Trading Techniques

Below is a compilation of various techniques that I have come across on trend determination, cutting losses short, and letting winners run. I will add to this page as and when I come across techniques that are not already covered here.

Methods to Determine Trend

  • Lines
    • Trend lines
    • Regression lines
  • Moving averages
    • Price is above / below 50-day / 60-day moving average
    • Direction of the 13-period moving average line
    • Slope of two moving averages, a 25-day and a 40-day. Uptrend if pointing upward, downtrend if pointing down.
    • Crossover of 5 EMA with 8 EMA
    • Crossover of 50-day EMA and 100-day EMA
    • 20-day SMA > 40-day SMA is an uptrend, when price crosses below 40-day SMA, uptrend ends.
  • Channels
    • Moving average trading bands (from J. M. Hurst’s The Profit Magic of Stock Transaction Timing)
    • Moving average channel comprising a 10-bar moving average of the highs and a 8-bar moving average of the lows. The trend turns up when you have two successive price bars completely above the top moving average. If remains up until you have two successive price bars completely below the bottom moving average.
  • Price action
    • Pattern cluster – Three successive price bars that each shows higher highs, higher lows, and higher closes. When you get three such successive price bars, you have confirmation that the trend is up, that there is accumulation. The reverse pattern applies to downtrends.
    • Structure – Higher highs and higher lows (uptrends), reverse for downtrends (have at least 3 sets to determine trend for a longer time frame). Minimum reaction to make a swing is 3 days.
    • Distance and time – Once 6 points of distance and 6 bars have traded (inclusive of the first bar with the ‘extreme’ value), we have a trend.
  • Momentum
    • Trend is up when 14-period Momentum is > 0, down when 14-period Momentum is < 0.
  • Volume
    • In the 1st hour of a trading day, if more volume is traded above the mid-line of the 5-min opening range compared to volume traded below the mid-line, then it is an up day.
  • Time
    • If market spends more time going up than going down, then it is an uptrend.
  • Price-based oscillators
    • Direction of the 14-bar weekly Stochastics and/or monthly Stochastics. The direction they are headed is the trend, except when they are at extreme values.
    • Modified RSI
    • Commodity Channel Index
    • 3-minus-10 moving average
  • Price-based trend indicators
    • Wilder’s ADX, ADXR, Directional Movement Index
  • Price and volume/open interest-based trend indicators
    • Multiple divergences on Herrick Payoff Index or On Balance Volume with confirmation.
  • Cycles
    • Seasonal, weekly (primary), daily (trading). The weekly cycle is the trend. Look for both primary cycle and the trading cycle to bottom to enter. Normal trading cycle is 4 weeks, half-cycle is 2 weeks, so look for a dip every 2 weeks, and a sizable dip every 4 weeks.
  • Composite tracking
    • Create and track an index of the leading physical commodities (Wasendorf Composite Index), with subindices: Grain Index, Meat Index, Metals Index, Food and Fiber Index. If there is a trend, all boats in the harbor will rise.
  • Combination
    • 4-day Momentum of the 14-bar ADX. It changes to an uptrend when the momentum turns up, reverse for a downtrend.
    • To end an uptrend, wait for an RSI sell signal from an overbought area and wait until the ADX line has turned down. Also needs confirmation with a top formation on the chart
    • When Stochastic (9 to 16 days) is positive, Wilder’s Directional Movement (10 to 14 days) is positive, a short-term moving average is above a long-term moving, and both moving averages are moving up, then it is an uptrend.
    • Four indicators which can contribute a +1 score each: 9-period ADX above ADXR, moving averages, linear regression channels. If moving average of the total score is > 2, then it is an uptrend.
  • Alignment with other trends
    • Looking for seasonality charts to line up with daily charts.

