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Jan 13, 2008 - It must be remembered that these strategies work only when discipline is applied religiously...
In the last article, we discussed the value in having two indicators confirming each other in order for the trade to obtain the high probability trade and these two signals have to be in synch. This is a simple strategy but effective when accompanied with discipline and experience. But it’s the discipline that usually corrupts the strategy making it useless. Experience counts on interpreting the signals and price action big in timing the trade, entry or exit. Once discipline is conquered, other types of strategies and other forms of trading can be explored. But these still requires discipline but of a different kind. The method used here is loosely interpreted from another method called Stochastics pop. Stochastics pop is when the lines are above 80% and the lines reverses back up again (for long entries, vice versa for short, lines going below 20%). In this case, it doesn’t have to be above 80% for longs or below 20% for shorts. When the lines cross in the right direction, it’s a good signal to trade. This method captures the momentum showing a trend has been clearly established. Taking the two signals in synch has a higher risk because it’s still early to determine if a trend has been established. The risk can be assumed if and only if the stop loss is small. Otherwise, it wouldn’t make sense to take the trade if there is a narrow margin of success with a big loss. Let’s take an example. Figure 1 shows the two indicators that don’t cross together. That doesn’t necessarily mean the trade doesn’t exist. There is one that comes after the MACD has crossed.
>From the chart above, the red arrows show how they are not in synch, especially the Stochastics lines compared to the MACD lines and the price action. Although there is no trade, the next chance is just around the corner. The green arrow shows the Stochastics moving down again, showing the price bar with the green arrow. This is a pullback entry. As can be seen, the pullback entry helps the trader miss the trade going against him had he taken the trade after the MACD lines crossing. This entry pushes the prices straight down without hesitation, giving him instant unrealized profit immediately. Here’s another example.
The MACD on figure 3 crossed to the upside along with prices breaking out in early December, but Stochastics lines had crossed earlier. Waiting for the second cross to occur (blue arrow on bottom of chart), the right moment presents itself for an entry. With the lines already above 80% on the reading, this pop is confirmed with a breakout from the high from October, a significant event. With the MACD firmly moving higher, the timing couldn’t have been better.
The last chart illustrates the use of MACD (trend indicator) and Bollinger Bands (oscillator) to find the setup to trade. MACD lines crossed in late November but Bollinger Bands touching the top line. For a long entry, this price location is not ideal. The rule for Bollinger Bands (BB) is to fade the extremes, a counter-trend indicator. The rule is to buy or cover short when the prices touch the bottom line and sell or sell short when prices touch the top line. Since the purpose of this strategy is to trade with the trend, we have to wait until the prices move down to touch the bottom BB line. Finally, by mid-December, price finally touched and beginning reverse to the upside, an entry is immediately taken. It must be remembered that these strategies work only when discipline is applied religiously. There is no room for errors and misinterpretation, for example, a belief that a trade is there when in fact it isn’t. Sometimes a strategy is simple but traders have a tendency to make it more complicated than it really is. Only when the criteria are met the trader is notified of the setup. A scan can take away a large degree of discretionary interpretation. This will avoid a factor why many traders fail thinking it’s the strategy but in fact it’s the traders that failed.
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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