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We have demonstrated in this and other sections of this book the ability of the Directional Day Filter to isolate these sidewayS days early in the session. This makes it practical to apply effective strategies during the initial part of the day that have a high probability of success for the remainder of the session. The following section of charts will deal specifically with strategies that can be effective for trading trendless days using this filter and the dual settings of our oscillator indicators.
For this discussion we will first concentrate on a one-minute chart of Broadcom Corporation (BRCM) (Figure 11.21). Note that the trading activity up to the familiar 60-minute bar has been roughly equal on both sides of our filter line. The close of the 60-minute bar is a fair distance below the filter line, thus giving the day a bit of a downward bias. However, the prediction for this trading day, taken only one hour into the session, is for a sideways, trendless affair to persist throughout the trading session.
With this in mind, the trader is equally confident in taking positions from both a long and a short perspective.
On this initial chart we are showing both buy and sell signals
BRCMLAST-l min H,-!i;.i:Ol .. i... ........• . ... i-.-. O=126.2S0 H.131.500 , f.C Vfe452320C
t Chad - BHCMI eioadcom Cuipo.<jticm CI A LAST
Figure 11.21 Multiple buy and sell windows as indicated by dual stochastic
are illustrated on a sideways day in BRCM.
as generated by the dual stochastic indicator. The indicator on this chart is using the same settings as were used on all other charts in this section.
The buy signals that appear near the lows of each major market swing are fairly well placed by this indicator setting, allowing entries without a significant amount of price movement against the position. On such sideways days it is common to have a considerable amount of fluctuation around the filter line. Also, recall from previous commentaries that this line frequently can act as support or resistance for intraday price moves. Since we are fairly certain that the market will visit this line frequently, the level represented by the filter line can be effectively used as an exit point for trades taken from both the long and the short sides. Taking profit at this point, while possibly limiting the potential for a trade, is a more conservative exit. The market can easily turn at this point, moving against the trade and possibly turning an open profit into a losing situation.
For many of the same reasons it is often not profitable to take a short position below the filter line or take a long position above this point. As an example, there are three short trades marked on Figure 11.22 that are taken below the line and another taken just as the market is flirting with this level. It would have been a significant challenge to capture a reasonable profit from any of these trades. It makes a lot more sense to take trades on a sideways day that are a reasonable distance from the filter line, as it is quite likely that the market will once again find itself in the vicinity of this line.
Again note in Figure 11.23 that the dual Percent R indicator gives a few more trade entries than our other tools. The same strategy of using this oscillator as a lead-in type tool also applies well on sideways days. Comparing Figures 11.22 and 11.23 will again reveal that there is an advantage to the utilization of more than one oscillator to pinpoint entries. This is especially true on the latter chart when examining the short entries between 12:45 and 2:00 p.m.; the Percent R indicator allows trades to be entered at a higher level here than the dual stochastic tool indicated on the previous chart.
In Figure 11.24 we see that once again the dual RSI indicator is more selective in its buying and selling recommendations than
Figure 11.22 Often on a sideways day the Directional Day Filter line can provide a pointatwhich profits may be accepted. Several such areas are highlighted here.
Chart created with TradeStation® 2000iby0mega Research, Inc.
either the dual Percent R or the dual stochastic oscillator. Although a few previously good trades were not marked on this chart, the overall accuracy of RSI is higher on this series.
On this chart the prices were contained within the range of the 60-minute bar for the remainder of the trading session. This is not always the case for a nontrending day. Keep in mind that our definition of a sideways day is one during which both new highs and new lows are made after the 60-minute bar. The next chart (Figure 11.25) illustrates such a day for General Electric (GE).
Contrary to popular belief, it is not necessary to concentrate only on high-priced, wide-ranging, volatile stocks to be a successful day trader. One of the most successful traders I know day trades only stocks such as General Electric, Citicorp, and General Motors, trading large blocks of stock for as little as % or % point per trade.
This five-minute GE chart is clearly in a nontrending mode after 60 minutes; the trading activity is almost equally represented above and below the filter line, and the close of the 60-minute bar
BRCM LAST-1 min V;. > .
TiedeSLiHon Chait (HIICMI ro.-tdcom Corporation CI A LA5T-1 r
♦ D=12S. 5D H=131.500 L=111.CCC V-45232G0 D<rDayFilt8r(1,60)
Dual Percent R Sell Signals
Dual Percent R Buy Signals
243.CO0 242.500j 242.000 241 500
241.000 240.500 -240-000 -239-5 OOi! •239.000 i -238.600 :238.000: 237.500. 237 000 236.500
Figure 11.23 Dual Percent Ris also useful as a heads-up tool when trading sideways days.
Chart created with TradeStation® 2000i by Omega Research, Inc.
Figure 11.24 The usual higher degree of selectivity of the dual RSI is again! apparent as Significantly fewer trading windows are opened. (Chart created with TradeStation® 20001 by Omega Research, Inc.
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. 1 -5 1 1imQ0m-:.:4UB. .1 m :• f-" •:• 40. 1-4S 613 L=49.063 . 225600 Dual Stochaslle<7,45.12,30 15)
Dual Stochastic Sell Signal----.
-Directional Day Filter-
.60 Minute Bar..............;.
Sideways Day Forecast
Dual Stochastic Buy Signal
11)09 9:00 9:25 9:50 10:15 10:40 11:05 11- 11-55 n-7(l
1Ti 3:26 JsW-
Figure 11.25 Two signals areissued by dualstochastic duriag a sideways in a relatively quiet stock.
Chart created with TradeStation® 2000i by Omega Research,Inc.
is in the center of the intraday range and very close to the filter line. Both sides of the market can be traded with this forecast early in the day.
Note the accuracy of the signals given by the dual stochastic indicator on the chart. Once again observe the behavior of the market when the filter line is approached from both above and below. In some instances the market definitely was turned by this line, while in other situations on the same chart the line was penetrated with ease. Contrast this observation to the frequently noted instances when, in the case of an upward-trending day, the market was seen to find support regularly on this line, or on a down day when resistance was uncovered at this point. Since the behavior around this line is inconsistent on sideways days, the conservative approach here is to consider taking profits at the filter line, entering only on indicated reversals at the extremes of short-term price moves. Using market activity around this line as an entry routine is not likely to be productive.
Dual Percent RSell Signal
Dual Percent R Buy Signal
11/09 9:00 9:25 9:50 1015 1040 11:05 11:30 11:55 12:20 12:45 1:10 1:35 2:00 2:25 2:50
Figure 11.26 Dual Percent R signals again precede those of other oscillators. Make particular note of the market activity around the Directional Day Filter
Chart created with TradeStation® 2000i by Omega Research, Inc.
Shown in Figure 11.26 are the dual Percent R signals generated for the same price chart. Note that on this sideways day the range has expanded considerably beyond the range of the 60-minute bar. However, the market puts in both new highs and new lows for the session, thereby fulfilling our definition of a sideways day.
Figure 11.27 displays the buy and sell signals from the dual RSI indicator on the same day. Note the proximity of the buy and sell signals generated by the three separate oscillator combinations by comparing Figures 11.25, 11.26, and 11.27. These combinations again reinforce the wisdom of utilizing all three approaches when generating signals using this strategy.
Again the dual RSI indicator confirms previous entry signals, showing the reliability of using all three oscillators in conjunction with each other to generate the highest-probability trades.
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