Methods to Cut Losses Short

  • Support / Resistance
    • Place initial stop below major support / above major resistance.
  • Chart pattern
    • Peter Brandt’s Last Day Rule: Once the boundary lines of a classical chart pattern is drawn, use the opposite extreme of the last day in which the market traded within the pattern as a base point to establish a stop price. In the case of an upside breakout from the pattern, it would be the low of the last day the market traded within the pattern. In the case of a downside breakout from the pattern, it would be the high of the last day the market traded within the pattern.
  • Fibonacci levels / Pivots / Expected Extremes
    • Next lower Fib retracement level for a long.
    • Daily pivot points
    • Day’s expected high, expected extreme high, expected low, expected extreme low
  • Gap fill
    • If you are buying a market above a gap, you risk to the point where the market would fill that gap.
  • Signal bar
    • Place stop 40 points below the low of the signal bar.
  • Moving average
    • 30-day simple moving average
  • Channel
    • Channel based on volatility
  • Trade hypothesis invalidation
    • Initial stop placed at a point where, based on your system, your trade hypothesis is no longer correct.
    • Reverse signal on your system.
  • System’s historical results
    • Use the average loss per trade that our system experienced in the last 5 years, and add some buffer around that based on standard deviations, to allow for market noise that might carry you beyond the average loss. E.g. Average loss in corn is ~$295, so we picked $500 for corn’s stop-loss, average loss in platinum is $620, so we use $1,000 stop in platinum.
  • Volatility-based stop
    • Look at the range for the last 3-4 days. An excursion beyond half of that would make me nervous about a position. If the market moves the distance of the previous day’s range against me, I’m out of it.
    • If soybeans are currently exhibiting a daily volatility of 15 cents, I’m going to put my stop outside that volatility so the market can make its noise.
  • Fixed dollar stops
    • E.g. $2,500 for S&P, $1,500 for currencies, $1,000 for soybeans, $800 for corn and oats.
    • Small fixed dollar stops requires more selective, accurate, entries.
  • Percentage of account equity
    • 2% of account equity for 1 contract, around $500 of risk.
  • Limit / margin
    • 50% of a limit move (or 50% of the margin required by an exchange).
  • No stops
    • Diversify using computerized trading over 50 markets with highly uncorrelated strategies.

Methods to Let Profits Run

  • Reverse system signal
    • Exit when there is a reverse entry signal.
  • Support / resistance
    • Trail stop below a major support area or below a Fibonacci pullback.
    • Trail stop below the previous swing low or above the previous swing high. A swing has to run 3 days or more to qualify (unless price spikes in a parabolic manner, then 3 days is not required).
    • Trail stop below previous week’s low.
  • Moving averages
    • Trail a close-only stop using a 45-50 day moving average
    • Trail using a 18-day moving average
  • Channels
    • Trail using an 11-day channel
  • Re-entry
    • Necessary to have a method of re-entry with the trend in case the market hits your trailing stop prematurely.
  • Volatility-based
    • Trailing stop is recalculated each day using a 30-day weighted moving average of volatility.
  • Historical leg retracement
    • Trail price using an amount equal to the last retracement (in points). However if the retracement is less than 38%, use a 40% retracement of the most recent leg. You don’t want the stop to be too tight (i.e. below 40%).
  • 50% retracement
    • Trail stop based on a 50% retracement of the most favorable open profits (calculated based on bar close). Hence you risk half of your open profits.
  • Targets
    • Use Point & Figure methods to set targets.
    • Use Gann methods to generate time and price objectives.
  • Target to target
    • Set targets based on different time frames and/or levels. As each target at a lower time frame / lower level is hit, move stop up to the target to gun for the next one. Once price exceeds a certain level, more than likely it’s going to run to the next level.
  • Target to tight trailing stop
    • When you’ve reached your price objective, take partial profits, then go to a trailing stop. At that point, place your trailing stop close behind the current price and trail it until you’re stopped out…. Once you reach your price objective, have the stop inside of one limit move so that you won’t fail to get out the same day that the market reverses. You don’t want to be locked in.
  • Tight trailing stop
    • When you have a market that’s moving up vertically, you can use a trailing stop below the low of two or three days back and you never get stopped out.
  • Parabolic stops
    • e.g. Welles’ PSAR



One thought on “Trading Techniques

  1. Awesome!

    Posted by Gamer | April 20, 2016, 7:28 am

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