In order to trade effectively, it is important to be as mechanical as possible. By writing down all aspects of your entry and exit methods you will be able to follow these commands to the letter. Rather than provide you with a definitive list of entry and exit signals that may not suit your own personal trading requirements, I have prepared some questions to help you establish your own set-ups and triggers. Go and find a blank piece of paper and a pen, and get ready to formulate your own rules.
To actually enter a position requires a set-up, and then a trigger. The set-up may alert your attention to a possible trend, but a trigger is required for you to actually enter a position. Describe some of the key set-up signals that you would look for that indicates that a share is in an uptrend and the conditions that would trigger your entry. List as many as you can.
If you mentioned any of the set-ups and triggers listed here, then you are on the right track:
- Share prices are predominantly above a 30-week exponential moving average (Set-up)
- A golden-cross with two moving averages of different time durations e.g. a 30- week exponential moving average and a 15-week exponential moving average (Set-up)
- A rising momentum indicator at a historically low level (Set-up)
- An upwards sloping trend line (Set-up)
- A momentum histogram showing higher highs while the share price is also displaying higher highs (Set-up)
- Heavy relative volume when a share moves upwards in price (Set-up)
- Low relative volume when a share moves down in price, compared to when it moves upwards (Set-up)
- A predominance of white candles compared to black candles (Set-up)
- Longer white candles compared to black candles and/or a series of candle tails pointing downwards indicating buyers moving into the market (Set-up)
- Ease in the share’s ability to break through round dollar value figures e.g. $5.00, $5.50, $6.00 etc (Set-up)
- A series of higher lows and higher highs (Set-up)
- Buy when a share breaks out from a base formation on a white candle or a gap (Trigger ie a breakout trade)
- Buy when a top reversal pattern that fails (Trigger)
- Buy when a gap hurdles a previously established level of resistance, particularly on heavy relative volume levels, during an existing uptrend (Trigger ie a breakout trade)
- Buy when there is a breakout through a significant resistance line on heavy relative volume, preferably initiated with a white, bullish candle, or a gap (Trigger ie a breakout trade)
- Buy on a confirmation of a recovery (eg white candle) from a period of retracement (Trigger ie a retracement trade)
- Buy when a resistance line that becomes a line of support (Trigger ie a retracement trade).
You may have added in a few more, which is terrific. The key is to put into writing the set-ups signals and the triggers to ensure your entry into a particular share. Make the wording unambiguous, and define each signal as carefully as possible. In times of trading pressure, you will need to have some simple methods to ensure that you are thinking clearly.
Would you be able to instantly spot whether a share is in decline? This may assist in helping you avoid buying a share that is currently trending downwards. It can also help when trying to identify ‘shorting’ opportunities, which is a specific strategy that enables you to make money out of a downtrending share. Try writing down the indications that you would use to suggest that the sellers are more aggressive, and that the share has turned bearish. Think about a set-up and a trigger as you did in the entry examples.
You are doing well if you wrote down any of the signals listed here:
- Share prices are below the 30-week exponential moving average and a downwards sloping trend line (Set-up)
- A dead cross between two moving averages of different time durations e.g. a 30- week exponential moving average and a 15-week exponential moving average (Set-up)
- A falling momentum indicator, especially at a historically high level (Set-up)
- Heavy relative volume when a share moves downwards in price (Set-up)
- Low relative volume levels when a share moves upwards in price (Set-up)
- A predominance of black candles compared to white (Set-up)
- Longer black candles than white candles and/or many candlestick tails pointing upwards showing seller pressure (Set-up)
- Failure to push upwards through round dollar values e.g. $2.00, $2.50, $3.00 etc (Set-up)
- A series of lower lows and lower highs (Set-up)
- Enter a short sell position on a gap downwards past support in an existing downtrend (Trigger)
- Enter a short sell position a break downwards through a significant support level, especially on heavy relative volume, preferably initiated with a black, bearish candle or a gap (Trigger)
- Enter a short sell position when the share price trades at a lower price than a bottom reversal pattern (Trigger)
- Enter a short sell position when the share prices close beneath an upward sloping trend line (Trigger)
Once you have been able to express in writing your exact entry and exit signals, then you may be able to program these parameters into your trading software package. This will help you search for buy and sell signals that fit your own unique trading style. You need to spell out your search requirements precisely or the results derived will be useless.
To help you pursue your trading goals, if you would like to download a trading plan template called a ‘Trading Plan Review’, there is one available for free from my website www.tradinggame.com.au. It will help you work through all of the vital issues that need to be included in a sophisticated trading plan to give you an edge in the sharemarket.
|Louise Bedford (www.tradinggame.com.au) is a full-time private trader and author of four best-selling books – The Secret of Writing Options, The Secret of Candlestick Charting, Charting Secrets and Trading Secrets. Register on her website to receive a free trading plan template and a 5-part e-course to get you trading like a machine.|