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1 1 111 < 1 1 1
GELAST-5rtlln 11/09/3000 = .43 -1 I :f »3.69% 0=49.500 H=49.913 U49.063 V=6225600 Dlr Day Fllter(5,60) 53.969
Dual RSI Sell Signal
Dual rsi Buy Signal
11/09 HOP 8:25 9:50 10 5 l0:40 "05 11:30 11 iMq 124 1:35 2:00 22b 75q
-5520o -65000 54 800 54 600 54 400 54.200 54 000 53.800 53 53.400 53.200 53 000 52800
Figure 11.27 Notethaton Figures 11.25, 11.26, and here on Figure 11.27 all three dual oscillator combinations have detected exhausted market corrections atapproximatelythe same points on the charts. When three separate, mathematically dissimilar routines agree, there is a high likelihood that the signal so generated will result in a trade with a high probability of being successful.
Chart created with TradeStation® 2000i by Omega Research,Inc.
1. Dual Percent R will issue relatively more signals and can be used as an indication that a trade set up is about to be completed.
2. Dual RSI will issue significantly fewer signals, although with higher accuracy.
3. Dual stochastic will issue signals on a more intermediate frequency with acceptable accuracy.
4. The most accurate trade entries are generated when all three dual oscillators agree.
5. The Directional Day Filter can be an effective tool to increase the accuracy of signals generated by dual settings of oscillator indicators.
PUTTING IT ALL TOGETHER
Using Common Oscillators, Support, Resistance, and the Directional Day Filter to Achieve High-Accuracy Trades
THE FOUR-STEP PROCESS
So far we have outlined and explained a number of methods by which many of the available online indicators can be used to create an effective trading strategy. We can now reduce these methods to a concise, structured four-step process that leads to the placement of high-probability trades. Our four steps are:
1. Determine the major trend of the day using the Directional Day Filter.
2. Determine the minor trend of the day using our selective interpretation of available online indicators.
3. Define an exact entry point using Category 1, 2, or 3 support and resistance levels.
4. Determine an exit strategy using these same support and resistance levels and/or selected interpretations of our list of online oscillator-type indicators.
Now lets examine a number of charts, many of which were used earlier, to illustrate the process as it applies to several different trading situations.
Many examples will be offered in this section covering the application of the outlined four-step process in extreme detail. Although the detail provided here may seem overly repetitive at times, readers are encouraged to examine each example in detail, as each will examine individual market scenarios that will be regularly encountered in everyday trading. Only by careful examination of each of these examples will the trader gain a full understanding of the application of this method across a wide variety of trading situations.
The two-minute chart of Comverse Technology Inc. (CMVT) shown in Figure 12.1 has been used on several occasions previously to demonstrate the activity of oscillator indicators in an uptrend and to show how support and resistance can be used to enter a trade with a high probability of success. In this instance I will describe the use of the four-step method to complete a trade. Figure 12.1 will serve as the main point of overall reference for this discussion. Portions of this chart will be reproduced in subsequent figures to allow more thorough discussion of the signals that are generated by our indicator combinations.
Category 2 Resistance
TriideSlahon Chait - ICMVTJ Coi
MVT LAST-2 min ;1 9/2000 C=r14.500 *S.2i)% 0=1 Kii 000.H=110.000 L=1C5.250 V=2519900
..DuaJ Stochastic Sell Signal
Resistance Broken ujl*"
..... - iH
Exit on Ck se „„
""Category ? Support
I Uptrend Predicted
\ Long Entry
Dual Stochastic Buy Signal -Directional Day Filter--j-\-
FastD(70.1) 67.50 30.00 70.00 FastD 7 Bar(90.0) 66.27 10.00 90.00
3:02 9:32 10:02 10:32 11:02 11:32 12.02 12:32 1:02 1:32
Figure 12.1 The Directional Day Filter, dual stochastic, and Category 3 resistance combine to generate a high-probability trade. Chart created with TradeStation® 2000i by Omega Research, Inc.
First, we can define the dominant trend of the day as higher after one hour of trading has passed. Note the position of the Directional Day Filter in Figure 12.2. Note that it meets our outlined criteria for an uptrending day: (1) The majority of the activity of the market is found above the filter line one hour into the trading day, and (2) the close of the bar that marks the critical one-hour time frame is found at the very high end of the daily range at the one-hour mark. Thus, having determined that the trend for the remainder of the day has a high probability of being up, we will enter only long trades that are in the direction of the dominant trend.
