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TRADING SYSTEMS


PSA New Fractal 2 Buy Signal

01/17/12 09:59:14 AM
by Donald W. Pendergast, Jr.

One of the more unique MetaStock systems has just gone long on shares of Public Storage.

Security:   PSA
Position:   Buy

One of the more unique MetaStock systems has just gone long on shares of Public Storage, Inc. (PSA). The screenshot (Figure 1) shows the three stocks in the Standard & Poor's 500 that fired Fractal 2 buy signals at Friday's close; the daily chart of PSA looks the most attractive, so that's where we will focus our efforts now.

A few days ago, I detailed an innovative way to do a little tweaking on the Fractal 2 trading system in MetaStock 11, which appears to be profitable as delivered, by simply choosing to enter a trade on a rise above the signal bar's high and then exiting on the second bar after the original buy signal (this is a long-only trading system). Some trades trigger on the bar after a signal, others on the second bar after, while some never trigger at all, but overall, this looks to be a significant improvement for traders who wish to:

1. Limit their market exposure

2. Increase the number of opportunities for their available trading capital

3. Pursue an active trading strategy with defined risk.

Looking at Figure 2, we find that of the prior two signals, the first one managed a loss of (0.25%), while the second one posted a respectable gain of 4.38%. In fact, if we analyze the nine trades prior to the ones on the chart -- trades that were triggered by a rise in price above the signal bar -- we also find that the modified Fractal 2 system won on six of those nine entries and was net profitable. And while you can't actually test this modified system (unless you code it to specifically handle the specific entry/exit strategy just described) in MetaStock, if you have reasonably good vision, you can confirm that this strategy is a winner -- and on a variety of stocks, too. So here are the rules, all three of them:

1. Enter long on a buy-stop market order on a rise of at least one tick above the signal bar's high

2. Place a sell-stop market order (good-till-canceled, or GTC) a couple of ticks beneath the signal bar's low

3. Exit the trade using a market-on-close order (MOC) at the end of the second trading session following the signal bar.

That's all there is to it. This is apparently a momentum-based system, so you are looking to capitalize on that initial upward thrust to push your position into the profit zone as quickly as possible so that you can hopefully do what one pop music star sang in one of his 1977 hits: "Take the money and run." And you get to do it legally and with no questions asked. What a deal for a savvy stock market participant to enjoy!

Aside from the smash 'n grab trading signal setup, the rest of the technicals on PSA's daily chart look very good. The on-balance volume (OBV) indicator is in a rising trend, meaning that volume is helping drive the run higher, the stock has been respecting its 21-period exponential moving average (EMA) and it also appears to be attempting to break higher from a minor consolidation pattern, too.

All in all, PSA looks like a good stock to consider playing on the long side. One thing is for sure: If you get filled on the stock on Tuesday or Wednesday, you'll be flat and out of the position by 4 pm Wednesday if you follow the three simple trading rules listed here.

By the way, this simple technique of using a time-based or bar-based exit strategy isn't a new concept, and some traders have been using variations of it for a long, long time. Consider using a time-based exit strategy of your own design on the systems that you use and see if it might not also prove to be a trading system tweak worth taking a shot at.



FIGURE 1: FRACTAL 2 IN THREE. The top three Fractal 2 buy signals based on their comparative relative strength vs. the .SPX.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
FIGURE 2: PSA, DAILY. Not only is the modified Fractal 2 system a hypothetical, backtested winner in PSA, its current chart dynamics also appear to be heavily biased toward the bullish side of the equation.
Graphic provided by: MetaStock.
Graphic provided by: Fractal 2 trading system signals from MetaStock.
 



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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