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TRADING SYSTEMS


Using The Lower Low Strategy Plus Volume

04/27/04 02:04:08 PM
by Koos van der Merwe

Finding a share out of the many thousands listed on the exchanges that could be a profitable trade is a matter of determining a trading strategy to use. There are many out there, and I have written a number of articles on various strategies, but one strategy that intrigues me more and more is the double bottom strategy I wrote about on February 19th (Buying At The Bottom) and again on February 23rd (End of Day Trading With Double Bottoms).

Security:   YRI-T
Position:   Buy

The strategy, which I call the Lower Bottom strategy, picks out those stocks whose prices make a low, rise, and within a 24 day period make a lower low. The strategy has been remarkably successful, even in the recent down market. A portfolio I started on December 30th, using this strategy to choose shares, has given me a 5.21% return, even in the present downtrend. I have programmed Technifilter Plus to analyze the market and highlight those shares that meet my parameters. This reduces the number of shares I scan each morning to an average of five or six. As a modification, I filter I out those shares that have traded less than 50,000 the previous day so that I am assured of a market when I want to sell. My final decision also depends on the following volume strategy.


Price Rise + Rising Volume = Strength
Price Rise + Falling Volume = Weakness
Price Fall + Rising Volume = Weakness
Price Fall + Falling Volume = Strength



Using volume with the lower low strategy.
Graphic provided by: AdvancedGET.
 
Because I am looking for long positions, I will look for a falling price with falling volume, which equals strength. As the share makes a lower bottom, volume should also fall. If volume rose as the price fell, I would tend to ignore the share.

What does a chart show? For this example I have chosen Yamanah Gold Corp., because it has given a lower low as the price fell. On April 14, Yamanah made a low of $3.41, then rose to $4.01 and fell to a lower low on April 21st, at $3.25. The fall to $3.41 was on volume of 8684 (00) and the fall to $3.25 was on volume of 4791(00). Volume dropped approximately 44%, which suggests that the price is falling on falling volume, a sign of strength, and that the share price should reverse upwards. This it started to do, and could continue to rise.


In an article in the May 2004 issue of Stocks and Commodities magazine, Tim Ord quantified the above volume strategy further. He wrote that when a price tests a previous low on an 8% or larger decrease in volume and closes back above the previous low, a reversal is implied. I used this figure I in my Technifilter Plus filter strategy. In his article Tim lists six rules, giving percentages that one can follow and apply to a move, to determine a stock's future movement. These percentages quantify a move, and can be incorporated into any trading strategy written in your program of choice.


My strategy now is to look for a low over the past 20 days, and to identify the volume of that low. Next I look for a low over the past four days that is lower than the first low, and identify the volume for that low. Then I identify a high point between the two lows and prepare a Fibonacci retracement level from the low to the high, as shown on the chart. I then highlight the share if the price of the second low is on an 8% or larger decrease in volume. I would buy the share if the price rises above either the first low or if I wish to be more cautious, above the 61.8% (0.618) Fibonacci level.

Should any reader want a copy of the technifilter plus strategy, please email me and I will send you a copy.




Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

Address: 3256 West 24th Ave
Vancouver, BC
Phone # for sales: 6042634214
E-mail address: petroosp@gmail.com

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Comments

Date: 04/27/04Rank: 5Comment: Do you have a formula for Metastock? If so please send it to me. THANKS Earl
Date: 05/18/04Rank: 4Comment: 
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