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39

Fortunately, the next trade of the day, entered under exactly the same circumstances as the losing trade just described, has a much better result (Figure 12.29).

The already open sell window is confirmed as our dual RSI indicator again gives a series of sell signals around 12:45 . . Our sell stop initially rested slightly above the 87 area. Several bars later another Category 3 support level allows us to replace our sell stop with a higher, potentially more profitable entry level where the position is filled during the 1:15 p.m. time frame. The initial stop point is located just above the two Category 3 resistance areas placed just before the position was established. As the market cascades lower for the remainder of the session we are able to follow the market down as successively lower resistance levels are formed behind the market. The position is exited on the close for a profit of greater than $7 per share.

Aggressive traders looking to add to their profitable short positions are able to do so at the Category 3 support levels marked by the solid lines on the chart. Those reluctant to enter the market as a reaction to the previous losing trade are also able to enter on any of these points.

Even though the first trade of the day was closed out for a small

Figure 12.29 The second trade of the day, entered as a result of the exact circumstances as the earlier losing trade, generates a substantial profit. Chart created with TradeStation® 2000i by Omega Research, Inc.

loss, sticking with the same strategy allows the trader to end the day with a net gain for the trading account. Losses are an unfortunate part of trading, but the professional trader is able to realize a loss as simply part of the game and methodically place the next order as indicated by the system he or she has spent months, if not years, developing and testing. Too many traders are spooked out of the market by one of these irritating losses only to have their situations worsen by not being able to take the next trade.

On all of the trading examples shown so far in this chapter I have displayed the buy and sell signals issued by the dual stochastic, dual RSI, and dual Percent R as dots that appear on the screen when the conditions for the appropriate signals have been satisfied. I chose this approach in an attempt to simplify the discussion of the use of these trading signals. In this manner we could focus our attention on the use of these buy and sell windows in real trading conditions rather than the reinterpretation of the actual indicator plots at the bottom of the screen.

Information on obtaining the computer code necessary to plot these buy and sell windows on the screen may be found at my web site (www.clayburg.com). Those employing Omegas TradeStation, which was used to generate the charts shown here, will be able to download and use these programs. If you are using this charting package or a similar one that allows the programming of user-defined indicators as a part of the software, I would highly encourage you to take the time to set up these tools in your system. While the interpretation of the indicator plots is quite important, it is also convenient to see the dots appear as a confirmation of the signal. These programs make the interpretation of these tools just a bit easier during an active trading session. Also, in the near future selected online packages will have these programmed indicators available as part of their analytical packages.

I strongly suggest that you always follow the actual indicator plots as a part of your trading routine. As you become more familiar with their use as described here you will soon be able to see the trades coming up several bars prior to the signal being plotted.

As will be covered in Chapter 15, these strategies are compatible with many of the online charting packages that are readily available at a very reasonable cost. Virtually all of these services make stochastic, RSI, and Percent R available as a part of their analytical packages. All these packages are therefore adaptable to the techniques we have covered in this book.



In preparation for the discussion of the use of these tools with several online services, the next section of this chapter will show several charts and trading scenarios. Instead of using our familiar dots on the charts, we will instead concentrate on the use of the indicator plots that actually generate the opening of the buy and sell windows. The experience gained by the study of the charts displayed previously in this chapter now allows us to explain trade generation from the actual indicators much as will be the case when using the various online charting packages.

The one-minute chart of the December 2000 S&P 500 futures contract (Figure 12.30) has three separate subgraphs placed below the familiar price chart. These subgraphs individually display both the faster and slower settings for each of the oscillator indicators we use in the trading scenarios set forth in this book. I will begin the explanations of these complex charts first with this basic version and add several interpretations as we progress.

sp z0 uvst-1 min 11/29 0 c=.334.sg -62.70 -4.49% =:1 43.0 h=1357.00 l=1333.00 v=0 dir day fllter(s.60) 1342.00

1356 00 1352gc 134s.c0 1344.c0 1 4 .0 133 .0

stochastic - slowihlbh.low.c\ase.7,nfiS) s.sb 68.00 12.00 stochastic- slow[hiflhilcw-ciose.45.30.70) 5.b7

rsi(closel12l3c.70,biackbiaclo 16.94 30.00 70.00 rsi (close ,4,30,70, blackjack) 5. 9 30.00 70.00

60.00 -30.00

percentr{5o.20-a0,black1black! 5.16 20.00 80.00 percentweo.eo.black.blacb) 6.16 20.00 good

2:46 11/29 8:56 9:21 9:46 10:11 10:36 11:01 11:26 11:51 12:16 12.41 1:06 1:31 1:56 2.21 2 46

Figure 12.30 The actual tracings of the separate indicator sensitivities are detailed on each subgraph. Most online charting packages can be configured to plot our three oscillatorsin a fashion similar to what is shown here. Chart created with TradeStation® 2000i by Omega Research, Inc.

The familiar Directional Day Filter is plotted over the actual price bars on the top graph.

