|Markets are generally more forgiving in strongly trending phases when exact entries and exits do not matter. In times of weakly trending and choppy markets, it is critical for traders to define the ranges in which the markets are trading and try to catch oversold or overbought extremes. The best method for filtering entries is by drawing a channel across the price pattern and going long (short) when the price touches the lower (upper) end of the channel, confirmed either by the RSI or Stochastics oversold (overbought) situation. This is important because the stock or the market in these cases is likely to show choppy/two way movement and the margin of safety in buying and selling is only possible at extreme levels. Of course, this filter can be further enhanced by using a confluence of daily and weekly charts.|
Figure 1: Daily chart of Citigroup.
The daily chart of Citigroup shows large, two way swings on the price chart. From this, I start my analysis by drawing a regression trend channel (available with most trading software) across the price chart, trying my best to fit the lower end of the channel to the rising bottoms and the upper end of the channel to the rising tops. An easier way of doing this is to draw two parallel upward sloping trendlines through the tops and the bottoms. Make sure they capture at least 95% of the price movement.
Now I can see that this is not a strongly trending stock. The right way to play this kind of price chart would be to filter long (short) entries when the price hits the lower (higher) end of the channel and filter it with oversold levels under the 40 level. I am using the 40 level as oversold for taking long trades and 60 for going short. This will provide enough signals for me to filter against price extremes in the trend channel.
The key to trading such stocks is to trade both sides and keep volumes lower than usual. Also avoid taking big losses and take profits as soon as the price chart touches the extreme part of the channel. As no channel lasts forever, traders should be on the lookout for signs that the channel is breaking out or breaking down. As you can see, the daily trend of Citigroup remains two way, and the ADX has not consistently been able to maintain over 20. Returns will only be maximized if entries are timed as well as possible.
|Figure 2: Weekly charts for Citigroup.|
|Graphic provided by: eSignal.|
|Despite what we have seen on the daily chart, the weekly trend has consistently remained up. A 20-week SMA (simple moving average) can be drawn on the weekly chart and entries on the daily chart can also be filtered by this average. Traders can take long trades whenever the price corrects back to the average or below it and then moves back up. This can be used as a filter for the daily signals. The ADX is maintaining over the 20 level although it is flat and the trend is not gaining further strength. |
In review, traders need to adjust their trading volumes and strategy based on trend strength and the phase of the market. Two way, choppy movements should be traded at momentum extremes and volumes should be kept lower than in strongly trending markets, and profits and losses should be taken quickly. These are not markets for home runs.
|Title:||Chief mkt strategist|
|Phone # for sales:||9871066337|
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