Then follow the indexation, smoothing, and SlowK plotting of this calculation. The SlowD, which is SlowK's smoothed average, is traced as well. The values of SlowK and SlowD may vary (oscillate) from 0 to 100. The Stochastics direction follows the price movement, e.g. the increasing prices cause the Stochastics raise.
Non-confirming or divergent points can also be found out through Stochastics. E.g. a fake situation is observed when the Stochastics doesn't support the new price increase. Extremely high or low values of Stochastic may also be an indicator of an overbought or oversold market, while an opposite sign is given when the SlowD is crossed by the SlowK.
Both Slow Stochastic and a five-day moving average of a 12-day interval chart the stochastic. The accuracy of the indicators and volatility reduction are tried to be reached by the Stochastic Oscillator smoothing.
The obvious signals of the stochastic are oversold situation at values over 80 and overbought one with values lower than 20.
The mild trend having bias that are slightly up or down as well as broad trading ranges are best for applying Stochastics. The market trending persistently with only minor corrections is the worst for the stochastics usage. The stochastics give an opportunity to enter the trade at the period when the reaction for the trend signal weakens (which is shown by stochastic crossing taking place at any level.) and ignore any oversold or overbought signals that means trading by trend.
Friday, January 23, 2009
Intraday Momentum (IMI
combination of the Relative Strength Index and Candlestick Analysis gives the Intraday Momentum Index, that was developed by Tushar Chande.
The IMI calculation is similar to RSI, but intraday opening and closing prices relationships are used here in order to find out if the day is up or down. An up day means that the close is higher than the open. It is signified by white candlesticks. A down day means that the close is lower than the open and it is signified by black candlesticks.
As well as RSI, the index rise over 70 indicates overbought conditions, that mean lower prices in future. Index values lower than 30 mean a possibility of oversold situation that is followed by higher prices. You should estimate the forex market trendiness using all overbought/oversold indicators before taking any actions on an signals.
The IMI calculation is similar to RSI, but intraday opening and closing prices relationships are used here in order to find out if the day is up or down. An up day means that the close is higher than the open. It is signified by white candlesticks. A down day means that the close is lower than the open and it is signified by black candlesticks.
As well as RSI, the index rise over 70 indicates overbought conditions, that mean lower prices in future. Index values lower than 30 mean a possibility of oversold situation that is followed by higher prices. You should estimate the forex market trendiness using all overbought/oversold indicators before taking any actions on an signals.
momentum
The Momentum indicator calculates the value of the commodity price shifts during a definite period of time.
The main ways of using this indicator are the following:
Momentum is used as a leading indicator. This tool uses the notion that as a rule the last phase of upward tendency is followed by absolute price increase because everyone is sure that it'll go on. In its turn, the closing of the bears' market is usually followed by absolute decrease in prices because everyone seeks after leaving the market. This is a rather usual situation in the market but it's important to understand that still it is quite a general conclusion.
Like MACD, Momentum is used as an oscillator following the tendency. In this situation of usage, if the indicator makes trough and begins to grow, the signal to purchase is sent; if it comes up to its high and turns downwards the signal to sell is sent. It is worth using its short moving average to determine the indicator's turning points.
Momentum calculates the currency's rate-of-change, being a leading indicator. An oscillator that shifts above and below 100 is formed by the current plot. Bearish and bullish interpretations are found by seeking discrepancies, extreme readings and centerline crossovers.
The momentum can be of either positive or negative values. The prices fall if the current price of closing is less than the price of closing of days back so. Negative values of momentum mean that the current price of closing is higher than the price of closing or days back, and that's why the prices grow if Momentum is of the positive value.
The absolute value of Momentum characterizes the velocity of movement of the prices; the large absolute value of Momentum means fast movement of the prices.
About a zero point the chart of the Momentum shifts. If the chart crosses the zero line, it means changing of direction of shift, which means that the market has lost the moment of movement. The price still can grow, when the Moment already will reach the zero point. After crossing a zero line, the movement below zero is signal to sale, above zero - means a signal to purchase,.
A definite investing or trading style is also characterized by Momentum. The rational is that the hot get hotter and the cold get colder. Bullish momentum players purchase currency pairs or commodities that are popular or that they think are going to be popular. At last, popularity grows, the advance will quicken. Price acceleration resembles an increase in momentum.
The main ways of using this indicator are the following:
Momentum is used as a leading indicator. This tool uses the notion that as a rule the last phase of upward tendency is followed by absolute price increase because everyone is sure that it'll go on. In its turn, the closing of the bears' market is usually followed by absolute decrease in prices because everyone seeks after leaving the market. This is a rather usual situation in the market but it's important to understand that still it is quite a general conclusion.
