The S3 Basic System Strategy is as follows.
- Crossover Rule:
- When the 8 EMA crosses above the T3-8 MA, we are looking for long entries.
- When the 8 EMA crosses below the T3-8 MA, we are looking for short entries.
- T3 Rule:
- Setup Long when a candle closes above the T3-8 MA
- Setup Short when a candle closes below the T3-8 MA
- Signal Rule:
- Long: On the next candle following a candle that meets the T3 Rule Setup, a Cyan color bar is one that closes a minimum number (e.g. 5) of ticks, and no more than a maximum number of ticks (e.g. 24) above the previous Setup Candle. A Dark Cyan candle is one that exceeds the maximum number of ticks, but otherwise meets the basic rules.
- Short: On the next candle following a candle that meets the T3 Rule Setup, a Magenta color bar is one that closes a minimum number (e.g. 5) of ticks, and no more than a maximum number of ticks (e.g. 24) above the previous Setup Candle. A Dark Magenta candle is one that exceeds the maximum number of ticks, but otherwise meets the basic rules.
Looking at the chart in Figure 1, one could take an entry after the close of any of the colored bars, and many would work out OK. However, to improve the probability of a profitable trade, two new rules were added. These Enhanced Rules require that the T3-8 slope be in sync with the direction of the trade, and limits the number of entries to 1 per crossover, to help avoid losing trades at the end of a trend.
The S3 Enhanced System Strategy (starting with Cyan and Magenta bars from the Basic Strategy) adds additional rules to filter out some trades:
- T3-8 Slope Rule:
- Long: Cyan Bar must appear with a positive (White) sloping T3-8 Moving Average.
- Short: Magenta Bar must appear with a negative (Red) sloping T3-8 Moving Average.
- First Candle Rule:
- Long: Enter a Buy Market Order after the close of the first Cyan Candle after the 8 EMA cross over from below the T3-8 MA that meets the T3-8 slope rule.
- Short: Enter a Sell Market Order after the first Magenta Candle after the 8 EMA cross over from above the T3-8 MA that meets the T3-8 slope rule.
- Optional VWAP Rule:
- Long: Only if above the Daily VWAP.
- Short: Only if below the Daily VWAP.
In Figure 2, we see white and yellow arrows. These indicate where the Auto Trade study, following the additional Enhanced rules, would make trade entries. The Long entries are White Up Arrows and the Short Entries are Yellow Down Arrows. In this example, the enhanced rules reduce the number of possible trades in the Basic Strategy from 27 (the number of cyan and magenta bars) to 8. While this is a fairly choppy time period, most of these trades would have worked out OK, providing the target is not too far from the entry. You can see there are bars that would have been OK, but they don’t meet the T3 slope rule.
- T3 Cross:
- Long: Exit when price action closes below the T3 MA or when 8 EMA Crosses T3-8 MA from above.
- Short: Exit when price action closes above the T3 MA or when 8 EMA Crosses T3-8 MA from below.
- Target Hit
- Stop Hit
- Manually Flatten
Why two strategies?
The Basic strategy is easily implemented in Sierra Chart using the Color Bar Based on Alert study. For every bar it looks at the previous bar to see if it closed above the T3 study. It also looks at the current bar, to see if it closed far enough away from the previous close. Users who purchased the Manual Chartbooks will only see these bars and will need to follow the Enhanced rules in their head, deciding visually if a bar is the first bar to close after the crossover that is also in sync with the slope of the T3.
The Enhanced rules require more complex formulas to count bars and compare them to moving average crossovers and the slope of the T3 MA. The Spreadsheet Study for Trading enables these rules, as well as managing the trade entries and exits.