Creating our own indicators and turning them into a trading strategy is something all technical analysts strive to do. Unfortunately, a lack of programming skills can often discourage us from accomplishing this. But there are ways to get around it. Here’s one way to create and backtest an indicator without writing any code.
If you are a devout reader of Stocks and Commodities magazine, then I can confidently say that you likely have your own ideas for creating custom indicators and turning standard and custom indicators into a trading strategy. Ideally, these ideas would first be backtested on historical data and possibly run in full autotrading mode. Wouldn’t that be magnificent?
Of course, having an idea is one thing, but turning it into an executable piece of program is a different ballgame. In this article, I will create a combined indicator and a backtesting strategy, and I will do this without using a programming language.
The basic trading idea
First, please note that the purpose of this article is to provide an example of one way to create indicators and trading strategies without writing programming code. Thus, the indicators and strategies shown here are for educational purpose only. I’ll start with the basic strategy idea, one that I’ve already used before; namely, the crossing of two specific moving averages. The first and faster average is the simple moving average of the typical price. The typical price is the high + low + closing price divided by three. The second average is a simple moving average of heikin-ashi recalculated prices, or haOpen + haHigh + haLow + haClose divided by four. In the first part of this article series on charting techniques in the July 2014 S&C, I presented the modified renko chart. This kind of chart filters out most of the noise found on standard fixed-time-related charts resulting in clear up and down moves and turning points. When you apply moving average crossovers on this type of chart, it will produce less losing trades than the commonly used fixed-time-related charts. In Figure 1 you see a 100-tick (one-point) modified renko chart of the S&P 500 index. I have added the eight-bricks simple moving average (SMA) of the typical price in blue and the eight-brick SMA of the heikin-ashi price in orange. Both are calculated on the renko bricks. Note the green buy and red sell signals produced by the crossovers of the two averages. Is this a profitable system? Can it be improved? Although you can find the answers to these questions using historical data, you still need to create the indicators and a trading strategy.