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4>i - i i ..... 21/2000 <:- . 7 *. "► . 0=61.166 H=62.250 L=57.975 V=0 DlrDayFilter(5.60J 96.032
Figure l I
generat< line. Jit i line can
ictional Day Filters
Dual RSI Sell Signals.
! 60 Minute Line : Downtrend Forecast
3:21 9:46 10:11 10:36 li:01 11:26 11:51 12.16 12:41 1:06 l:31 1:56 2:21
4. Dual RSI signals on the same chart of ADI on Augnst21, 2000. >\ with TradeStation® 2000i by Omega Research,Inc.
aid definitely have been prompted to action by the conflu-1 three signals at the same point on the chart.
It is. ilso interesting to note that these initial signals are being
:1 as the market approaches the Directional Day Filter ill from previous discussions the situation whereby this often act as resistance when the market attempts to re-
cover frii m previously experienced losses. The appearance of sell signals I all three oscillators at this point of resistance is an-ot.hor <>f row several suggestions by our set of routines that point st. ron I to the necessity of placing a sell order at this point.
Tlx- lilhird sell signal is issued too close to the end of the day to In mi j; 11 i 11 cant for our purposes here. Of interest also is the absence of s< I I Hgnals from dual RSI during the 1:00 to 1:45 p.m. time il firing which sells were issued by dual stochastic on the fi r.sl tl i,i t of this series. It is doubtful that traders experienced in the 11: ;i 1 « f these methods would have seriously considered placing aslmi l"*ade at this point since signals were issued by only one of on r 1.11 ret* tools in this area.
Now lets look at the various combinations as they are ap-
plied to an advancing day in the market for i2 Technologies Inc. (ITWO). As before, we will begin with the dual stochastic signals (Figure 11.5).
We are clearly in an uptrend for the balance of the trading session on this chart, as the majority of the activity resides above the filter line. Also, the close of the 60-minute bar is in a bullish configuration well above the filter line. Also, this close is near the intraday high, indicating that we should expect the formation of new highs the remainder of the day while the established intraday low should remain intact.
The first minor pullback in the market shortly after the formation of the 60-minute bar is not picked up by the dual stochastic indicator. One should recognize, however, that the strategy for trading the breakout of the intraday range after the 60-minute mark as discussed earlier in the book is certainly an applicable method to capture a move such as this one.
Our first buy signal from the dual stochastic indicator comes shortly after the 10:30 a.m. time frame as the first major correction
* TradeStation Chart - (ITWO] 12 Technologies Inc LAST-1
t - -7! Wp if--;i iiin „* 1 i-m w -iMi jMZliJL-M£2i2£ZiM
Figure 11.5 Dual stochastic identifies exhausted corrections in the uptrend that can be used for long entries.
of the downtrend completes its exhaustion phase and the major trend of the day resumes in an upward direction. This upward thrust terminates with the placement of a new intraday high as expected by the Directional Day Filter.
The next correction runs almost parallel to the first when compared in both time and distance. The exhaustion of this phase also results in a buy signal from the dual stochastic indicator. Note also that the indicator waits for a small double bottom formation before issuing a third buy signal that ultimately results in the placement of the daily high on the chart.
The next four signals from this indicator are not as useful for the trader as the first ones to appear. Note from a historical perspective that the market has entered a downtrend to finish the day and our indicator has assumed its familiar habit of issuing buy signals in a down market. However, in real time these signals would have appeared without the perspective we have that allows us essentially to see the decline in the market before it actually happens. Be aware that our purpose is not to show these tools strictly in situations where they have worked perfectly. The real trading world does not work that way. Only by studying charts such as these that show the problems one can encounter in everyday trading will the trader gain an accurate perspective of both the potential and the difficulties that will arise from their use. In the next chapter you will be presented with a method of assessing short-term support and resistance, which will be very helpful when it comes time to sort out situations such as the one at the conclusion of this chart.
