I. Use three charts covering different timeframes
A. Weekly Chart displaying 180 bars
1. Overlay: 12 and 26 week exponential moving averages (EMA)
2. Indicator: MACD & Histogram based on 12-26-9 EMAs
B. Daily Chart displaying ~500 bars
1. Overlays: 22-day EMA with price channels (22-day EMA ±X%) where X is set at a level required for channels to contain ~95% of price action; 132-day EMA; 66-day EMA if desired
2. Identify & draw support & resistance lines, trend lines where applicable
3. Other: display 22-, 66-, 132-day EMAs of volume, 66-, 132-day EMAs of close price if desired
C. Daily chart displaying 120-200 bars; adjust as desired
1. Overlays: 22-day EMA & price channels, 132-day EMA, support & resistance lines, trend lines, other analysis.
2. Indicators: MACD & histogram calculated from 12-26-9 day EMAs; Force Index smoothed with 2-day & 10-day EMAs
D. Optional 4th chart to avoid visual clutter: 120-200 day weekly chart including stop-loss lines.
1. Stop Loss (short position): result = cFunctions.CompileFormula(“a = ref(close,0)+ema((ref(high,0)-ref(close, x)),132)+2*(stddev((ref(high,0)-ref(close,x))-(ema(ref(high,0)-ref(close, x),132)),132));”).GetVectorDouble(“a”)
2. Stop Loss (long position): result = cFunctions.CompileFormula(“a = ref(close,0)+ema((ref(high,0)-ref(close,x)),132)+2*(stddev((ref(high,0)-ref(close,x)-(ema(ref(high,0)-ref(close,x),132)),132));”).GetVectorDouble(“a”)
3. Value of x from 1 to 5.
II. Begin by looking at 180 bar weekly chart.
A. Use 26 week EMA on weekly chart to identify trend (up, down or sideways).
B. Use MACD to evaluate whether current rate of change in momentum lies within typical range (reversals are more likely to occur when MACD histogram is unusually low or high) and look for divergences that might hint at a long-term trend reversal.
III. Next look at 500 bar daily chart
A. Identify, draw lines of support & resistance, trend lines and any other relevant longer range chart patterns.
B. Adjust price channel width so it contains ~95% of price movement at least over last 180 bars. Note what tends to happen when price approaches or exceeds upper and lower channels.
C. Note if there are any reliable candlestick patterns evident that have been good predictor of price movement in immediate future (e.g., kangaroo tails, dark cloud cover, bullish engulfing, etc.)
D. If trend is present, note whether it continues to be supported by volume.
E. Use this chart to get a generally idea of price behavior of stock.
IV. Use the 120-200 bar daily chart to identify opportunities to buy and sell.
A. In general, potential trading opportunities occur when price deviates abnormally far from 22-day EMA, as determined by exceeding or touching price channels when price in trading range, or when price touches trendline or long-period EMA if trending.
B. MACD histogram can confirm a buy or sell signal in a few ways.
1. A divergence forms over a period of weeks to months (for example, price has been rising but MACD histogram shows decreasing upward momentum)
2. MACD histogram that had been putting showing increasingly positive or negative values has leveled off and begun reversing.
3. MACD histogram has reached a highly unusual or unprecedentedly positive or negative value. If extremely high value, interpret as potential shorting opportunity; if extremely negative value, interpret as potential buy signal.
C. Force Index divergences with price indicate reversal may be imminent.
1. Pattern of decreasing negative values suggest selling pressure diminishing, buying pressure gaining strength
2. Pattern of decreasing positive values suggest buying pressure diminishing, selling pressure gaining strength.
D. Buy and sell signals provided by the above analysis and indicators are lent further confirmation when they occur in vicinity of previously established levels of support & resistance.
E. If price has been trending, retracements to trend line or long-period EMA signal opportunities to buy into broader uptrend or sell into broader downtrend.
F. Candlestick patterns, other characteristics of price action that have historically preceded price movement in given direction may also confirm or fail to confirm buy & sell signals.
Entering and Exiting Trades
V. Enter trade when multiple lines of analysis point in the same direction.* (See illustrations below.)
A. Trades based on end of day charts EOD, positions entered, exited by market order at start of trading day.*
B. Decide beforehand how you plan to exit the trade (e.g., when price hits upper or lower channel, reaches 22-day EMA, reaches established support/resistance line, when MACD histogram reverses, etc.)
C. Decide beforehand what will constitute clear evidence that your analysis is wrong and you need to get out of the trade.
D. Include price indicated by stop loss formula in trade; may use stop loss based on technical analysis not included in trade but which you will execute based on EOD chart analysis.
1. Stop loss may only move in direction of trade (only up for long position & down for short positions).
Choosing What to Trade
VI. Blue chip stocks with high daily volumes listed on major indices. Prefer charts that exhibit continuous price movement on daily charts, as opposed to ones that gap frequently.
VII. Every 6-12 months, backtest large number (100+) of stocks from index using outlined strategy. Limit list of stocks to top ten best performers.
