.2% of all rotations. Of course, this all depends on your entry method so you’ll have to adjust the data to suit your own preference.
Next I’ll be looking at some of the data outside of the 2nd standard deviation and see if there is an edge there. Until then!