Like MACD, Momentum is used as an oscillator following the tendency. In this situation of usage, if the indicator makes trough and begins to grow, the signal to purchase is sent; if it comes up to its high and turns downwards the signal to sell is sent. It is worth using its short moving average to determine the indicator's turning points.
Momentum calculates the currency's rate-of-change, being a leading indicator. An oscillator that shifts above and below 100 is formed by the current plot. Bearish and bullish interpretations are found by seeking discrepancies, extreme readings and centerline crossovers.
The momentum can be of either positive or negative values. The prices fall if the current price of closing is less than the price of closing of days back so. Negative values of momentum mean that the current price of closing is higher than the price of closing or days back, and that's why the prices grow if Momentum is of the positive value.
The absolute value of Momentum characterizes the velocity of movement of the prices; the large absolute value of Momentum means fast movement of the prices.
About a zero point the chart of the Momentum shifts. If the chart crosses the zero line, it means changing of direction of shift, which means that the market has lost the moment of movement. The price still can grow, when the Moment already will reach the zero point. After crossing a zero line, the movement below zero is signal to sale, above zero - means a signal to purchase,.
A definite investing or trading style is also characterized by Momentum. The rational is that the hot get hotter and the cold get colder. Bullish momentum players purchase currency pairs or commodities that are popular or that they think are going to be popular. At last, popularity grows, the advance will quicken. Price acceleration resembles an increase in momentum.
Other combinanciones moving average recommended
Exponential 5 13 14
Simple 4 9 18
. EMA 20
2. Momentum 14Signal to buy When the price pierces heavily to the EMA of 20 upwards Signal Sale When the price pierces the heavily EMA 20 to the low The indicator Momentum is a big help to tell the market trend
This strategy is very similar to the strategy of the tunnel. Indicators
1 exponential moving average of 20 high
2 exponential moving average of 20 low
3 exponential moving average of 20 close
4 exponential moving average of 4 close
5 exponential moving average of 70 close
Signal BuyWe hope that the EMA 4-enter the tunnel and is projected upwards by the central EMA, we expect to come out by the EMA 20 high.
We place a purchase order when the EMA 4 exit the tunnelSignal Sale We hope that the EMA 4-enter the tunnel and is projected downwards by the central EMA, we expect to come out by the EMA 20 under. We placed an order for sale when the EMA 4 exits the tunnelThe EMA 70 shows the trend of the market. Buy only when the price is above the EMA 70. Sell only when the price is below the 70 EMATake Profit
1. The half of lots exits the range that exists between the EMA 70 and the opening price
2. The other half of the lots, when the EMA 4 touches to the EMA 20 blue, or the EMA 20 yellow central
The Stop Loss place it in the price you tell us the EMA 70
Simple 4 9 18
. EMA 20
2. Momentum 14Signal to buy When the price pierces heavily to the EMA of 20 upwards Signal Sale When the price pierces the heavily EMA 20 to the low The indicator Momentum is a big help to tell the market trend
This strategy is very similar to the strategy of the tunnel. Indicators
1 exponential moving average of 20 high
2 exponential moving average of 20 low
3 exponential moving average of 20 close
4 exponential moving average of 4 close
5 exponential moving average of 70 close
Signal BuyWe hope that the EMA 4-enter the tunnel and is projected upwards by the central EMA, we expect to come out by the EMA 20 high.
We place a purchase order when the EMA 4 exit the tunnelSignal Sale We hope that the EMA 4-enter the tunnel and is projected downwards by the central EMA, we expect to come out by the EMA 20 under. We placed an order for sale when the EMA 4 exits the tunnelThe EMA 70 shows the trend of the market. Buy only when the price is above the EMA 70. Sell only when the price is below the 70 EMATake Profit
1. The half of lots exits the range that exists between the EMA 70 and the opening price
2. The other half of the lots, when the EMA 4 touches to the EMA 20 blue, or the EMA 20 yellow central
The Stop Loss place it in the price you tell us the EMA 70
moving average strategy
SYstem TradingAnd here we are again talking about the strategy that withstood the test of time. This commodity trading method is based on the same study of defining support and resistance levels and trading upon the fact of their violation.A trading setup requires only an open chart and no restrictions for the currency or timing preferences.Entry rules: Once the price makes it through the “pivot Line” - dotted white line on the figure below (drawn using the latest price peak) - and closes above (for uptrend) or below (for downtrend) the line buy/sell accordingly.Exit rules: not set. However, exit can be found using Fibonacci method; or traders can measure the distance between point 2 and point 3 and project it on the chart for exit.Additions: as an additional tool traders can use MACD (12, 26, 9). The rules for entry then will be next - let’s take a SELL order:When MACD lines cross downwards, you look for 1-2-3 set-up to form. When the price starts “attacking” the “pivot Line” you check that MACD is still in SELL mode (two lines are heading down). Once the price closes below the “pivot Line” – place Sell order.