Now lets move to the same chart, this time with the signals from the dual Percent R indicator applied as before (Figure 11.6).
Note carefully the minor but important differences in the placement of the buy signals that appear at the exhaustion point of the first three major corrections. Again note that the dual Percent R signals appear slightly before the signals that were generated by dual stochastic. On two occasions these signals appear only one bar prior to the signal issued by dual stochastic, while on the other buy signal a dual Percent R signal appears several bars earlier. In all cases the dual Percent R signal acts once again as warning that another signal from an alternate source is imminent. Once again the terminal portion of the chart causes several buy signals to appear in a down market.
Figure 11.6 Dual Percent Rissues a greater number of buy signalstbatour otber two oscillators.
Chart created with TradeStation® 2000iby0mega Research,Inc.
Figure 11.7 applies the dual RSI indicator to the same market. Note that once again there are fewer signals generated by the dual RSI tool when compared to dual stochastic and dual Percent R. It is also possible to state that these signals are more accurately placed, as they have identified the strongest two moves in this market while ignoring the third buying opportunity signaled by the other two routines. This trade, while profitable, still took a bit longer to develop.
The dual RSI is no better at ignoring the false signals that are issued during the latter portion of the trading day than were the others. Again, use of support and resistance that is covered in Chapter 12 will be of considerable value in avoiding the unprofitable entries that could result from using these tools alone in these types of situations.
The next chart series also uses data from ITWO, this time working with a down day.
The Directional Day Filter is forecasting a sideways to lower day in Figure 11.8 due to slightly more activity below the line and
!il,itior> rh.nl (II Wl][ <s
> 625 ¹116000 1=101.936 \=2151200 DlrOayFlllBr(5,60)
Wild 8:56 9.21 3:46 lj);il 10:36 1 i 1 11:26 11 12.1B i;:41 1:31 1 6 2:21 2:46
Figure 11.7 Dual RSI signals generated from identical data used for Figures li.S and 11.6.
Chart created with TradeStation® 2000i by Omega Research, Inc.
Figure 11.8 Sell signals are issued as dual stochastic identifies exhausted correctioas during the downtrend forecast by the Directional Day Filter. Chart created with TradeStation® 2000i by Omega Research, Inc.
the close of the 60-minute bar also slightly below the line. The sudden, sharp drop in the market quickly confirms the lower part of the forecast. Also, had one delayed the interpretation of the daily trend for another 30 minutes the prediction would clearly be for a continued market decline.
As was the case when we examined an uptrend for this same stock issue, the initial, sharp market move was quite violent. The minor corrections that did exist were not strong enough to trigger any signals from the oscillator indicators that are designed to signal the exhaustion phase of such corrections. The strategy mentioned earlier that trades the breakout of the intraday range as defined by our 60-minute bar would have again been very successful in capturing what turned out to be the best trend of the entire day. This is an example of how careful study of any individual market can be of benefit to the trader. After the examination of only two days of market activity for ITWO we have already noticed a characteristic early-morning move that in both cases would have been very profitable had the described breakout strategy been employed. It is entirely possible that these observations have only uncovered one of those one- or two-day wonders that do not persist throughout the trading history to the degree necessary for this strategy to be helpful in the long term. On the other hand, if careful study of several months of data from this issue indeed proves that this is not an aberration but instead a repetitive feature of this particular stock, we may have found something worthy of further consideration. It is often tempting for traders to immediately begin implementation of a new strategy such as this one after watching it be so successful twice over a short period of time. Caution is certainly advised here; the possibility definitely exists that this may not be a repeatable feature of this particular market.
The initial sell signals from dual stochastic come as the first major correction nears its first exhaustion point in the $182 area. This trade may have been profitable depending on the exit strategy or stop loss routine that was employed.
The second sell signal is released just as the exhaustion is completed at the $184 level. This entry is followed quickly by a sharp down move that has the possibility of a $5 or $6 per share profit, again dependent on the choice of an exit strategy or trailing stop routine.
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