Also on this expanded chart you are able to observe more closely the placement of the several dual stochastic sell signals that persistently arise as the market continues its upward climb. As mentioned in previous chapters, this feature of the oscillator indicator is the one that causes problems for many traders as they persistently are prompted to sell into these rising markets. This chart again provides evidence of why this occurs. As you can see in the lower graphs, the slow oscillator plots ride almost constantly above the overbought threshold areas, making it very easy for the faster average to turn down slightly and issue a sell signal. These are obviously false signals-the market continues to rally.
Trades lotion Ch«irl [CMVf) Comverse Technology Inc LAST-2
CMVTLAST-2min 10/19/2000 0=114.500 -5631-0.49% 0=03.375 H=96.250 L=97.203 V=1279200
Category 2 Resistance.
Hiial SlnnhflQhc !1 .Sirjnsl
. * « ...hV-..""
Category 2 Support
-Directional Dpy Filter-
114.000 110.000 10 .0 0
FasID(45.70.1) 87.50 30.00 70.00 FasID 7 8ar(90.D) 66.27 10.00 90.00
B:52 9:12 9:32 9:52 10:12 1032 10:52 11:12 11:32 11:52 12:12 12:32
Figure 12.2 The Directional Day Filter prevents entry into short positions early in the day.
Chart created with TradeStation® 2000i by Omega Research,Inc.
By using our Directional Day Filter and realizing very soon in the trading session that the trend for the rest of the day has a high probability of being upward, we are therefore able to ignore these signals, giving us a much higher chance of success.
Also detailed on this expanded chart are several Category 2 support levels that are marked by the small black squares that you see under several of the price bars. Although these points are used mainly for short entries into a down market, there is good reason to have an understanding of their placement and use in an upward-trending market such as this one.
First of all, lets assume that we either have chosen not to use the Directional Day Filter, are unsure of its interpretation, or are incorrect in the reading of the signals from the indicator. In any of these instances we could be looking for sell signals in this market. Also, there are traders who are absolutely certain that this market is going to top out on the next bar and are itching to enter on the short side. If traders are vigorously looking for a sell signal in this market and at the same time are convinced that support and resistance are an important part of any trading strategy, they will be looking to enter the market on sell stops placed slightly below each support point as it is formed.
Notice how the support points are formed here, each slightly higher than the previous point. If our determined short seller was placing his or her sell stops properly, the stops would have been moved higher several times, each time without a market fill as this market plainly refuses to challenge or break the support that it itself has created. The trader is never positioned on the short side under this scenario.
Again, it is as important to know when not to trade as to know when to trade. In this instance we have detailed two reasons not to sell into this market, thus keeping several trades out of the loss column. Our Directional Day Filter and prudent use of simple support and resistance formations has kept us out of trouble for the entire upward move.
By now you must be thinking, "If we are so sure of an uptrend, how could we have participated in this move using our trading tool package?" Figure 12.3 details the use of the 60-minute bar breakout strategy, which can be used in conjunction with the indications from the Directional Day Filter.
As discussed previously, this strategy is used to capture the initial move of the day that occurs as the market breaks out of the range as defined by the 60-minute bar. This method is usually most successful
TiiitfcStation Chert - [CMVT) Comverie Technology Ine LAST-2 n
CMVT L4BT-2 min 10 2000 C=", 14.500 -.503-0.49% 0=93.375 H=9E.250 L=97.203 V=1279200
IjX- " Stopped Cut-Category 2 Support -i-Directional Day Filter-
Enter Long Breakout Trade
ategory 2 Support
-j-HG.000 : 4.300
110,000 10B.300 108.000: 104.300-102.000 1D0.DOO: 98 000
FaslD(45.70.1) B7.5O 30.O0 70.OO FastD 7 BarQQ.O SB.27 10 00 9000
Figure 12.3 Trading the breakout of the early range as defined by the Directional Day Filter provides a reliable method for entry on the long side during a day when an uptrend is expected to continue. Category 2 support provides for trailing stop protection, which eventually causes the trade to be exited at a profit.
Chart created with TradeStation® 2000i by Omega Research, Inc.
when the close of the 60-minute bar is within 15 to 20 percent of the intraday high or low. The entry is very basic-it is accomplished by placing buy stops slightly above the intraday high or sell stops slightly below the intraday low. This system will automatically enter the trader into the market in the direction of the breakout of the 60-minute range.
In this case we will consider only the breakout of the intraday high, because the trend of the day has been identified as being higher for the remainder of the session. The buy stop placed just above the intraday range is filled just two bars later as the market trades through our stop.
As with the trades generated in the direction of the major trend by our oscillator indicators, we must now immediately move to step four to protect our position with an appropriately placed trailing stop. Our initial protective stop will rest slightly below the Category 2 support point, which was just as our position is being established. Twelve bars later we are able to move our stop to slightly above breakeven, as we now have a second, higher point supporting the market at this time. This stop level is marked by the dashed line labeled 2. The market now
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