Elimination of the Baseline – What does this change involve for the algorithm?
Well, first let’s review the three functions of the baseline.
The baseline has 3 purposes:
- To signal which direction you should be trading. If the price crosses and closes above the line, you are to trade long. If the price crosses and closes below the line, you are to trade short.
- To signal when to exit the trade. If price crosses and closes above/below the line in the opposite direction when you are in a trade, you exit.
- It signals if you are entering a trade at the best price. To enter into a trade all of your indicators must be giving you a signal BUT price also must be within the 1 ATR zone before you can enter the trade. If price goes outside of that zone the price is too far gone and you are overpaying for it.
So, here is what happens if you eliminate your baseline from the algorithm.
- You no longer have that extra indication of telling you what side of the trend you are following, instead you are going to rely more on your primary and secondary indicators to tell you that.
- You no longer have that usage of the baseline as an exit indicator and you now rely only on the primary, secondary and exit indicator to exit you from trades.
- You no longer follow entering a trade with any 1 ATR rule, therefore price is never too expensive for you to enter.