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Figure 10.5 With the majority of market activity below the horizontal line priortothe 60-mimite line, the Directional Day Filter is forecasting a downtrend for the remainder of the session. Chart created with TradeStation® 20001 by Omega Research, Inc.
Figure 10.6 As expected from the forecast on Figure 10.5, several new lows occur duriag the balance of the day.
were six distinct new lows established during the rest of the market session, as marked by the series of upward-pointing black arrows
on the chart. Also, note that there were no new highs for the day.
I Thus this day clearly meets our definition of a down day as forecast
* tjy our indicator.
Again, note that between several of the new lows made for the
I day, there were distinct reaction highs charted by the market. These swing high points mark excellent opportunities to enter the market on the downside to participate in the major trend of the day. Figure
10.7 clearly identifies these reaction highs.
Accurate methods for the identification of these points in real time will be discussed in detail in later chapters of this book. Figure
10.8 of the same day will be used to detail the actual placement of longer-term trades in the direction of the major trend as well as shorter-term, higher-risk entries against the major trend. This chart is included here to give the reader an appreciation of the ultimate use for the Directional Day Filter. All details of this chart will be explained in Chapter 12, "Putting It All Together."
Figure 10.7 The down arrowsidentifyexhaiisted correctionsinthe persistent downtrend forecast by the Directional Day Filter. Readily available oscillator indicators are effective tools for the isolation of these points. Chart created with TradeStation® 2000i by Omega Research, Inc.
DSP200009 LAST-1 min 07/06/2000 C=1 463.40 -17.B
m f. - - - ciuci il i\ ijtji iqioj
1:..... -\& 1&
1.20% ..«14910» H=1494.00:L=1477.S0 V-0 Median L,lne(5.60) 1480 00
Percent R Sel Signals;
irectional Day Filter-
Percent R Buy""Signals"
Category 3 Support
14i2JO0 148C0C 1478 Of -1476 00 U74.0C 1472.00 -H70.0[ 1 68 0 1466.30 1464.00 1462 00
1-4 1 -11 1 11-m 11-11! We. n-ic iVi. Vn» "
Fii£J[CrelQ088 The Directional Day Filter allowsthetraderto enter only in the direction of (tftg utalinwtfll Lt irahn. Tmtn sleCtX trattSS UJUStr3te<tt. Chart created with TradeStation® 2000i by Omega Research, Inc.
As mentioned earlier, there are days when the Directional Day Filter is useful in the identification of a purely sideways trend for the day in question. On these days the trader can feel confident taking trades on both sides of the market, trading from both the long and the short side.
On the one-minute chart of eBay in Figure 10.9, note that there is nearly an equal amount of activity above and below our calculated line at the determined analysis time of 90 minutes, which has proven effective for this particular security.
Consequently, the trader can take both long and short positions on the day in question. During such days we do not expect major trends to develop. Such days probably occur due to a lack of new information concerning the security. It is also possible that there is an announcement expected in the near future that may affect the price of the stock. If so, most traders will be reluctant to make position changes in the security until these conditions change. Thus, very little movement takes place on such days.
The very definition of a sideways day is that there will be little activity one way or the other. Traders can have increased confidence in buying exhausted declines and selling exhausted rallies on such days.
6?.:>13 ..125 .U20".i O-S2.0D0 H-63.375 L- V-1685e00 CD Median Une(S0) 02.094
Figure 10.9 Market activity approximately GCJUal on both sides of the horizontal line previoustotheverticallineis a forecast of a sideways, trendless day by the Directional Day Filter. Chart created with TradeStation® 2000i by Omega Research, Inc.
In Chapter 11 we will discuss the use of several oscillator indicators and their unique use to enable the trader to enter the market on exhausted corrections from the major trend of the day. Obviously, on some of these days the trend will be forecast as nontrending, as is the case on the August 25, 2000, chart of eBay (Figures 10.9 and 10.10). On such sideways days these oscillators can be very effective trading tools. The Directional Day Filter is a very valuable tool to determine how these oscillator indicators will be used on any given day.
As will be described in detail later, dual settings of these oscillators can be quite effective trading tools when applied to nontrending days. Figure 10.10 details the trades generated by a system using two diverse settings of the popular Relative Strength Index (RSI). As you can see, the trades placed by this use of the RSI indicator were fairly effective in catching the apex of each price swing as it was about to play out. Using sensible money management strategies along with this system would have resulted in an effective trading session by most standards.
The actual operation of the dual indicator setting strategy was covered in detail in Chapter 6, "Use of Multiple Indicator Sensitivity Settings." This chart is an example of the importance of the identifi-
:BAY LAST:1 min 08/2512000 C.=S2 313 -16.500 .3602% 0=36613 H=36.0CC L=30.750 V=2565500 Median Lln8(5 60) 62 094
Nontrending Day Predicted
0;25 8:66 9:21 9:46 10:11 r10.36 Viii 11:26 11:51 12:16 1241 1: ill 7- "
Figure 10.10 During aoatreadiag days as predicted by the Directioaal Day Filter oscillator iadicators give reliable sigaals. These trades are geaerated by the dual RSI strategy discussed ia Chapter 6. Chart created with TradeStation® 2000i by Omega Research, Inc.
cation of a sideways day for trading purposes. The obvious point to be made here is that it is not necessary for the trader to concentrate only on trending days for effective day trading. The early identification of a trendless day in this instance was effective in the selection of a proper strategy to be implemented on such a day.
An additional example of a sideways day can be seen in Figure 10.11.
The Directional Day Filter Indicator clearly is predicting a sideways day one hour into the trading session. There is a bit more activity below the plotted line than above. However, the close of the one-hour bar above but quite close to the line clearly shifts the balance to neutral, suggesting a sideways day during which both new highs and new lows for the daily session are made after the first hour.
As an example of some of the trading strategies that are of use on sideways days, the same chart is reproduced with the addition of generalized buying and selling points that will be generated by a variety of trading tools (Figure 10.12). These signals will be generated by the use of a trading strategy involving intraday support and resistance calculations.
Briefly, positions are taken using this method when the market
DSP UO LAST-1 mm
60 Minute U
G8121/2000 ->150fi.50 -7.10 -0.47% o=1511 50 H=1528.3G Lai 511 00 V=0 CO Median Line(0O) 1504 15
M ikf NewIntradayHl9h
/ V* a ft Ll Directional Dav Filter j/fu \ 1
1502.00 -15G1 .CO
ng Day Predicted 1 T "i 1111
New Intraday Low If f
im- »-«« q-11 -4 1 1 10- l1:01 11-26 l 1 51 1216 12:41 1:06 1:31 1.56 2:21 2:46
Figure 10.11 A sideways day is forecast by the Directioaal Day Filter as the activity is fairly well distributed duriag the first 60 miautes. The settiag of both aewiatraday highs and lows coafirms the sideways tread. Chart created with TradeStation® 2000i by Omega Research, Inc.
i/21 -5 3-71 9 10-11 111:36 11:01 4:26 11:51 12:16 12:41 1:06 1:31 56 2:21
Figure 10,12 During sideways trading days both buy and sell signals may be taken with coafideace.
Chart created with TradeStation® 2000i by Omega Research, Inc.
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