The best entry point for stock by a professional trader – Fred

The best entry point for stock by a professional trader – Fred

This sytem includes three entry rules:

1. Define the major trend and trade only in its direction. Here we use an 89­day SMA (simple moving average). We also like exponential MAs but initially simpler is better.
2. Place Bollinger bands one standard deviation above and one standard deviation below the MA; watch for a breakout in the direction of the MA (a green line on the chart).
3. Place lines extending forward from each 34-day high and a 34-day low; watch for a breakout in the direction of the MA (a red line on the chart).

To enter a trade, all three signals have to occur, but not necessarily at the same time: The moving average has to turn in the direction of the trade and prices have to penetrate both the Bollinger band and the 34-day line, in the same direction. For #2 and #3 the latest signal simply has to be in our favor and not against us.

This chart uses cash data because the trade spans several contract rollovers. At the right edge of the chart we see all three signals in place: The MA has turned up and prices broke out of both channels—we go long.

For example

This is a channel breakout system—it identifies a trend and enters a trade when the volatility increases in the direction of that trend. Most people do not like this type of system because drawdowns tend to be large. We found that by using two channels we can tighten the parameters for both. By using both a Bollinger band and a Donchian channel, we try to tame the volatility beast. A Donchian channel is built by pushing horizontal lines forward from the highest high and the lowest low of a set number of days. Here we use a 34-day Donchian channel. Note that the upper and the lower boundaries of this channel can change independently from each other.

Trendlines are notoriously tricky because people can draw them a little higher or a little lower on the same chart, depending on their bias. Still, at the right edge of the chart, prices are coming up against the downtrend line at a time when both EMAs are turning up—a sign that an upside breakout is likely.

Buy low, sell high. The euro was definitely low in April 2002. The new European currency, recently launched on par with the U.S. dollar, promptly sank below 85 cents. This weekly chart shows that amidst mass pessimism the euro found support in the mid-80 cent range. The 2003 bottom of the MACD-Histogram was shallower than in 2002, indicating that bears were becoming weaker. At the right edge of the weekly chart, both the 26-week and the 13-week EMAs are turning up, along with MACD-Histogram, showing that bulls are in control—the Impulse system is flashing a buy signal. The red line (13-week EMA) is still below the yellow line (26-week EMA) and ready to cross above it; such crossovers tend to occur during the most dynamic stages of rallies.