Thursday, September 1, 2011

Trading with a clean chart

Open a chart, then apply four different indicators. Now, you have five charts on the screen (price + 4 indicators). Add a few studies on the price chart, like Bollinger bands, fib retracements, averages...). What do you get? I will show you an example:

This is a spaggetti chart. You take a lot of indicators and throw it on the chart until it becomes unreadable. Worse, it is likely that the indicators are likely to contradict each other, giving a chart that will lead to 'paralysis by analysis'.  (Note: the indicators applied on the chart were selected at random).

Traders should have 'clean' charts to guide them in their trading. Whatever you have on the chart should be actionable. Some examples follow:

1. On a high-low chart, develop rules to identify consolidation patterns. Your strategy should be to take a breakout from the consolidation,with proper stops and targets.

2. Using a momentum idnicator with a signal line, your strategy is to buy/sell minor pullbacks in the indicator in the direction of the signal line. (google information on 'The Anti' by Linda Bradford Raschke in the book 'Streetsmarts')

3. You trade the first pullback after prices cross the 20 period MA.

These are simple rules, which should give a profitable trading strategy. I hope you get the idea. I request readers to provide their own ideas on similar strategies. While their views will be available in the comments section, I can make a complete post for these ideas if we get a reasonable number.


Research said...

Dear Sir
I am a very big fan of your blog. Your Blog is very helpful for people like me who are keen to know about technical analysis. Each post at your blog has very useful tutorial for investors, Traders and Analysts. This one is also a part of excellence in technical analysis.

sudhin said...

1. Plot the 5,20 ema on the price chart.
2. Plot the 5 n 20 ema on the RSI CHART, YES RSI(14) CHART.
3. If ema5>ema20 on price and if ema5>ema20 on rsi then trend is up.
4. if ema5ema20 on price and ema5ema20 on rsi then trend is flat to negative.
Kindly back test this before using.

sudhin said...

This method i use but it has got it's own + and -ve points.
1. Invest in the same stocks which one can accumulate on declines (preferably index stocks but RIL HAS nailed me here), so buy 5-10% and keep adding every 4% down. If the last purchase gives u 4% just sell and wait for a re-entry, or sell on every 4% rise, at some time buy a bigger quantity instead of 10%, PLEASE DO NOT USE THIS METHOD ON ANY MID/SMALL CAP STOCK.
This method has got its own advantages and disadvantages, so stock selection is important here, I prefer this method as I feel stocks are ranged most of the time. A one way up or down movement is not suitable for this method so back test over 2-3 years and see if this helps before jumping. Pivot points can be used for entry and exit say sell at r2 and buy around s2, PLEASE paper trade on this method before using.

gourv said...

Hello Sir,

Identify the trend change by DMI/ADX or Moving aerages which ever ones like and buy the First pull back and sell at least 50% @ target and follow the next 50% by trailing SL like 5 or 10 period MA.


Nirav said...

Dear Sir,

I am comfortable to trade market with Swing Trading Strategy (Marc Rivalland Book). I think it gives a proper view about the market. What do you say about that?

Nirav Kansariwala.

DK said...

Sir ,I M fan of your views
I think price and RSI Importants
and I use 60 period EMA on price charts that suggest Proper Resistance and Support If there is any Spikes in Price.
ADX-I use With Combination if range Breakout Occur