Trading System
Can be used in any chart, but I recommend in 4 hours charts1. Moving averages- Exponential moving average of 3 (for my green) - Exponential moving average of 14 (blue) - Exponential moving averages of 28 (red)
All-closure2.
We place an RSI of 14 periods red, with a simple moving average of 7 periods of blue. We place the respective vertical lines of 70, 50 and 30
3. Put one of MACD: -
Period 9 -
Period quick 12 -
Period 26 slower
4. And finally a period of 7 ADX exponentially, so that he can indicate the strength of the pair. Place lines of references in sections 10, 20, 40 and 50
The first indicator that we have to do is the ADX, indicating the strength of buying or selling.
1. Buy when the moving average of 3 periods (green) crosses and 14 (blue) and 28 (red), the RSI crosses its moving average upward, and the MACD signal to buy into this. Wait for the opening of the next sail to enter.
2. Sell when the moving average of 3 periods (green) crosses and 14 Blue and 28 (red), the RSI crosses its moving average to low and the MACD signal in this offering. Wait for the opening of the next sail to enter.
Departures 1.
We must be alert to the candles. When you see a candle significant change in trend, it is sign of Departure.
2. We can also expect the RSI crossing its moving average
3. And if you want to risk more, letting tap the moving average of 3 to any of the other moving averages.
Trading System
Can be used in any chart, but I recommend in 4 hours charts1. Moving averages- Exponential moving average of 3 (for my green) - Exponential moving average of 14 (blue) - Exponential moving averages of 28 (red)
All-closure2.
We place an RSI of 14 periods red, with a simple moving average of 7 periods of blue. We place the respective vertical lines of 70, 50 and 30
3. Put one of MACD: -
Period 9 -
Period quick 12 -
Period 26 slower
4. And finally a period of 7 ADX exponentially, so that he can indicate the strength of the pair. Place lines of references in sections 10, 20, 40 and 50
The first indicator that we have to do is the ADX, indicating the strength of buying or selling.
1. Buy when the moving average of 3 periods (green) crosses and 14 (blue) and 28 (red), the RSI crosses its moving average upward, and the MACD signal to buy into this. Wait for the opening of the next sail to enter.
2. Sell when the moving average of 3 periods (green) crosses and 14 Blue and 28 (red), the RSI crosses its moving average to low and the MACD signal in this offering. Wait for the opening of the next sail to enter.
Departures 1.
We must be alert to the candles. When you see a candle significant change in trend, it is sign of Departure.
2. We can also expect the RSI crossing its moving average
3. And if you want to risk more, letting tap the moving average of 3 to any of the other moving averages.
Weekly 3 Bar Pattern by neeru
The Weekly 3 bar Pattern is a strategy which is ideal for position trading and is very effective on larger time frames, like the daily or the weekly chart.
Basically this technique allows a trader to stay with the trend for a longer period of time.
You can use a candlestick or bar charts along with the DMI indicator with a setting of 10. But I prefer the candlestick charts since reversal patterns are easier to spot on this.
Our strategy is to determine if the pullback of price in an ongoing trend will lead to a change in trend direction or will turn out to be just a retracement. Hence we choose an indicator which tells us when price is in the overbought/oversold area.
Any oscillators like the slow stochastic, RSI or MACD will give us this information but these oscillators have a basic drawback which defeats the very purpose of our strategy.
In a strongly trending market the oscillators remain overbought/oversold for an extended period of time, thus giving false signals. So we use the DMI indicator, which gives more accurate information on a change of momentum.
We will look at the technique for a short setup and simply reverse the rules for a long setup. The basic function of the DMI indicator is to confirmed a trend when the (+) DMI line has crossed the (–) DMI line (in case of the uptrend). The end of the current trend is signaled by the DMI when it reaches an overbought/oversold area and starts turning from there. This indicates a change in momentum of price, and we would expect price to start moving to the downside. But the change in momentum does not necessarily mean a change in trend. It could also mean that price is catching its breath to resume the main trend. (A reading of 45 on the DMI is considered overbought and we will use this setting to define the change in the DMI.) So we use price action for a confirmation, which brings us to the 3 bar pattern. We look for the highest high in an uptrend when the DMI reading is +45 and starts retracing down. It would probably be the bar where the DMI is at its peak. We then count back 3 bars from this the bar which has made the highest high (including the highest high bar) and we place our sell stop orders beneath the low of this third bar. We can define the exact parameters of our setup for this technique as-
Price is in an uptrend, with the (+) DMI line above the (-) DMI line.
