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The next three signals are involved near the exhaustion point of the next correction. Once more we see a pattern of the early signals in this market being quickly replaced by signals given at a better price level. Again, this may be a pattern of activity with this indicator on this particular stock issue that may be worth further examination of historical data. This trade could also have been exited for a small profit or at least could have broken even, again dependent on the selection of an exit strategy.
The last two sell signals are presented too late in the trading day to have any major significance for our purposes.
As was the case in previous examples, in Figure 11.9 we find the dual Percent R signals appearing well in advance of the signals issued from the dual stochastic indicator. In all instances on the chart this indicator gave us the usual heads-up warning that a signal from the other oscillators is just around the corner.
Again the dual RSI signals are definitely fewer in number and seemingly more accurate as you can see in Figure 11.10.
When examining these three charts it is interesting to note that the best reaction trade of the day, the one entered at the
Figure 11.9 Dual Percent R signals appear well before signals from dual stochastic or dual RSI.
Chart created with TradeStation® 2000i by Omega Research, Inc.
1 Oi.jit IUW01 a l4:c:h,hjttirii«s Inc VAST -I
Figure 11.10 Once again dual RSI is issuing the final, confirmatory indication of an exhausted correction.
Chart created with TradeStation® 2000i by Omega Research, Inc.
high point of the correction that ends at approximately 12:00 noon, is clearly marked by all strategies used here, all on about the same bar. The less attractive entries that came in during the 12:45 to 1:45 p.m. time frame were issued only by dual stochastic and dual Percent R.
On the basis of these examples the trader is presented with some interesting choices concerning both trade entry and risk management. More conservative traders may wish to bide their time until all indicators have given an appropriate signal for a trade. One would look to dual Percent R to give the first warning that the current correction was beginning to exhibit early signs of trend exhaustion that is likely to lead to a reversal in the actual direction of the market. No action would be taken until the signal was confirmed by both the dual stochastic and dual RSI components of this strategy. This approach would certainly limit the number of trades per day but should confine ones trading activity to the signals most likely to produce a consistent profit.
A bit more risky approach, but one likely to trade more often, would be to use the dual Percent R as the qualifier but then rely on
just one of the two remaining oscillators to confirm the entry. Again, on the basis of these examples, the risk assumed with this approach would be greater with the utilization of the dual stochastic indicator as it seems to throw off a few more trades and enters a bit earlier than dual RSI. One would have to devise an appropriate exit strategy for each approach, realizing that a tighter trailing stop and possibly a smaller profit target may be more appropriate for the higher-risk scenario. A larger profit target or a trailing stop that does not follow as tightly may be more appropriate when one uses all three indicators to confirm entry.
Chapter 12, dealing with market-created support and resistance, will prove to be a valuable tool to enhance both the entry and exit scenarios constructed by the use of this group of oscillator indicators.
In Figure 11.11, a chart of Echostar Communications Corporation (DISH), the Directional Day Filter clearly is predicting a down day for the rest of the session; the majority of the activity is below
ljw> TiadeStation Chait - DISH) Echostaf Coramun Coip LAST-3 n
DISH LAST-3 min[11/07/2(100 125 *0 4" 2"?!% 0=32.760 H=35.000 U32.S75 V-2M.7CC
Dual Stochastic Sell Signals
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K.ri (Hi ,n
Directional Day Filter:
-46.000 •46 50C •45.000 •44.500
Figure 11.11 Research has shown that the Directional Day Filter is 75 percent accurate. This is one of the other 25 percent. Although the expected downtrend did not develop, our dual oscillators effectively identified exhausted uptrends, providing tradable entry points. Chart created with TradeStation® 2000i by Omega Research, Inc.
the filter line and the close of the 60-minute bar is well below this point and near the intraday low. We then are expecting the intraday high at this point to be in place for the rest of the session, and further are anticipating the establishment of one or more new lows for the day, right? Looking at the chart you will notice that just the opposite happened as the day developed; the intraday low placed by the 60-minute bar actually turned out to be the daily low, and two new highs were placed on the chart. So, what happened? Misprint in the book? Nope. This is a day when the indicator was just wrong in its prediction. Remember, in discussing in detail the construction and interpretation of this indicator, we have stated that the indicator could be accurate around 75 percent of the time. This is one of the other 25 percent. It does no one any good to point out only the times during which these tools work well. In real-time trading we must be prepared to deal with "the other 25 percent."
