Check This Out

I know from lots of experience how dangerous it is to assume that you will get the same results from live trading that you do from backtesting.  It is simply amazing how much your emotions come into play when you're actually in the fray.  However, backtesting is essential.  It is educational; it helps structure the strategy; and it helps with perspective and expectations.  The data in the spreadsheet is from a backtest.  The last three trades in the spreadsheet were made in real time, though.

Murphy's Law came into play when I decided to use the strategy with real money, and Mr. Murphy handed me the first loss of the month.  Emotions had nothing to do with that loss; the signal simply put me on the wrong side of the market.

Nevertheless, the results of this backtest cannot be ignored.  If it were complicated, I'd be very wary of replicating the results.  But this is simple.

I'm using only one component of the Better Sine Wave -- the support and resistance lines.  I'm then simply looking at the Rainbow MA to see if the trend is up or down on the higher time frame.  If I get a long signal from the Better Sine Wave and the 4500 or the 500 trend is decidedly down, I don't take the trade.  If the 4500 is in position to be pushed up by the 500 soon, I'll wait for the 500 to cross in anticipation of a 4500 cross up.  If the Better Sine Wave support is still in place then, I'll enter.

You can simplify this by insisting on both of these "permission" charts be in an uptrend (the lightest yellow line would be above the other seven moving average lines).  That strategy has had similar results during the backtest period and takes less thinking.

The other rules are as follows:

• Accept no entry signals until 0930 ET.
• Accept no entry signals after 1159 ET.
• Exit on any END signal by the Better Sine Wave.
• Hold the trade until the 1614 ET bar if there has been no END signal.
• Place a stop loss one tick beyond the maximum MAE of all winners during the test period.

The bottom line of this strategy is that it doesn't make sense to trust the Better Sine Wave indicator unless it is confirmed by price action.  That price action is vividly displayed in the Rainbow MA.  I want to always be in the direction of the higher time frame, but I'm not going to fight the lower time frame.  When they get in sync and I have the Better Sine Wave signal in place, I'm in.