The (+) DMI line exceeds the 45 reading and starts retracing down.
We identify the highest high at or before the price bar where the DMI turned down.
We count back 3 bars from this highest high bar (including the highest high bar.)
We place our sell stop order beneath the low of this third bar. Now if this retracement is just a temporary pullback, then price should not cross the low of this third bar. In which case our order does not get filled and we look for a long entry to remain in the uptrend. If, on the other hand, price does break this low of the third bar, it would mean that a change in trend has taken place. This low of the third bar is chosen because it is far enough away to give the market enough room for a pullback and also far enough away to avoid getting caught in stop running. This allows us to remain in the existing uptrend for a longer time and also get into a new trend much earlier as we can use the stop level as an entry level for a new position. Looking at this example of the NZD/USD weekly chart we have two situations where the DMI crossed the 45 mark (marked as the blue line). This is the identifying set-up for this technique and we follow the rules
Basically this technique allows a trader to stay with the trend for a longer period of time.
You can use a candlestick or bar charts along with the DMI indicator with a setting of 10. But I prefer the candlestick charts since reversal patterns are easier to spot on this.
Our strategy is to determine if the pullback of price in an ongoing trend will lead to a change in trend direction or will turn out to be just a retracement. Hence we choose an indicator which tells us when price is in the overbought/oversold area.
Any oscillators like the slow stochastic, RSI or MACD will give us this information but these oscillators have a basic drawback which defeats the very purpose of our strategy.
In a strongly trending market the oscillators remain overbought/oversold for an extended period of time, thus giving false signals. So we use the DMI indicator, which gives more accurate information on a change of momentum.
We will look at the technique for a short setup and simply reverse the rules for a long setup. The basic function of the DMI indicator is to confirmed a trend when the (+) DMI line has crossed the (–) DMI line (in case of the uptrend). The end of the current trend is signaled by the DMI when it reaches an overbought/oversold area and starts turning from there. This indicates a change in momentum of price, and we would expect price to start moving to the downside. But the change in momentum does not necessarily mean a change in trend. It could also mean that price is catching its breath to resume the main trend. (A reading of 45 on the DMI is considered overbought and we will use this setting to define the change in the DMI.) So we use price action for a confirmation, which brings us to the 3 bar pattern. We look for the highest high in an uptrend when the DMI reading is +45 and starts retracing down. It would probably be the bar where the DMI is at its peak. We then count back 3 bars from this the bar which has made the highest high (including the highest high bar) and we place our sell stop orders beneath the low of this third bar. We can define the exact parameters of our setup for this technique as-
Price is in an uptrend, with the (+) DMI line above the (-) DMI line.
The (+) DMI line exceeds the 45 reading and starts retracing down.
We identify the highest high at or before the price bar where the DMI turned down.
We count back 3 bars from this highest high bar (including the highest high bar.)
We place our sell stop order beneath the low of this third bar. Now if this retracement is just a temporary pullback, then price should not cross the low of this third bar. In which case our order does not get filled and we look for a long entry to remain in the uptrend. If, on the other hand, price does break this low of the third bar, it would mean that a change in trend has taken place. This low of the third bar is chosen because it is far enough away to give the market enough room for a pullback and also far enough away to avoid getting caught in stop running. This allows us to remain in the existing uptrend for a longer time and also get into a new trend much earlier as we can use the stop level as an entry level for a new position. Looking at this example of the NZD/USD weekly chart we have two situations where the DMI crossed the 45 mark (marked as the blue line). This is the identifying set-up for this technique and we follow the rules
TRIPLE SCREEN TRADING SYSTEM
The Triple Screen trading system was developed by this author and has been used for trading since 1985. It was first presented to the public in April 1986, in an article in Futures Magazine.
Triple Screen applies three tests or screens to every trade. Many trades that seem attractive at first are rejected by one or another screen. Those trades that pass the Triple Screen test have a higher degree of profitability.
Triple Screen combines trend-following methods and counter-trend techniques. It analyzes all potential trades in several timeframes. Triple Screen is more than a trading system, it is a method, a style of trading.