One approach on a day such as this is simply not to trade the issue in question when we are certain that one of our usually dependable indicators decides to take a vacation. After all, one does not need to trade every day to have a profitable trading career. Often it is just as important to know when not to trade as to know when to place the high-probability trades we are detailing here. In this case, we are aware that the Directional Day Filter is having an off day when a new high is made on the chart at about 10:15 a.m.
Recall again from previous discussions of the Directional Day Filter that when a down day is expected for the rest of the session, we will then take only trades on the short side of the market. Assuming that we have made the decision to trade this market today regardless of the new high made by the market in direct conflict with our indicator, we will still adhere to the principle that only short trades will be taken. This is not all that unreasonable since there is a good chance that the long side of the market will be less productive just due to the sharp drop early in the day causing our indicator to predict a down day.
With this in mind, we still look to our dual stochastic to signal possible short entries. The first such signal appears shortly after the intraday high that was supposed to be the high of the day got blown away by the rising market. The market proceeds to sell off gradually before rallying once again to issue yet another sell signal just as the market establishes its high for the day.
The dual Percent R indicator again serves us in the role of a qualifier of sorts as the signals from this tool consistently come in a bar or two prior to the signal issued by dual stochastic (See Figure 11.12). The second and third signals that arise from this tool should probably be discarded as they are not confirmed by dual stochastic or, as we will see in the next chart (Figure 11.13), by dual RSI.
Again the dual RSI indicator holds true to form; it is also able to accurately define prime entry points on this chart. In this case the dual RSI indication of a sell signal came only one bar after dual stochastic, which followed by one bar the same signal given by our qualifying dual Percent R tool. Combining the activity of all three of our indicators has once again proven successful even in the light of an incorrect signal issued by the Directional Day Filter.
We have just shown a day during which the Directional Day Filter was predicting new lows for the market. Instead new highs were placed on the chart. In the strict definition of the filter the indicator was incorrect. However,- the application of the filter to the actual trading signals, taking only trades on the short side of the market, was successful in producing two profitable trades. The initial reading
" fiadeSUtion Chail - (DISH} Fchostai Commun Corp LAS 1-3 n
,.?.. ?! :?. ™ 1 1VP?.0P0 0=44.125+9.43? +27.21% 0=32.750 H=35.000 L=32.675 V=296700 DirDayFlller(B,60) 43.282
: Dual Percent R Sell Signals
Downtrend Predicted 60 Minute Bar
Directional Day Filter-
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1 1 li33- ;0
Figure 11.12 Dual Percent R signals again precede those from the other oscillators.
9:03 V33 10:03 10:33 jvflj 1133 12:33 1:33 ?- "!
Figure 11.13 Dual RSI also identifies our exhausted corrections. Chart created with TradeStation® 2000iby Omega Research,Inc.
from the indicator was for downside pressure to be present in the market today. This pressure expressed itself in this case not by causing a new low to be formed for the day but rather by limiting the advance of the market, enabling our short trades to be successful.
Figure 11.14 also describes the activity of our dual oscillator indicator arrangement on a downtrending day, this time utilizing data from a chart of JDS Uniphase Corporation (JDSU).
The Directional Day Filter is predicting an uptrend on this chart with most of the activity above the filter line at the 60-minute bar and the close of this bar well above the line as well. Again we notice that the market makes new lows in violation of the prediction by the filter that new highs, not new lows, should be charted sometime during the rest of the day. Again, although the strict interpretation of the indicator has proven incorrect, we can still have a certain amount of faith in the indicators suggestion that only trades from the long side should be considered on this chart.
We receive an initial buying signal from the dual stochastic configuration just as the market plunges to a new intraday low, which turns out to be the low for the entire day. The market rallies
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