The first subgraph contains the plots of the two stochastic settings that are used in the dual stochastic indicator with which you are by now familiar. The more active plotted line is created by the faster 7-bar average while the slower moving, less active line is generated by the 45-bar stochastic setting. The two top lines designate the overbought thresholds for each stochastic setting, with the top line placed at 90 for the fast average and the next line down placed at 70, which is the threshold for the slower average. The bottom two lines are the oversold lines at 30 and 10 for the slower and faster averages, respectively.

The next subgraph is used for our two RSI settings, in this instance set at 12 bars for the slow setting and 4 bars for the fast average. In this case the indicator is set to use identical thresholds for both the slow and fast averages. The overbought line is at 70 while the oversold threshold rests at 30.

Finally, the lowest subgraph displays the plots for both settings of the Percent R oscillator. In this case we are using a 50-bar setting for the fast average and a 75-bar average for the slow setting. The overbought threshold is set at 80 percent for both the fast and slow averages while the oversold line for both rests at 20 percent for this S&P application.

As mentioned many times previously, these indicator settings should be adjusted to fit the individual trading style of each user. Appropriate settings are used for various other stock issues and commodity contracts.

Study this chart carefully, attempting to isolate selling opportunities for entry into the downtrend. These areas are isolated in Figure 12.31. The dark vertical lines on the chart designate the areas where all three dual oscillator indicators indicate prime selling opportunities. Readers are encouraged to review the rules for the opening of buying and selling windows in previous chapters in order to fully understand the interaction of all six plots on this chart as signals are plotted.

Figure 12.32 details each of our three oscillator indicators in their dual setting plots. Dots as labeled on the top graph indicate the exact location of actual sell signals as the indicator plots below generate them. Study this chart closely to reinforce your understanding of the various oscillator plots as they interact to generate trading signals.



20 LAST-1 min 11/29/20W C-1334DQ -62 70 -44G% 0=1343.00 H=1M7.00 L=1333.C0 V=C DlrDayHHerfB.eC) 1342.00

-v 1

1 5 0 1352 00 134B 00 1344.00 1340.00 1336.00

Stochastic Slow(Hlon,Low.Clase.7.l 2,88)

08.00 12.00 Stochastic-Slaw(HlDn.Low.Closel4Si30.ir0) 3.S7

RSI(Cloee1l2I3D,T01black,bl8Ck3 1B.94 30.0 i 70.0! RSI(Close.4.30I70.black,WaclO 5 69 30.00 70.00

GOOD 30.00

Percent R(50.20.80.blacKntaGk) 5.16 20.00

Percent R(75.20.80,nlacKt)lacb3 5.16 20.00 80.00

sooo

30.00

2:46 11129 6:56 9:21 9:46 1D:11 11:01 11:26 11:51 12:16 12:41 1:06 1:31 1:56 2:21 2:46

Figure 12.31 The two darkverticallines spanning allgraphsindicate prime selling windows as designated by all three dual oscillator indicators. Chart created with TradeStation® 2000i by Omega Research, Inc.

Figure 12.33 is a duplication of the first in this series (Figure 12.30) with appropriate dots added to the price graph to further facilitate the study of the underlying plots.

Observing this much information on a historical chart such as this one certainly can be a bit overwhelming. However, consider that you are looking at a chart with a bar for each minute of the day covering an entire trading session. When actually trading, you will be focusing your attention on only a few bars at a time when making decisions as to actual trade entries and exits. It will not be necessary for you to interpret a chart as cluttered as this one, which is displayed as such for demonstration purposes.

In Chapter 14 Ill also describe how the use of a computerized trading system can be useful in the generation of trades from the sequences of indicator data generated from the routines we have described.

SP Z0 LAST-1 mm 1 72000 C=1 334.80 -62.70 -4.48% 0=1343.00 H=1 357.00 L=1333.00 V=0

Dual Stochastic

~~ ~* . -Dual RSI Dual Percent R Dual RSI \\\\ " + 4

\ . ,1 . .1 1

, I

1 1 1

» -1358.00 135400 -1350.C0 -1346.00

1342.00

bcnaslic-Slow(Higri,Low.Closel712,88) 8.88 88.00 1200

;90.00

.. "--- \ --

-60.00

\ J 4 -; v

-30.00

RSI(Close,12.30.70.rjlack.blaM0 18.94 30.00 70.00 RSI<Close.4.30,70.Mack.tlJacl$ 5.69

90.00 -60.00

-30.00

90.00 60.00 30.00

9:31 9:36 9:41 9:46 9:51 9:56 10:01 10:06 10-11 1 -1R m-71 in-«

Figure 12.32 This expansion of a portion of Figure 12.31 places the familiar dots on the charts where the signals are generated by the actual OSClllatOT plots below. These sell signals correspondtothetwo heayyverticallinesthat are opening sell windows on Figure 12.31. Chart created with TradeStation® 2000i by Omega Research, Inc.

TRADE ORGANIZATION

To efficiently generate the necessary information to assemble each trade there is admittedly a considerable amount of information to process. It is first necessary to determine the major trend of the day. Then you must assess the positions of effectively six indicator settings, as we are utilizing two settings of three separate oscillators to identify exhausted corrections. Finally the appropriate buy or sell stop must be determined before the trade can be placed. Following the establishment of a position it is then necessary to record the fill price and actively



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