Trend-Following Indicators and Oscillators
Beginners often look for a magic bullet—a single indicator for making money. If they get lucky for a while, they feel as if they discovered the royal road to profits. When the magic dies, amateurs give back their profits with interest and go looking for another magic tool. The markets are too complex to be analyzed with a single indicator.
Different indicators give contradictory signals in the same market. Trend-following indicators rise during uptrends and give buy signals, while oscillators become overbought and give sell signals. Trend-following indicators
turn down in downtrends and give signals to sell short but oscillators become oversold and give buy signals.
Trend-following indicators are profitable when markets are moving but lead to whipsaws in trading ranges. Oscillators are profitable in trading ranges, but give premature and dangerous signals when the markets begin to trend. Traders say: "The trend is your friend," and "Let your profits run." They also say: "Buy low, sell high." But why sell if the trend is up? And how high is high?
Some traders try to average out the votes of trend-following indicators and oscillators. It is easy to rig this vote. If you use more trend-following tools, the vote will go one way, and if you use more oscillators, it will go the other way. A trader can always find a group of indicators telling him what he wants to hear.
The Triple Screen trading system combines trend-following indicators with oscillators. It is designed to filter out their disadvantages while preserving their strengths.
Choosing Timeframes — The Factor of Five
Another major dilemma is that the trend can be up and down at the same time, depending on what charts you use. A daily chart may show an uptrend while a weekly chart shows a downtrend, and vice versa (see Section 36). A trader needs to handle conflicting signals in different timeframes.
Charles Dow, the author of the venerable Dow theory, stated at the turn of the century that the stock market had three trends. The long-term trend lasted several years, the intermediate trend several months, and anything shorter than that was a minor trend. Robert Rhea, the great market technician of the 1930s, compared the three market trends to a tide, a wave, and a ripple. He believed that traders should trade in the direction of the market tide and take advantage of the waves but ignore the ripples.
Times have changed, and the markets have become more volatile. Traders need a more flexible definition of timeframes. The Triple Screen trading system is based on the observation that every timeframe relates to the larger and shorter ones by approximately a factor of five (see Section 36).
Each trader needs to decide which timeframe he wants to trade. Triple Screen calls that the intermediate timeframe. The long-term timeframe is one order of magnitude longer. The short-term timeframe is one order of magnitude shorter.
For example, if you want to carry a trade for several days or weeks, then your intermediate timeframe will be defined by the daily charts. Weekly charts are one order of magnitude longer, and they determine the long-term timeframe. Hourly charts are one order of magnitude shorter, and they determine the short-term timeframe.
Day-traders who hold their positions for less than an hour can use the same principle. For them, a 10-minute chart may define the intermediate timeframe, an hourly chart the long-term timeframe, and a 2-minute chart the short-term timeframe.
Triple Screen demands that you examine the long-term chart first. It allows you to trade only in the direction of the tide—the trend on the long- term chart. It uses the waves that go against the tide for entering positions. For example, daily declines create buying opportunities when the weekly trend is up. Daily rallies provide shorting opportunities when the weekly trend is down.
First Screen — Market Tide
Triple Screen begins by analyzing the long-term chart, one order of magnitude greater than the one you plan to trade. Most traders pay attention only to the daily charts, with everybody watching the same few months of data. If you begin by analyzing weekly charts, your perspective will be five times greater than that of your competitors.
The first screen of Triple Screen uses trend-following indicators to identify long-term trends. The original system uses the slope of weekly MACD- Histogram (see Section 26) to identify the market tide. The slope is defined as the relationship between the two latest bars. When the slope is up, it shows that bulls are in control—it is time to trade from the long side. When the slope is down, it shows that bears are in control and tells you to trade only from the short side (Figure 43-1).
A single uptick or a downtick of weekly MACD-Histogram indicates a change of a trend. The upturns that occur below the centerline give better buy signals than those above the centerline (See "Indicator Seasons" in Section 36). The downturns that occur above the centerline give better sell signals than the downturns below the centerline.
Some traders use other indicators to identify major trends. Steve Notis wrote an article in Futures magazine showing how he used the Directional System as the first screen of Triple Screen. Even a simpler tool, such as the slope of a 13-week exponential moving average, can serve as the first screen of the Triple Screen trading system. The principle is the same. You can use most trend-following indicators, as long as you analyze the trend on the weekly charts first and then look for trades on the daily charts only in that direction.
Triple Screen applies three tests or screens to every trade. Many trades that seem attractive at first are rejected by one or another screen. Those trades that pass the Triple Screen test have a higher degree of profitability.
