How (not) to Set Up Profit Target and Stop Loss in SeasonAlgo – 2/3

In the previous article we explained the principle of calculating historical patterns in the SeasonAlgo platform. In this article we will focus on how they can get displayed.

The SeasonAlgo allows to display more historical patterns in a single chart without the current market. Such a view is available in the Analyze/Seasonal module. it enables to see all the available historical patterns in one chart and to compare their degree of correlation.

Nevertheless, traders more often use the Builder view, which renders selected historical patterns including the current spread in a single chart. In relation to this type of view, however, there is a problem that the historical patterns get calculated as the arithmetic average of relative values, whilst the spread chart of the current year is displayed in absolute values. In order to draw and analyze both types of charts in the same chart, it is necessary to convert the historical pattern back to absolute values. Only then it is possible to compare both types of charts.

To achieve this, the SeasonAlgo proceeds as follows:

SeasonAlgo-normalizovanyprumer

Figure 1: Conversion of standard historical patterns into absolute values. Source SeasonAlgo

  1. The software selects only that period of the historical pattern which corresponds to the length of the current year spread. In the figure above you can see that this period spans from June to October 2012.
  2. Within this period, the SeasonAlgo searches for minimum and maximum values ​​for both the spread and the historical pattern.
  3. Then the SeasonAlgo calculates the difference between the spread maximum and minimum values and the difference between the historical pattern maximum and minimum values and compares these differences. The resulting ratio is then applied to the remaining part of the historical pattern and the platform renders it in a given ratio. This means that the relative values ​​of the historical pattern got converted into the absolute values.

Now let's have a look at how the current spread, including the historical pattern, would be rendered in a later period - in March 2013.

SeasonAlgo-normalizovanyprumer2

Figure 2: Change of historical pattern values as a result of the current spread development. Source SeasonAlgo

You may have noticed that the current spread development caused that the historical pattern rendered differently than in October 2012. It is because the historical pattern is continuously rendering in the ratio that is being constantly adjusted according to the above calculations. The ratio between the max/min value of the spread and the max/min value of the historical pattern is continuously changing on the basis of development of the current spread. This means that the absolute value of the historical pattern is being continuously recalculated.

And this leads us again to determination of SL and PT. We see again that it is not possible to set SL and PT according to historical pattern because its absolute value is constantly changing! Therefore, historical patterns can only be used for analysis of seasonality and not for analysis of price movements or ranges. SL and PT for the current spread must be set by using the Backtest or Advanced Backtester tools.

Summary

In this article, we described rendering of a chart which displays both the historical pattern and the current spread. In order to enable and analyze such a view, it is necessary to convert the historical pattern back into absolute values. These values, however, are being continuously recalculated according to the current spread development. It is therefore not possible to use the values of historical pattern ​​for determining SL and PT! In the following article we will describe tools that can be used for setting SL and PT.

Should you want to learn how to trade commodity spreads differently than traditionally taught, you can take part in our spread trading courses. For getting more profound knowledge of all functions of the SeasonAlgo platform, you can purchase an online course or join a group or individual course. For all these courses, you will be entitled to 10% discount on the SeasonAlgo use. All the courses can be taught remotely via shared screen.

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