VIII. Monitor all stocks on top ten list every day.
IX. When no trades present themselves, practice trading in simulations using historical charts. Randomize start and end dates to practice trading under different market conditions.
- Do not deviate from strategy mid-trade
- Keep a record of all trades
- Do not change strategy without a carefully reasoned, thoroughly tested justification
1.SSE.L – Stock in a Trading Range
The weekly chart, with an end date of 10 Aug. 2015, reveals that this stock has been more or less trading sideways within a range established between July and December 2014.
Long Daily Charts
A quick glance at the long daily chart reveals that since July 2014, this stock has established a fairly reliable pattern of hitting its ±4% price channels and then reverting to the 22-day EMA. When it hits the bottom channel and then rises, it tends to overshoot the 22-day EMA. Price reversals are preceded by candlesticks with long wicks pointing in the opposite direction from the forthcoming change in price, or by strings of days marked by long candle bodies in a sequence of up and down days.
The date in this screenshot is 24 Sept. 2015. After a period of observation, I draw lines of support and resistance. I find that price has fallen to a line of support established in around March 2014. I note that a potential double bottom of sorts may have formed as well.
In this long daily chart I incorporate the Force Index (top) and MACD with histogram indicators. I observe the tendency of this stock to show up-down volatility prior to reversals of various magnitudes, particularly following large price moves and note that the same pattern appears to have formed now. Force Index has been trending increasingly less negative, indicating the selloff that began in May may be running out of steam. The volume spike on 21-25 August further suggests the recent downtrend is over. MACD Histogram, in addition, is tracing out a weak bullish divergence.
Short Daily Charts
A closer look at the chart confirms my analysis. I decide to take a long position tomorrow and set my stop at 1362.5, per my stop loss formula. A close on strong volume in the 1390 range is my signal that I have made an error and need to abandon the position.
The following morning, on 25 Sept. 2015, I buy at the morning’s open at 1448.
After following two consecutive closes at prices below my entry price, on 30 Sept. the stock gaps up on solid volume. I decide to hold, anticipating continued gains. My decision appears vindicated when on 5 Oct. the price gaps up again for a close at 1552, well above its price channel. Given that that day’s candle suggests an exhaustion move, and that MACD histogram is near its highest value over the past 200 trading days, I decide to sell my position at the next day’s open.
On 6 October, I close my position at 1560 for a gross return of +7.73%
A follow-up chart reveals that my exit was fairly well timed.
2. IMT.L – Stock in an Uptrend
This stock has been in a strong uptrend since at least Jan. 2014, arguably since Aug. 2013. The 26 week EMA is flattening out, perhaps repeating what happened in July-October 2014. Occasions when price dips below the 26-week may represent good buying opportunities.
Long Daily Chart
Price rebounds fairly reliably after touching or exceeding its price channels, especially from the lower price channel as is typically the case for a stock in an uptrend. Volume on the most recent selloff has been weak, suggesting this stock’s uptrend is not over. Price hitting the 132-period EMA has been a good time to buy into the trend. This is seems likely to be the case.
I draw lines to show areas of support and resistance, which on this chart are easy to find. I note the most recent close occurred in the vicinity of one of these areas. I also draw a trend line.
On this view of the long daily chart, I can see that MACD histogram is getting close to its previous record negative value over the past 500 trading days. No divergences in MACD or Force Index are apparent at this point.
Short Daily Chart
The situation looks pretty much the same on the shorter period chart. Given the strength of the selloff indicated by Force Index, MACD histogram continuing to put in new lows and the most recent candlestick looking strongly bearish, I decide to hold off on entering a long position for the moment. I have learned in the past that it’s generally not a good idea to try to catch falling knives.
Two days later, a “Morning Star” candlestick pattern has formed. Price is up sharply on strong volume the day after intraday trading pushed IMT’s price to below the trendline I drew. MACD histogram has ticked up and Force Index is strongly positive. I decide to enter a long position with a market-on-open order. I set my stop loss at 2974, per my formula. That’s also where my technical stop loss is.
I enter the trade from the long side on 26 August at 3090.
On 14 September I consider selling my position, as the price rebound appears to have stalled. I decide to remain in the trade at this point for the following reasons: 1) Force Index shows the selling pressure to be weak; 2) because previous price rises have looked similar in the past, with brief pauses; and 3) because the stock is in an overall uptrend that I expect to continue. My stop loss has risen to 3125, so I am already above breakeven. If my analysis proves wrong and price starts to fall, I should still stop out with a profit.
Here again I consider getting out of the trade. I decide to hang on because the selloff appears weak.
At this point, I decide to take profits. Price has risen quite far very fast, and the candlestick pattern “dark cloud cover” indicates further price declines are likely to lie ahead. I set my stop loss at the close price, 3440.
On 29 September, the market gaps down the next morning and I stop out at 3399p for a gross return of exactly 10.00%
A follow-up look at IMT.L’s chart shows that I could have gotten a better sell price had I waited. More patience may have been a virtue.