Triple Screen combines trend-following methods and counter-trend techniques. It analyzes all potential trades in several timeframes. Triple Screen is more than a trading system, it is a method, a style of trading.
Trend-Following Indicators and Oscillators
Beginners often look for a magic bullet—a single indicator for making money. If they get lucky for a while, they feel as if they discovered the royal road to profits. When the magic dies, amateurs give back their profits with interest and go looking for another magic tool. The markets are too complex to be analyzed with a single indicator.
Different indicators give contradictory signals in the same market. Trend-following indicators rise during uptrends and give buy signals, while oscillators become overbought and give sell signals. Trend-following indicators
turn down in downtrends and give signals to sell short but oscillators become oversold and give buy signals.
Trend-following indicators are profitable when markets are moving but lead to whipsaws in trading ranges. Oscillators are profitable in trading ranges, but give premature and dangerous signals when the markets begin to trend. Traders say: "The trend is your friend," and "Let your profits run." They also say: "Buy low, sell high." But why sell if the trend is up? And how high is high?
Some traders try to average out the votes of trend-following indicators and oscillators. It is easy to rig this vote. If you use more trend-following tools, the vote will go one way, and if you use more oscillators, it will go the other way. A trader can always find a group of indicators telling him what he wants to hear.
The Triple Screen trading system combines trend-following indicators with oscillators. It is designed to filter out their disadvantages while preserving their strengths.
Choosing Timeframes — The Factor of Five
Another major dilemma is that the trend can be up and down at the same time, depending on what charts you use. A daily chart may show an uptrend while a weekly chart shows a downtrend, and vice versa (see Section 36). A trader needs to handle conflicting signals in different timeframes.
Charles Dow, the author of the venerable Dow theory, stated at the turn of the century that the stock market had three trends. The long-term trend lasted several years, the intermediate trend several months, and anything shorter than that was a minor trend. Robert Rhea, the great market technician of the 1930s, compared the three market trends to a tide, a wave, and a ripple. He believed that traders should trade in the direction of the market tide and take advantage of the waves but ignore the ripples.
Times have changed, and the markets have become more volatile. Traders need a more flexible definition of timeframes. The Triple Screen trading system is based on the observation that every timeframe relates to the larger and shorter ones by approximately a factor of five (see Section 36).
Each trader needs to decide which timeframe he wants to trade. Triple Screen calls that the intermediate timeframe. The long-term timeframe is one order of magnitude longer. The short-term timeframe is one order of magnitude shorter.
For example, if you want to carry a trade for several days or weeks, then your intermediate timeframe will be defined by the daily charts. Weekly charts are one order of magnitude longer, and they determine the long-term timeframe. Hourly charts are one order of magnitude shorter, and they determine the short-term timeframe.
Day-traders who hold their positions for less than an hour can use the same principle. For them, a 10-minute chart may define the intermediate timeframe, an hourly chart the long-term timeframe, and a 2-minute chart the short-term timeframe.
Triple Screen demands that you examine the long-term chart first. It allows you to trade only in the direction of the tide—the trend on the long- term chart. It uses the waves that go against the tide for entering positions. For example, daily declines create buying opportunities when the weekly trend is up. Daily rallies provide shorting opportunities when the weekly trend is down.
First Screen — Market Tide
Triple Screen begins by analyzing the long-term chart, one order of magnitude greater than the one you plan to trade. Most traders pay attention only to the daily charts, with everybody watching the same few months of data. If you begin by analyzing weekly charts, your perspective will be five times greater than that of your competitors.
The first screen of Triple Screen uses trend-following indicators to identify long-term trends. The original system uses the slope of weekly MACD- Histogram (see Section 26) to identify the market tide. The slope is defined as the relationship between the two latest bars. When the slope is up, it shows that bulls are in control—it is time to trade from the long side. When the slope is down, it shows that bears are in control and tells you to trade only from the short side (Figure 43-1).
A single uptick or a downtick of weekly MACD-Histogram indicates a change of a trend. The upturns that occur below the centerline give better buy signals than those above the centerline (See "Indicator Seasons" in Section 36). The downturns that occur above the centerline give better sell signals than the downturns below the centerline.
Some traders use other indicators to identify major trends. Steve Notis wrote an article in Futures magazine showing how he used the Directional System as the first screen of Triple Screen. Even a simpler tool, such as the slope of a 13-week exponential moving average, can serve as the first screen of the Triple Screen trading system. The principle is the same. You can use most trend-following indicators, as long as you analyze the trend on the weekly charts first and then look for trades on the daily charts only in that direction.
Weekly MACD-Histogram — The First Screen of Triple Screen
The slope of MACD-Histogram is defined by the relationship between its two latest bars (see inset). Triple Screen tells traders to examine weekly charts before looking at the dailies. When the weekly trend is up, it allows us to trade only from the long side or stand aside. When the weekly trend is falling, it allows us only to trade from the short side or stand aside.
Weekly MACD-Histogram gives a buy signal when its slope turns up. The best buy signals are given when this indicator turns up below its centerline. When MACD-Histogram turns down, it gives a sell signal. The best sell signals are given when it turns down from above its center- line (see "Indicator Seasons," Section 36). Once you find the trend of the weekly MACD-Histogram, turn to daily charts and look for trades in the same direction.
Screen One: Identify the weekly trend using a trend-following indicator and trade only in its direction.
A trader has three choices: buy, sell, or stand aside. The first screen of the Triple Screen trading system takes away one of those choices. It acts as a censor who permits you only to buy or stand aside during major uptrends. It allows you only to sell short or stand aside during major downtrends. You have to swim with the tide or stay out of the water.
Second Screen — Market Wave
The second screen identifies the wave that goes against the tide. When the weekly trend is up, daily declines point to buying opportunities. When the weekly trend is down, daily rallies point to shorting opportunities.
The second screen applies oscillators to the daily charts in order to identify deviations from the weekly trend. Oscillators give buy signals when markets decline and sell signals when markets rise. The second screen of the Triple Screen trading system allows you to take only those daily signals that point in the direction of the weekly trend.
Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities.
When the weekly trend is up, Triple Screen takes only buy signals from daily oscillators and ignores their sell signals. When the weekly trend is down, Triple Screen takes only shorting signals from oscillators and ignores their buy signals. Force Index and Elder-ray are good oscillators to use with Triple Screen, but Stochastic and Williams %R also perform well.
When the weekly MACD-Histogram rises, the 2-day EMA of Force Index (see Chapter 8) gives buy signals when it falls below its centerline, as long as it does not fall to a new multiweek low. When the weekly MACD-Histogram declines, Force Index gives shorting signals when it rallies above its centerline, as long as it does not rise to a new multiweek high (Figure 43-2).
When the weekly trend is up, daily Elder-ray (see Section 41) gives a buy signal when Bear Power declines below zero and then ticks back up toward the centerline. When the weekly trend is down, daily Elder-ray signals to go short when Bull Power rallies above zero and then ticks back down.
Stochastic (see Section 30) gives trading signals when its lines enter a buy or a sell zone. When weekly MACD-Histogram rises but daily Stochastic falls below 30, it identifies an oversold area, a buying opportunity. When the weekly MACD-Histogram declines but daily Stochastic rises above 70, it identifies an overbought area, a shorting opportunity.
Williams %R (see Section 29) needs a 4- or 5-day window to work with Triple Screen. It is interpreted similarly to Stochastic. The Relative Strength
Index does not react to price changes as fast as other oscillators. It helps with overall market analysis, but is too slow for Triple Screen.
Third Screen — Intraday Breakout
The first screen of the Triple Screen trading system identifies market tide on a weekly chart. The second screen identifies a wave that goes against that tide on a daily chart. The third screen identifies the ripples in the direction of the tide. It uses intraday price action to pinpoint entry points.
The third screen does not require a chart or an indicator. It is a technique for entering the market after the first and second screens gave a signal to buy or sell short. The third screen is called a trailing buy-stop technique in uptrends and a trailing sell-stop technique in downtrends (Figure 43-3).
When the weekly trend is up and the daily trend is down, trailing buy- stops catch upside breakouts. When the weekly trend is down and the daily trend is up, trailing sell-stops catch downside breakouts.
Triple Screen Summary
Weekly Trend
Daily Trend
Action
Order
Up
Up
Stand aside
None
Up
Down
Go long
Trailing buy-stop
Down
Down
Stand aside
None
Down
Up
Go short
Trailing sell-stop
When the weekly trend is up and a daily oscillator declines, it activates a trailing buy-stop technique. Place a buy order one tick above the high of the previous day. If prices rally, you will be stopped in long automatically when the rally takes out the previous day's high. If prices continue to decline, your buy-stop will not be touched. Lower your buy order the next day to the level one tick above the latest price bar. Keep lowering your buy-stop each day until stopped in or until the weekly indicator reverses and cancels its buy signal.
The slope of MACD-Histogram is defined by the relationship between its two latest bars (see inset). Triple Screen tells traders to examine weekly charts before looking at the dailies. When the weekly trend is up, it allows us to trade only from the long side or stand aside. When the weekly trend is falling, it allows us only to trade from the short side or stand aside.
Weekly MACD-Histogram gives a buy signal when its slope turns up. The best buy signals are given when this indicator turns up below its centerline. When MACD-Histogram turns down, it gives a sell signal. The best sell signals are given when it turns down from above its center- line (see "Indicator Seasons," Section 36). Once you find the trend of the weekly MACD-Histogram, turn to daily charts and look for trades in the same direction.
Screen One: Identify the weekly trend using a trend-following indicator and trade only in its direction.
A trader has three choices: buy, sell, or stand aside. The first screen of the Triple Screen trading system takes away one of those choices. It acts as a censor who permits you only to buy or stand aside during major uptrends. It allows you only to sell short or stand aside during major downtrends. You have to swim with the tide or stay out of the water.
Second Screen — Market Wave
The second screen identifies the wave that goes against the tide. When the weekly trend is up, daily declines point to buying opportunities. When the weekly trend is down, daily rallies point to shorting opportunities.
The second screen applies oscillators to the daily charts in order to identify deviations from the weekly trend. Oscillators give buy signals when markets decline and sell signals when markets rise. The second screen of the Triple Screen trading system allows you to take only those daily signals that point in the direction of the weekly trend.
Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities.
When the weekly trend is up, Triple Screen takes only buy signals from daily oscillators and ignores their sell signals. When the weekly trend is down, Triple Screen takes only shorting signals from oscillators and ignores their buy signals. Force Index and Elder-ray are good oscillators to use with Triple Screen, but Stochastic and Williams %R also perform well.
When the weekly MACD-Histogram rises, the 2-day EMA of Force Index (see Chapter 8) gives buy signals when it falls below its centerline, as long as it does not fall to a new multiweek low. When the weekly MACD-Histogram declines, Force Index gives shorting signals when it rallies above its centerline, as long as it does not rise to a new multiweek high (Figure 43-2).
When the weekly trend is up, daily Elder-ray (see Section 41) gives a buy signal when Bear Power declines below zero and then ticks back up toward the centerline. When the weekly trend is down, daily Elder-ray signals to go short when Bull Power rallies above zero and then ticks back down.
Stochastic (see Section 30) gives trading signals when its lines enter a buy or a sell zone. When weekly MACD-Histogram rises but daily Stochastic falls below 30, it identifies an oversold area, a buying opportunity. When the weekly MACD-Histogram declines but daily Stochastic rises above 70, it identifies an overbought area, a shorting opportunity.
Williams %R (see Section 29) needs a 4- or 5-day window to work with Triple Screen. It is interpreted similarly to Stochastic. The Relative Strength
Index does not react to price changes as fast as other oscillators. It helps with overall market analysis, but is too slow for Triple Screen.
Third Screen — Intraday Breakout
The first screen of the Triple Screen trading system identifies market tide on a weekly chart. The second screen identifies a wave that goes against that tide on a daily chart. The third screen identifies the ripples in the direction of the tide. It uses intraday price action to pinpoint entry points.
The third screen does not require a chart or an indicator. It is a technique for entering the market after the first and second screens gave a signal to buy or sell short. The third screen is called a trailing buy-stop technique in uptrends and a trailing sell-stop technique in downtrends (Figure 43-3).
When the weekly trend is up and the daily trend is down, trailing buy- stops catch upside breakouts. When the weekly trend is down and the daily trend is up, trailing sell-stops catch downside breakouts.
Triple Screen Summary
Weekly Trend
Daily Trend
Action
Order
Up
Up
Stand aside
None
Up
Down
Go long
Trailing buy-stop
Down
Down
Stand aside
None
Down
Up
Go short
Trailing sell-stop
When the weekly trend is up and a daily oscillator declines, it activates a trailing buy-stop technique. Place a buy order one tick above the high of the previous day. If prices rally, you will be stopped in long automatically when the rally takes out the previous day's high. If prices continue to decline, your buy-stop will not be touched. Lower your buy order the next day to the level one tick above the latest price bar. Keep lowering your buy-stop each day until stopped in or until the weekly indicator reverses and cancels its buy signal.
When the weekly trend is down, wait for a rally in a daily oscillator to activate a trailing sell-stop technique. Place an order to sell short one tick below the latest bar's low. As soon as the market turns down, you will be stopped in on the short side. If the rally continues, keep raising your sell order daily. The aim of a trailing sell-stop technique is to catch an intraday downside breakout from a daily uptrend in the direction of a weekly downtrend.
Wednesday, January 21, 2009
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